The Surprising Resilience of the Russian Economy (and Why It Won’t Last)

The Russian economy has been isolated, its billionaires have been sanctioned, and hundreds of foreign companies have either left the country or reduced their operations there.

And yet, the Russian economy is surprisingly resilient; its currency rebounded and this week found a way avoid defaulting on its external debt.

“All things considered, this is holding up better than initially expected,” said Art Woo, senior economist at Bank of Montreal.

Russia’s economy is still expected to fall into recession later this year, Woo said. But so far he has managed to soften the harshest economic consequences of Western sanctions, imposed amid the country’s invasion of Ukraine.

Two women walk past an exchange office displaying the exchange rates of the US dollar and euro against the Russian ruble in Moscow on April 1. (The Associated Press)

The Russian ruble crashed 30% in late February when Western sanctions were first introduced. A month later, US President Joe Biden said the sanctions were working and Russia’s economy was about to be cut in half.

“As a result of our unprecedented sanctions, the ruble was almost immediately reduced to rubble,” tweeted Biden in March.

Protect the ruble

But since then, the currency’s value has nearly doubled – thanks in large part to some deft moves by the country’s central bank as it took swift action to strengthen the rouble.

The Central Bank of the Russian Federation has severely restricted the ability of Russian citizens to sell rubles and buy foreign currency. He demanded that foreign countries pay for Russian energy products in rubles. And that forces Russian companies that still export to sell 80% of their foreign currency earnings and buy rubles instead.

Customers queue outside a currency exchange office in Moscow on February 28, just days after Russia invaded Ukraine. The Bank of Russia moved quickly to shield the nation’s $1.5 trillion economy from sweeping sanctions that hit major banks and pushed the ruble to an all-time high. The currency has since rebounded, thanks to a series of economic measures. (Andrei Rudakov/Bloomberg)

Experts say this essentially created an artificial demand for the currency, which increased its value and maintained a floor under the ruble. As the Wall Street Journal put it, the ruble is in “a central bank-induced coma.”

Meanwhile, Russia’s labor market has remained strong — and the state has shown a willingness to intervene to keep the national economy functioning, Woo said.

“We suspect the government will rely on Soviet-era tactics (when unemployment was effectively outlawed) and encourage employers to lower wages/reduce working hours instead of reducing the number of employees,” he told CBC News in an email.

A tanker loads its cargo of liquefied natural gas from the Sakhalin-2 project in the port of Prigorodnoye, Russia, October 29, 2021. Russia supplies around 40% of Europe’s natural gas and around 25% of its oil, which means that the EU has been reluctant to impose sanctions on Russian energy exports. (The Associated Press)

Energy exports in the crosshairs

At the heart of this strength are Russia’s vaunted oil and gas exports. Since the invasion of Ukraine on February 24, oil and gas prices have surged.

“Exorbitant fossil fuel prices and continued imports into Europe have provided the Kremlin with a major windfall and undermined the effect of economic sanctions,” said Lauri Myllyvirta, senior analyst at the Center for Energy and Clean Air Research. .

Its organization tracking shipping patterns to determine how much money Russia made since the start of the war, finding that Russia has earned around $65 billion for its oil, gas and coal in the past two months alone. That’s over $955 million a day.

That kind of money buys a lot of wiggle room. And combined with the movements of its central bank, the Russian economy is holding up.

But now the European Union is also threatening to cut off some energy exports, with possible Russian oil sanctions on the table and should be discussed at a meeting on Wednesday.

Russia supplies around 40% of the EU’s natural gas and around 25% of its oil.

“Our objective is simple,” said Charles Michel, the President of the European Council, this week. “We must break the Russian war machine. And I am convinced that the Council will soon impose new sanctions, in particular on Russian oil.”

The mere idea of ​​cutting off Russian energy exports was almost unimaginable when the conflict began.
But as the war dragged on, pressure grew on governments to do more.

People walk past wrecked military vehicles in Bucha, on the outskirts of kyiv, Ukraine on April 30. The conflict has been going on for 10 weeks now. (Emilio Morenatti/Associated Press)

“Politics has become so toxic,” said Rory Johnston, managing director and market economist at Toronto-based Price Street Inc.. « Russian Activities and Human Rights Violations in Ukraine [were] so offensive that the governments of the world really had no choice.”

If Europe follows through on the threat and bans Russian oil and gas, it would significantly limit Russia’s ability to soften the blow of Western sanctions.

Economic problems ahead

And it comes as its central bank was already warning that the country was heading for the worst economic downturn it had seen in decades.

“The sanctions imposed on Russia have affected the situation in the financial sector, stimulated the demand for foreign currency and caused the rapid sales of financial assets, the outflow of cash from banks and an increase in the demand for goods,” he said. Elvira Nabiullina. in prepared remarks first published in English on Friday.

In this photo, the head of the Russian Central Bank, Elvira Nabiullina, delivers her speech at the State Duma in Moscow on April 21. (Press Service of the Federal Assembly of the Russian Federation via AP)

For the second time in less than a month, Nabiullina cut the country’s interest rates by three percentage points. She further warned that consumer prices could climb up to 23% this year.

As the sanctions drag on, she said, exporters and producers will have to look for new partners and new markets.

“Currently, this problem may not be as acute because the economy still has stocks, but we can see the sanctions being tightened almost every day,” she said in a speech at the meeting. a joint meeting of the State Duma last month.

The yacht Amore Vero is shown moored in the Mediterranean resort of La Ciotat, France, on March 3. French authorities have seized the yacht, linked to Igor Sechin, an ally of Putin who heads Russian oil giant Rosneft, as part of EU sanctions against invading Russia. from Ukraine. (Bishr Eltoni/Associated Press)

The forecasts of the International Monetary Fund (IMF) are even more dire.

“Baseline forecasts call for a sharp contraction in 2022, with GDP falling by around 8.5% and falling further by around 2.3% in 2023,” the IMF wrote. in its overall forecast.

The most difficult part in assessing the state of the Russian economy is taking into account all the unknowns; even the best experts do not know how the war will progress or how European countries will react.

Measuring this uncertainty is the unenviable task of economists like Doug Hostland, associate vice president at TD Economics.

“Due to the unprecedented nature of what is happening, we are really beyond our realm as economists to predict,” he said.

Hostland has written a research paper on the impact of Russia’s potential default on its debt. “Foreign investors only hold about $20 billion in Eurobonds issued by the Russian government, which is not much,” he wrote.

But the threat of a default was a mere distraction from the real concern, Hostland said, which is a broader European ban on Russian oil and gas.

“It’s the main event,” he said. “That’s what the financial markets are all about and the whole geopolitical perspective: what is Europe going to do next?”