The sanctions imposed by the United States are harmful to Russia in five ways | Education
|The sanctions imposed by the United States are harmful to Russia in five ways|
US sanctions hurt Russia in five ways
Some analysts have described international sanctions against Russia's aggression in Ukraine as an economic cold war.
While U.S. officials have been careful to describe sanctions as a destructive tool of foreign policy, most anti-Western economic measures have targeted wealthy elites and their companies, which are often remote from the global economy.
The sanctions fell short of those on Russian energy exports, which would hurt the highly dependent European economy and push up already high energy prices at a time when U.S. inflation is at its highest level in 40 years.
However, sanctions on Russia's central bank have alienated Moscow's reserves. Russia is also having a hard time finding buyers for gold.
The sanctions also hit ordinary Russians, reminiscent of the country's past economic woes.
There are five ways U.S. sanctions hurt Russia:
Russia's GDP is shrinking
According to JPMorgan economists, Russia's gross domestic product could shrink by 7% annually and 35% quarterly. Inflation in Russia could hit 14 percent by the end of the year, they said.
Declining business confidence and increased investor uncertainty are expected to dampen asset prices and encourage capital outflows, the International Monetary Fund (IMF) said. The flights of many international companies following their government leaders have also had a negative impact on the lives of Russians.
"Fortunately, my life hasn't changed much, but I've been deprived of normal things," said a Russian woman who asked not to be named for security reasons in an interview on social media channels. “I can’t use Apple Pay anymore, I can’t watch Netflix, I can’t buy anything from foreign websites, I need a VPN [virtual private network] to use Instagram. Prices are going up on almost everything, especially imported goods.”
"Deep down, I feel uncertain," he added. "Every day there's something new that can be withdrawn, banned or restricted. It's really hard to plan for anything these days."
Sanctions hit Russia's financial sector hard
Russia's central bank has struggled to stabilize the ruble and prevent a sharp rise in interest rates without drawing on about half of its foreign exchange reserves.
The Russian stock market is also closed this week, and shares of local companies are likely to fall once trading begins.
Russia has so far avoided default on its foreign debt and even paid international bonds in dollars, the value of which rose in Russia rather than the ruble.
“The problem with Russia is that if you default, you can pay your creditors to try to get your assets back,” said Chris Miller, a visiting scholar at the American Enterprise Institute (AEI), a right-leaning think tank.
"This is not a problem for the Russian state, because it is very difficult for investors to seize state assets because they provide sovereign immunity in most legal systems. You also have resources abroad."
Russian industry and trade are shaken
Since the 1990s, Russia has gradually integrated into the globalized supply chain of technology, aviation and other industries. Parts designed, engineered or regulated without access to intellectual property laws in the U.S. and elsewhere are now a barrier.
"We're already seeing this in the auto industry, for example," said AEI's Miller. "Nearly half of Russian auto companies have closed factories because they can't get the materials they need." Different sectors are seeing more of this because of supply chain issues over time."
Key components used in a wide range of industries are semiconductors, computer chips that store and process data in products ranging from smartphones to weapons systems. Most of Russia's chips come from China, but many analysts say the chips are below U.S. and other East Asian hardware standards.
"The Taiwanese make the most advanced logic chips, then the Koreans, then the American Intel," Miller said. Russia's internal capabilities are more than a decade behind.
Even advanced chips made in China are still subject to U.S. export controls because they are made using imported U.S. technology. Manufacturers may try to illegally circumvent these controls, but China's largest semiconductor maker largely complied when it imposed a similar fine on Chinese telecom giant Huawei in 2019.
The ban has cultural implications
For many Russians, the current crisis brings back memories of the 1990s, when the country faced a prolonged recession as it restructured its economy after the collapse of the Soviet Union.
From 1989 to 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 in 1995 the IMF had to stabilize the Russian ruble through strict currency controls and nominal exchange rate targeting.
“The Russian people are used to facing a lot of economic crises,” said Ekaterina Selyuzitskaya, a Russian citizen and a freelance Russian-Chinese translator who lives in Dongguan, China. We rarely think of an era without economic crises.
"Right now, the people I know are nice," he added. "Of course they are afraid of their future, and some of them may lose their jobs. The future is not clear."
Selyuzitskaya noted that Russian public sector employees have higher financial stability than private sector employees, especially those working in international organizations.
"Buying and selling spare parts is becoming more and more complex," he said. “If people are working in China, they would rather pay in yuan than in dollars because currency activity in dollars is very complicated right now, and the yuan is very strong.”
Sanctions lead to exodus of Western companies
The massive withdrawal of multinationals from Russia is reminiscent of Soviet-era restrictions on the country's economy. Dozens of companies have announced plans to wind up operations in Russia, citing the ethical implications of working under Putin's regime and the risk of conflict with sanctions.
Russians are now largely cut off from American financial services, technology and entertainment companies, including Apple, Netflix, Visa and Mastercard. American brands such as McDonald's and Lewis that crossed the Iron Curtain have ushered in a new era of economic liberalization in Russia and no longer exist.
While the United States and its allies may lift some economic sanctions on Russia at some point in the future, some trade ties severed this year may not be restored.
The Russian government has announced plans to seize the assets, including intellectual property, of any international company protesting during the war. This means Russia can help state-owned companies replicate products and companies that no longer operate in the country, using the same brands and local ingredients.
Source: Tobias Burns and Sylvan Lane, The Hill, Direct News 99