The Downfall of the Russian Economy

How have the Russian-Ukraine war and the subsequent sanctions imposed on Russia affected its economy?

12th April, 2022, 12.00am

Soham Aher, Senior Correspondent, India

Source: Reuters

Over the last several days, there have been hints that Russia's economy is adjusting to the tough economic sanctions placed on it as a result of the invasion of Ukraine. The rouble has made a comeback. The domestic banking sector's acute stress has subsided. The Russian government is still paying its debts and selling most of its oil. On Friday, the central bank also dropped its benchmark interest rate after immediately doubling it in the aftermath of the penalties.

It's far too early to declare defeat, just as it was far too early to proclaim with satisfaction that the rouble had been "reduced to rubble," as President Biden said a few weeks ago. As a result, many began to believe that economic hardship would result in an instantaneous collapse. However, these economic sanctions were never intended to persuade Russia to relinquish its military preparations on its own, despite the fact that many of us hoped they would as Russia faced the danger of ruining its economy and future prospects. Russian policymakers have deviated from standard cost-benefit analyses both on and off the battlefield. The absence of straightforward, inexpensive, asymmetric policies that the coalition may use to affect Russia, along with Moscow's warped decision-making, means that these measures will take time to develop. Targets who have been sanctioned maintain some policy authority. Similarly, the US and its allies will need to adjust the amount of pressure they apply and focus more on how to cushion the impact on global consumers.

Higher costs are degrading Russians' living standards, while concerns about the country's banking system have caused lines to form outside banks all throughout the country as individuals race to withdraw their funds. The rouble has subsequently rebounded to pre-invasion values, owing to capital controls that have kept reserves in Russia and European countries' continued purchases of Russian oil and gas. Despite the strong increase in inflation, which rose to 9.15 percent in February, Russia's central bank lowered its benchmark interest rate from 20% to 17% in an effort to keep production stable.

The World Bank estimates that the war, which began in late February and has forced more than 4 million Ukrainians to flee to Poland, Romania, and Moldova, would inflict an 11.2 percent drop in GDP in Russia. Grain and energy costs have also risen as a result of the conflict. "The findings of our investigation are frightening. According to our projections, Russia's invasion of Ukraine has halted the region's recovery from the virus "Vice President of the World Bank, stated "This is the area's second huge economic shock in two years, and it comes at a critical moment for the region, as many economies are still recovering from the epidemic," she told reporters.