Consequences of Western Sanctions. Russia Is Approaching a Crisis

Ivan Sichen

 

 

Ukrainian and foreign media have repeatedly raised the issue of the consequences of Western sanctions on Russia, which have been steadily intensifying since March 2022 due to Putin’s war against Ukraine. In fact, this is another form of strong support for our state from its Western partners and their front against the Russian Federation. Of course, as in previous years, Moscow denies the effectiveness of sanctions and even claims that they are “positive for the Russian economy”. Thus, Russia allegedly managed to stabilize the ruble and received favorable conditions for the independent development of new technologies. Unfortunately, some Ukrainians, who hoped for a quick effect from the sanctions, are beginning to believe this. Do not be disappointed with them. Sanctions do work and this already recognized by impartial Russian media. It is on the basis of such media that we would like to build an article on the economic situation in Russia.

 

…The imposition of Western sanctions is another form of strong support for Ukraine from its Western partners and their front against Russia…

According to official reports from the Russian government, the country’s economy continues its “stable work and positive dynamics”. Evidence of this allegedly are the macroeconomic indicators of the first quarter of this year, as well as the strengthening of the Russian ruble. However, in reality the situation is absolutely different.

For one, the cessation of trade and economic ties with Russia by Western countries has led to the loss of a significant part of the European market and access to a wide range of components and materials used in Russian industry. As a result, the work of a significant number of enterprises, primarily in the machine-building industry, has been suspended or limited.

In particular, since the beginning of April 2022, due to a lack of components, the AvtoVAZ plant has actually stopped working, except for the production of some spare parts. No commercial vehicles have been produced during this time. Similar problems have arisen at the KamAZ and Ural plants, which are major producers of trucks in Russia, including military ones.

For the same reason, there are now difficulties with the production and repair of military equipment. Evidence of the severity of this problem was the refusal of sailors of the Caspian military flotilla to go to sea due to the sharp deterioration of the technical condition of ships. In addition, Russia is forced to remove from storage and send to the front obsolete military equipment such as T-62 tanks, because it is simply not able to produce new ones.

Indeed, how to do it when the electronic components of Russian military equipment, including air defense systems “Pantsir”, attack helicopters Ka-52 “Alligator” and cruise missiles X-101 use Western-made chips. And now they are gone. Therefore, Russia is forced to replace them with electronic chips for washing machines…

By the way, the lack of modern electronic components for the production of military equipment, satellites and other products was recognized by Moscow before the full-scale attack on Ukraine in February 2022, as a result of previous sanctions on Crimea and the Donbas. However, this has taught Russia nothing.

But let us return to the main topic of the article. Another significant problem was the closure of a number of foreign companies in Russia, which also led to the complete shutdown or restriction of their enterprises on Russian territory. In particular, before the war, the Kaliningrad car assembly plant Avtotor daily produced up to 900 German BMW cars and South Korean Hyundai. After the German concern left Russia, the production of cars at the plant fell three times.

According to Russian experts, a rather difficult situation may arise in agriculture. The reason for this is the lack of grain, which has already forced Moscow to impose restrictions on its export from the country. According to experts, in case of cancellation of this decision, food prices in Russia could increase 1.5–2 times.

…As shown by the experience of previous years, Russia, in principle, cannot provide import substitution…

Besides, Russia is heavily dependent on imports of sunflower seeds (70 %), potatoes (80 %), corn (60 %) and sugar beets (98 %), as well as agricultural machinery, equipment and materials for food production. At present, due to sanctions, such goods are no longer supplied to Russia by Western countries. And as shown by the experience of previous years, Russia, in principle, cannot provide import substitution.

This fact was confirmed by the management of the Rostselmash plant, which is one of the leading manufacturers of agricultural machinery in Russia. Before the war, the plant purchased in Europe thousands of components for combines and tractors, including engines, hydraulic components, plastic spare parts, gearboxes, and even paint. Now the company is deprived of such an opportunity, and Russian industry is unable to produce these products. The plant was actually on the verge of stopping.

Therefore, food prices in the Russian Federation will inevitably increase. And that’s not all. The possibility of a food crisis in Russia is not ruled out. Such prospects are one of the main reasons for the mass transporting to Russia of grain, vegetables and agricultural machinery stolen in the occupied territories of Ukraine.

…A real catastrophe for Russia could be the imposition by the EU of an embargo on Russian energy imports…

However, a real catastrophe for Russia could be the imposition by the EU of an embargo on Russian energy imports as part of another package of sanctions, or even the independent rejection of them by leading European countries. Thus, Poland, Lithuania and Bulgaria have already given up Russian oil and gas. The United Kingdom, Italy, France, Germany, the Netherlands and a number of other European countries plan to join them in the near future. In addition, the EU is speeding up the construction of new liquefied gas terminals.

At this, Moscow itself contributes to this process with its insane policy of using the energy factor to put pressure on Europe. In the first four months of 2022 (including the pre-war period), Russia itself reduced gas supplies to Europe by 32.5 %. Besides, on May 21, 2022, the supply of gas to Finland was completely suspended due to its application to join NATO.

