GLOBSEC Russia Sanctions Update October 2023

2023-10-30 | Expert publications, sanctio

By Vladimir Milov.

How is the Russian economy doing 19 months after Putin began his full-scale invasion of Ukraine? Many voices argue that the sanctions have had only a limited impact and are not truly working, that the Russian economy has been “resilient”, and that Russia is successfully restructuring its economy, decoupling from the West.

These optimistic estimates are primarily made in comparison to some hotheads’ initial assumption that the Russian economy would “collapse” as a result of sanctions – which it didn’t. However, by any objective indicator, Russia faces severe and growing economic troubles and multiple crises, and the situation continues to progress over time. It means that sanctions are having their effect, albeit not immediate – but, with the necessary patience, it may further complicate Putin’s ability to wage war and the Russian domestic political situation.

Earlier this year, most experts predicted that the key economic problem Russia would face is the budget crisis caused by the Western oil embargo, oil price cap, and a sharp plunge in revenues. That is indeed happening, but more importantly, it led to the plunging ruble exchange rate and the resulting inflation – now the top economic challenge. The ruble has lost about half of its value since mid-2022 and continues on its devaluation trajectory; this drastically affects domestic prices, as Russia still continues to import the bulk of consumer and investment goods. Inflation, which was projected by the Russian authorities at the beginning of the year to be tamed to 4% by early 2024, is now projected to reach 7.5% by the end of 2023 and keeps increasing. As a result, since mid-July, the Russian Central Bank had to nearly double the interest rate from 7.5% to 13%, promising further rate hikes and announcing a “protracted period of tight monetary policy”. Russian business has already lambasted this policy as “putting an end to hopes for economic recovery”.

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