May 20, 2022

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Five ways US sanctions are hurting Russia

Five ways US sanctions are hurting Russia

International sanctions against Russia in the wake of its invasion of Ukraine have triggered what some analysts have described as an economic Cold War.

While US officials have been careful to portray their sanctions as destructive tools of foreign policy, the bulk of anti-Western economic measures still target wealthy elites and their corporations, which are generally well insulated from the globalized economy.

Sanctions fall short of a ban on Russian energy exports, which would hurt the heavily dependent European economy and exacerbate already high energy prices at a time when US inflation is at its highest level in 40 years.

However, sanctions against the Russian Central Bank isolated Moscow from its reserves. Russia also had difficulty finding buyers for its gold.

The sanctions also hit ordinary Russians while bringing back memories of the country’s past economic hardships.

Here are five ways US sanctions are hurting Russia.

Russia’s GDP is shrinking

Russian gross domestic product could shrink by as much as 7 percent over the year and 35 percent on a quarterly basis, according to JPMorgan economists. They say inflation could reach 14 percent in Russia by the end of the year.

Dwindling business confidence and rising investor uncertainty are expected to hamper asset prices and spur the movement of capital out of the country, according to the International Monetary Fund (IMF). The flight of many international companies, following the leaders of their governments, also negatively affects the lifestyles of Russian individuals.

“Fortunately, my life has not changed radically so far, but I am deprived of the usual things,” a Russian woman, who asked not to be identified for fear of her safety, said in an interview via one of the social media channels. “I can no longer use Apple Pay, watch Netflix, buy anything from foreign websites, and need a VPN [virtual private network] To use Instagram. The prices of almost everything are going up, especially imported goods.”

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“Deep down, I feel very uncertain,” she added. “Every day there is something new that can be withdrawn, banned or restricted. It is really hard to plan anything these days.”

Sanctions have caused chaos in the Russian financial sector

The Russian Central Bank has struggled to stabilize the value of the ruble and prevent a sharp rise in interest rates without access to nearly half of its foreign reserves.

The Russian stock market has also been closed for weeks, suspending shares of local companies that are likely to fall once trading resumes.

Russia has avoided defaulting on its foreign debt so far, and even made a payment for international bonds in US dollars, the value of which is increasing in Russia, rather than in rubles.

“The problem with Russia is that if you default, you are likely to pay your creditors to try to recover your assets,” said Chris Miller, visiting fellow at the American Enterprise Institute (AEI), a right-leaning think tank.

“This is not a problem for the Russian state, because it is difficult for investors to seize state assets, because they give sovereign immunity in most legal systems, but if you are a large Russian state-owned company like Gazprom or Rosneft, in addition to the assets you have in Russia, which are considered Great, you also have assets abroad.”

Russian industries and trade shook

Russia has been slowly integrating into globalized supply chains since the 1990s in industries such as technology and aviation. The inability to access parts that were manufactured, designed or controlled through intellectual property laws in the United States and elsewhere is now causing disruptions.

We’ve already seen this in car manufacturing, for example. “About half of Russian car companies have closed their factories because they can’t get the components they need,” said AEI’s Miller. “I think we will see more and more of this in different sectors of the Russian industry as supply chain issues build up over time.”

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A key component used in a range of different industries is semiconductors, the computer chips that store and process data in products ranging from smartphones to weapon systems. Russia gets most of its chips from China, but many analysts say these chips are below US and other East Asian hardware standards.

“The Taiwanese make the most advanced logic chips, followed by the South Koreans, followed by Intel in the United States,” Miller said. Russia’s domestic capabilities are more than a decade behind.

Even advanced chips produced in China are still subject to US export controls because these chips are made using imported US technology. Manufacturers will likely try to bypass these controls illegally, but the leading Chinese semiconductor maker in China largely complied when similar penalties were imposed on Chinese telecom giant Huawei in 2019.

Sanctions have a cultural impact

For many Russians, the current crisis brings back memories of the 1990s, during which the country faced a prolonged recession as its economy was restructured following the collapse of the Soviet Union.

Between 1989 and 1996, Russia’s gross domestic product fell by more than 40 percent, according to the United Nations Conference on Trade and Development. It got so bad that the IMF had to stabilize the Russian ruble in 1995 with strict monetary controls and nominal exchange rate targets.

“People in Russia are used to facing a lot of economic crises,” said Ekaterina Selyuzitskaya, a Russian citizen who now lives in Dongguan, China and works as a part-time Russian-Chinese translator. We hardly remember the times when we didn’t have an economic crisis.

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“Now, the people I know are fine,” she added. Of course they are afraid for their future and some of them may lose their jobs. The future is not clear.”

Selyuzitskaya noted that Russian public sector employees have a greater degree of financial stability than workers in the private sector, especially those working in international companies.

“Buying and selling spare parts is getting more and more complicated,” she said. “If people work with China, they would rather pay in yuan and avoid paying in dollars, because currency operations are very complicated in dollars now, and the yuan is very strong.”

Sanctions led to the exodus of Western companies

A mass departure of multinational companies from Russia has stirred up memories of Soviet-era restrictions on the country’s economy. Dozens of companies have announced plans to end operations in Russia, citing both the ethical implications of operating under the Putin regime and the risks of conflict with sanctions.

The Russians are now largely isolated from US financial services, technology and entertainment companies, including Apple, Netflix, Visa and Mastercard. American brands like McDonald’s and Levi’s, whose crossing of the Iron Curtain ushered in a new era of economic liberalization in Russia, also left.

While the United States and its partners are likely to reverse some of the economic sanctions against Russia at some point in the future, some of the trade ties severed this year may not be restored.

The Russian government has announced plans to confiscate the assets of any international company that leaves in protest during the war, including its intellectual property. This means that Russia can support state-owned companies to make copies of products and companies that no longer operate in the country using the same brand with local materials.