RMIT academic Dr. Greeni Maheshwari believes the sanctions against Russia imposed by the West in response to the conflict between Russia and Ukraine will last for an extended period of time.
How will sanctions from the West affect the Russian economy?
I believe that the sanctions are severe and may be longer. These sanctions have serious economic consequences for the Russian economy. Economists predicted that Russia’s GDP is expected to fall by 10-15% by the end of the year. Inflation rises to 20%. Some Russian companies that rely on imported components are already rolling back production lines.
Meanwhile, countries that normally sell goods to Russia have much less to lose if trade is halted. Russia spends $11.5 billion annually on its largest import, cars. Germany, South Korea and Japan lead the market, supplying 63% of Russian motor vehicles. But they would only lose about 3% of their international sales if they stopped selling to Russia.
Russian financial companies, large corporations, small and medium-sized enterprises are also under great pressure. Russian consumers are also feeling economic pressure. For example, there are widespread reports of panic buying in Russian supermarkets and Russian social media channels are awash with photos of empty supermarket shelves and videos of people rushing to buy bags of sugar and grains. However, this may be due to stock build-up and may not be due to general scarcity.
Major international banks are reluctant to fund Russia-related deals and have all said they are winding down there because they are likely to be scared by the prospect of being paid in rubles.
Russian airlines typically rely on Boeing and Airbus jets. And without aerospace imports, Russia risks running out of the specialized parts needed to maintain them, and these parts can’t always be obtained from outside suppliers.
The countries that want to trade with Russia are finding it difficult to trade as 30 to 50% of global shipping companies have already boycotted the country.
RMIT Lecturer in Economics and Finance Dr. Greeni Maheshwari
How does Russia strike back?
Before answering this question, it is useful to recall the sanctions imposed on Russia by the West in 2014 during the invasion of Crimea.
While the sanctions in 2014 were less severe compared to those now imposed, Russia has helped to become more resilient and develop some contingency plans to overcome such a future crisis.
In 2014, Russia raised interest rates from 5.5% to 17% to support the ruble and the same measure has been taken this time, when interest rates are raised, from 8.5% to 20%.
The decline in the ruble currency in 2014 was also similar to today. In 2014, the ruble fell from 35 rubles for 1 dollar to 69 rubles for 1 dollar in one year. While this time the currency has fallen from 78 rubles (February 23) to 150 rubles on March 7, which is about 15 days, and currently has risen to about 65 rubles to 1 dollar on May 6, 2022.
Rubles have been able to recover due to the following reasons:
- The rise in interest rates had a clear effect. Those who might have been tempted to sell their rubles and buy dollars or euros had great incentive to save that money instead. The fewer rubles for sale, the less downward pressure there is on the currency.
- The next factor that contributed to the currency’s recovery was a similar measure taken in 2014, requiring Russian companies generating revenue from exports to exchange 80% of the dollars paid into rubles, regardless of the exchange rate. , and this created significant demand for Russian currency that helped the currency emerge.
- The initial ban on all foreign exchange loans and transfers would be suspended to preserve the country’s foreign exchange and discourage Russians from selling rubles for dollars or euros, putting pressure on the currency. However, these restrictions have been relaxed somewhat of late, and hard currency exchange is capped at just $10,000 per year for individuals.
- Many foreign investors own Russian corporate stocks and government bonds, and they might want to sell those securities, but the government has restricted these sales, and this helps the stock and bond markets and keeps money within the country, all of which help keep the ruble from falling.
Why is Russia demanding payment in rubles for its natural gas exports to Europe?
Russia is a major gas station for the world and Europe imports the largest amount of Russian natural gas to heat homes, generate electricity and use it for the fuel industry. Europe continues to buy energy from Russia despite the war.
Europe is heavily dependent on Russia for its energy needs, with about 40% of its gas coming from the country. If Russia stops selling these, it could lead to supply shortages, plant closures and rising energy costs across the European region.
The stakes are particularly high for Germany, Europe’s largest economy and industrial power. Germany is more dependent on Russia for gas imports. Before the war started, 55% of gas imports came from Russia, falling to 40% in the first quarter of 2022.
Some German economists predict that if Germany stops importing energy from Russia, it could affect Germany’s GDP and GDP could fall by 2-5%.
Because of Europe’s heavy reliance on Russia, Russia therefore demands payment in rubles, as that would marginally help circumvent financial sanctions, increase the ruble’s value and protect the Russian economy.
If Russia manages to force these countries to pay in rubles, the other countries would be forced to buy them. Due to this, the demand for the currency will rise and the price of the ruble will naturally rise.
Could the ruble’s revival help Russia boost the financial world in case more countries want to use the ruble as a reserve currency?
So far, it seems unlikely that foreign buyers will make this switch, but to get around the West’s sanctions, many countries can use their own currencies or even use a ‘barter system’.
The Federal Reserve can track all transactions in the world conducted in USD. But if the transactions are made in rubles or other local currencies, then this weapon is lost and can help preserve the value of the Russian currency.
Only a few countries have imposed sanctions on Russia, but there are still many other countries that have not yet imposed sanctions on Russia. I think this could help Russia to continue trading. Although it will still affect the Russian economy.
Despite the impact of the sanctions, Russia is determined not to withdraw to Ukraine. Do you think Western sanctions will lead Russia to reconsider the war in its neighbor?
The effect of sanctions usually diminishes if the recipient country is economically strong and refuses to follow international orders. Russia exhibits many of these characteristics.
Russia is a major energy exporter, receiving nearly a billion euros a day for its fuel exports. Many western companies still pay rent on their premises and employee salaries. Daily life in the cities is therefore not affected as much.
Some analysts also thought that blocking VISA and Mastercard would cause chaos. But the Russian authorities had already prepared for this and in 2014 introduced a domestic payment system known as MIR, a Russian electronic funds transfer payment system set up by the Central Bank of Russia. As a result, domestic payment proceeded normally and only Russians currently abroad will be affected.
Russia has a good relationship with major economies like China and India and this can help Russia survive.
As another solution, Russia’s hopes of surviving sanctions rest primarily with China. China, the world’s largest exporter, supplies about a quarter of its imports from Russia. China’s manufacturing sector could replace some of the US and European goods that were on their way to Russia but are now blocked. The country already supplies a large part of Russia’s machinery and electronics.
Russia is unlikely to give up now and will continue until further severe sanctions are imposed.
dr. Greeni Maheshwari obtained her PhD in Business Administration (DBA) in Global Business and Leadership in California, USA. During her many years of teaching, she has won many outstanding awards for her outstanding contribution to learning and teaching in Vietnam. Dr Maheshwari currently teaches at the RMIT School of Business and Administration. Her research interest lies in entrepreneurship, SMEs and financial topics.
