The Putinomics playbook won’t work forever
On March 27, President Joe Biden claimed that U.S. sanctions had reduced Russia’s currency to “rubble.” Yet in the past few weeks, the currency has rebounded, while the country shows no outward signs of crisis. So what impact are sanctions having?
Plenty of questions remain in the short term. But the long-term consequences of the sanctions are clear and severe. Russian industry now faces difficulties in acquiring crucial tools and components. The future of entire sectors of the Russian economy, from aviation to autos, is in doubt. Russia’s already weak tech sector is now cut off from accessing advanced software and microelectronics. The Russian government has successfully managed the immediate financial shock of the sanctions. But its playbook will be of little relevance in addressing the industrial and technological restrictions that will ultimately have a compounding and devastating impact over time.
If it weren’t for the war and the sanctions that followed, 2022 would have been a banner year for Russia’s economy. Before President Vladimir Putin ordered his troops to attack on Feb. 24, Russia continued to recover from the scars of the pandemic, which (thanks to a policy that prioritized fewer restrictions and more deaths) was less economically costly than in many neighboring countries. Moreover, the price of Russia’s key export goods — oil and natural gas — increased substantially in late 2021 and the first part of this year. Higher energy prices were partly caused by Russian policy: first the Kremlin’s decision to limit gas exports to Europe last fall, then pre-war tensions that drove prices even higher.
Yet rather than benefiting from a year of rapid growth, Russia is in the early stages of a deep slump. The reason is the sanctions, official and voluntary, which are limiting Russia’s ability to import goods, increasing the cost of financing, driving firms toward default, and constricting consumption and investment.
Though Russia has been under different types of Western sanctions for many years, the measures imposed over the past few months are vastly more restrictive. [Continue reading…]