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source: February 25, 2022. REUTERS/Dado Ruvic/Illustration

Some analysts argue that sanctions against Russia are effective while others are sceptics. However, the Russian economy might fall probably due to the spill-over effects of the war itself rather than Western sanctions.


At the beginning of the Russian invasion of Ukraine and the imposition of economic sanctions by a significant part of the international community, many economists and political analysts argued that the effects on the Russian economy would have been devastating and constantly increasing. Indeed, also Putin did not expect such a swift and harsh reaction from the international community, with its selectorate – i.e., the so-called oligarchs supporting its power and providing political and economic support to his regime – facing unprecedented restrictions and penalties in sanctioning countries (for a reliable and detailed timeline of the sanctions against Russia, see here).

The rationale for these unmatched and unique sanctions is simple: money is the backbone of the war. Therefore, the idea that, by interrupting all financial and trade flows with Russia, the war would also stop is reasonable if it is efficacious in its target. However, the sanctions are not effective as previously expected, and they are becoming highly costly for Western states since the penalties are altering the global supply chain and exponentially increasing the costs of commodities.

This analysis will, thus, study the resilience and resistance of the Russian economy to its sanctions by examining the exchange rate regime and other macroeconomic variables to understand and clarify the diverging news regarding the topic.

Why the Rouble Survived?

Many articles discussed the sharp decline in value of the rouble – the Russian currency – following the sanctions in late February, arguing that the Russian economy could not withstand the costs for long. However, as shown in the graph, the rouble recovered almost entirely from its fall and losses. The central bank of the Russian Federation (Bank of Russia, BoR) implemented cutting-edge policies to defend its role and currency, with limits on the purchase and selling of the rouble to restrict any pernicious capital outflow.

Moreover, Putin requested that the payments for Russian gas and oil executed by “unfriendly countries” must be paid in roubles for two main reasons. Firstly, Russia wants to aggravate and intensify the European energy crisis since now foreign entities will experience a further increase in gas and oil prices. Therefore, the sanctioning regime will become more costly with higher prices, especially for the EU, forcing a total or partial withdrawal of the penalties. Further, this strategy can also aid Russia to divide the sanctioning front between gas-dependent countries – like Germany and Italy – and less-dependent countries – like Poland – regarding the economic foreign policy and sanctions to implement against Russia.

Secondly, this strategy will further strengthen the position and appreciation of the rouble compared with other international currencies since it will force European clients and banks to request more roubles from the BoR, reinforcing Russian money. However, Western countries are refusingto pay their gas bills in rouble since, as explained before, this would weaken their own sanctions against Russia. In the list of unfriendly countries, all the members of the EU and EEA are present, together with their sanctioning allies like the US, Canada, Singapore, Taiwan, and Japan. 

Besides, as explained in classical economic theory, devaluation of a currency is not always something negative or a situation that economists advise avoiding. On the contrary, currency devaluations directly affect trade since they increase exports and the net trade balance of a country, thus ameliorating the foreign reserve balance.

For this reason, the sanctioning coalition decided to implement, parallelly to financial sanctions, restrictions and boycotts of Russian exports to deprive it of this beneficial effect of the devaluation and, thus, jeopardising its foreign exchange regime. However, as noted by IESEG professors Bertrand and Burietz, the management of the rouble has switched into the hands of European firms and banks. Indeed, when Putin demanded the payment of foreign gas bills and permitted Russian debtors to repay their overseas loans in roubles, coerced European banks to sustain the exchange rate between rouble and euro to avoid further losses on their balance sheets.

More specifically, foreign financial institutions are now indirectly upholding Russia to not lose profits due to the devaluation of their credits since the option to refuse payments in roubles is challenging to employ inside a legal court due to the conflictual situation, and there is a real risk to never being recompensed at all. 

And The Other Macroeconomic Variables?

Although the resilience of the rouble against international pressures is pivotal for maintaining the war effort and economy, other economic aspects are still challenging to handle by Putting and the BoR. For instance, there is the problem of the GDP downfall and other financial repercussions of the sanctions. For instance, there are forecasts of an 8.5% contraction in Russia’s GDP growth estimates due to the conflict and supply chain disruptions.

However, forecasters also accepted the difficulty of the challenge since a combination of monetary, business, and technology sanctions have never been enforced on a significant, internationally connected economy before, so we have little to go on to foresee the extent of the impact. This is similar to the predictions proposed by the BoR which forecasted a fall in GDP by 8%, with an increase of only around 1% for the following years. This fall in economic production is comparable, if not even worse, to the falls following the dismantling of the Soviet Union, the 1998 default, and the 2008 global financial crisis. Regrettably, this is not the only bad news.

According to the same report, also inflation will continue to rise persistently during the following years. Indeed, the BoR estimated a high level of inflation at around 20% during 2022 and between 5-8% for the next biennium. The forecasts consider the sharp weekly increase in prices following the start of the military conflict.

Currently, the inflation rate in February is at 9.2%, well above the threshold of 4% targeted by the BoR, although the BoR tried to decelerate the rise by expanding at 20% its interest rates. Moreover, the increase in inflation in the last weeks is massive, with a 2% adding to the prices level every seven days. The changes in GDP and inflation are causing the risk of stagflationwhen the economy is suffering both economic stagnation – halting or declining output – and elevated inflation.

As expressed by SUNY professor Dolar, the problem during stagflation is that central banks and governments – in this case, Russia – that solutions for either problem aggravate and intensify the other. If the BoR decide to raise its interest rates even more, then the GDP will further decline due to the restrictions on investments and money circulation. On the other hand, expansionary monetary policies and elevated governmental budget deficits will only worsen the rise of inflation with the risk of transmuting into hyperinflation.

Will Russian Economy Fall?

Although the sanctioning coalition imposed heavy financial restrictions on Russia, the rouble is defending its position in the international currency system, thanks to Putin’s threats to repay the foreign private debt in Russian currency. On the other hand, inflation is skyrocketing, and predictions for GDP growth are gloomy, with the palpable risk of stagflation, hyperinflation, or even state default. However, and paradoxically, these latter detrimental effects are not the direct consequence of the sanctions but of the war itself.

Sanctions did not destroy the Russian financial system nor took down its currency. By contrast, the war jeopardised the global supply chain again and immediately after the Covid crisis. This forced inflation to rise globally – and not only in Russia – while many countries will experience a decrease in their production, and some updated their world forecast downgrading the global growth rate for 2022. Will the Russian economy fall? A deep economic recession is already in place, and this will cause a general collapse of Russia is also probable. However, sanctions merely worsened a condition already underway due to the current global economic disruptions, with Russia as the worst-hit actor and transboundary spill-over effects. 

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