Some world energy concerns have also refused to buy Russian oil. As a result, since February 2022, its production in Russia has decreased by almost 10 %. And by the end of the year (even without the embargo) it could fall by 25 %. In addition, global insurance companies such as Lloyd’s are refusing to insure ships carrying Russian oil, making it difficult to export.

Russia is trying to resolve this problem with discounts of up to 4 US dollars  per barrel of Russian oil (at average prices of 108–112 US dollars per barrel), which borders on the minimum level of profitability of its production and transportation. But it can’t do anything about this. More than 60 million barrels of Russian oil are already “stuck” in the market, as nobody wants to buy them.

…The policy of Western countries to restrict transport links with Russia dealt a severe blow to the Russian economy…

The policy of Western countries to restrict transport links with Russia also dealt a severe blow to the Russian economy. As you know, the EU, the United States and Canada have closed their airspace to Russian aircrafts. Finland has completely cut off rail services to Russia, and Poland and the Baltic states have restricted them. The movement of trucks from the Russian Federation through Poland to other European countries is complicated. Due to the Western companies’ refusal to service aircrafts purchased or leased from them and to supply spare parts, the air communication in Russia itself has been significantly paralyzed.

The considered problems objectively lead to a reduction in the volume of foreign trade of the Russian Federation. According to the Russian Ministry of Economy, the sanctions have affected about 20 % of the country’s exports. In general, unfriendly countries account for more than 50 % of Russian exports. In turn, Russia’s imports of goods from EU countries fell by 55 %, and from China — by 26 %.

Finally, we would like to discuss the situation in Russia’s financial sphere. Moscow is proud to demonstrate the stabilization of the ruble, which is called evidence of “the stability of the Russian economy, including in relation to sanctions”. However, the strengthening of the ruble has simple and prosaic reasons. The first is the rise in world oil and gas prices, currently being exported by Russia. Secondly, as a result of a significant reduction in imports in Russia, a surplus of currency was formed, which obviously reduces its exchange rate in the country. Therefore, the strengthening of the ruble is in no way an indicator of “stability” of the Russian economy and a condition for its positive development.

…The strengthening of the ruble has simple and prosaic reasons… And, there is no special merit of Moscow in the fact that it still avoids default…

There is no special merit of Moscow in the fact that it still avoids default. The “merit” here belongs to the United States, which still allows Russia to use its gold and foreign exchange reserves, which are in American banks, to pay off foreign debts. Although, in May 2022, the United States has already imposed a ban on transactions with Russian debt. That is why Russia’s default is also inevitable.

Especially since Moscow has lost the opportunity to replenish its reserves, which was recognized by Russian Finance Minister A. Siluanov. According to him, the budget rule on directing part of the revenues from energy exports to the Reserve Fund of the Russian Federation has been abolished. At present, all these revenues are used for expenditures such as warfare, economic support and pensions.

Given these circumstances, both the Russian Central Bank and international financial institutions expect Russia’s GDP to fall by 8–10 % in 2022, and according to some forecasts — by 12 %.

…The deterioration of the Russian economy is felt by most of the country’s population…

The deterioration of the Russian economy is felt by most of the country’s population. According to the Russian research center Romir, the share of citizens, who sharply reduce spending that is not related to priority needs, is rapidly increasing. In particular, about 47 % of citizens have abandoned plans to purchase durable goods or expensive purchases; about 43 % — limit their spending to buying only food and essentials; over 30 % — are looking for extra income; 20 % — save on treatment and education.

It cannot be otherwise, given the rise in prices and falling wages, as well as the increase in overt and covert unemployment. We have already mentioned the termination or restriction of a significant number of machine-building enterprises. Their workers have not yet been fired, but are sent on leave with half or a third of the average salary. The same is happening at the enterprises of foreign companies that have left Russia. However, the payment of salaries to their staff is planned only until the end of the year.

In addition to industrial enterprises, part of the aviation industry was “idle”, which further complicated the problem of employment and salaries of citizens. In particular, Sheremetyevo Airport and its subsidiaries sent 20 % of employees on vacation, Vnukovo Airport — 30 %, Ural Airlines — also 30 %. And that’s thousands of people.

According to official data, today the unemployment rate in Russia is 4.1 % — 3.1 million people, and 250 thousand people are “idling”. However, in reality there are many more, and in the near future their number may increase many times over.

Thus, the decline in purchasing power of the population causes a drop in demand for goods and services. As a result, there is a chain reaction of stopping or suspending the work of more and more small, medium and large businesses. And this is another reduction in wages and new unemployed.

…More than 91 % of Russians already acknowledge the negative economic consequences of the war against Ukraine and Western sanctions…

And at the end of the article, we will once again turn to statistics. According to the Romir Research Center, more than 91 % of Russians already acknowledge the negative economic consequences of the war against Ukraine and Western sanctions. In fact, this is recognized by the Russian leadership as well. This is the conclusion that can be drawn from the Kremlin’s open desire to resume talks with Ukraine. How else can the Kremlin’s proposals to open corridors from Ukrainian ports to export grain to foreign markets in exchange for lifting sanctions on Russia be seen?

 

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