Sanctions over Ukraine are starting to ‘shrink’ Russia’s economy. Here’s how

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Over a month into the invasion of Ukraine, Western sanctions are starting to have an impact on Russia’s economy, experts say.

“Their economy is really starting to shrink,” Mark Manger, associate professor at the University of Toronto’s Munk School of Global Affairs and Public Policy, told Global News.

Russia’s gross domestic product is estimated to shrink by 15 per cent by the end of the year, according to the International Institute of Finance.

If levels drop to this level, Russia will see its greatest recession since 1992, according to data from The World Bank. This would also be twice as severe as the 2009 recession.

Here’s a look at how Western sanctions are affecting Russia’s economy.

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Impact on manufacturing industries

In March, Russia’s manufacturing sector saw the largest decline since the beginning of the COVID-19 outbreak in 2020, according to S&P Global.

“Driving the downturn were the notably sharper decreases in production and new orders amid muted foreign and domestic client demands,” the company said in a report on April 1.

Employment in the manufacturing sector is “falling at the joint-fastest pace in almost two years” due to firms cutting jobs, according to the report.

Thousands of autoworkers in the small Russian city of Kaluga have been furloughed as Western sanctions hit its flagship foreign carmakers.

Sanctions have exacerbated lingering component shortages and halted production at two flagship car plants: Germany’s Volkswagen and Sweden’s Volvo. Both makers have suspended operations due to the war, affecting 4,200 and 600 workers respectively.

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Ford also announced it would suspend its Russian joint venture at the beginning of March.

According to Munk’s Manger, Russia has also begun “cannibalizing” its airplanes for parts after sanctions targeted their export.

“They can’t really get replacement parts for them, so they have to start cannibalizing one plane to keep another one flying,” he said, adding that the impact might be seen for both passenger and military planes.

“That’s similarly going to be the case for virtually every other technology there. If there’s no spares coming, they will have to make do with what they have.”

Value of the ruble

As the value of the ruble continues to fluctuate, some Russians have begun buying goods that may have a more stable exchange, according to Manger.

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“If you have enough money, you might buy a smartphone, and if you don’t have a lot of money, you buy canned beans,” Manger said. “They will also lose value but not as quickly as currency.”

Between Feb. 23 and March 4, the value of Russian currency inflated from 80.95 rubles to 108.19 rubles per U.S. dollar as a result of international sanctions imposed after the invasion, according to S&P Global.

A number of Russian banks have also been cut off from the SWIFT interbank payments system, the world’s main international payments network.

But even as the West piles on more sanctions, Russia’s central bank has managed to stabilize key aspects of the economy with severe controls, artificially propping up the ruble so it can rebound to levels seen before the invasion of Ukraine.

The central bank of Russia said Friday that it was lowering its benchmark interest rate and said more rate cuts could be on the way.

However, despite a ruble rebound, there’s no real market for it as it continues to face sanctions, Manger said.

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S&P Global has downgraded its assessment of Russia’s ability to repay foreign debt, creating the possibility that Moscow will soon default on external loans for the first time in more than a century.

The credit ratings agency issued the downgrade to “selective default” late Friday after Russia arranged to make foreign bond payments in rubles on Monday when they were due in dollars. It said it didn’t expect Russia to be able to convert the rubles into dollars within the 30-day grace period allowed.

S&P said in a statement that its decision was based partly on its opinion that sanctions on Russia over its invasion of Ukraine “are likely to be further increased in the coming weeks, hampering Russia’s willingness and technical abilities to honour the terms and conditions of its obligations to foreign debtholders.”

Empty grocery stores

Despite Moscow telling citizens there is no lack of food and urging them not to panic-buy staples like sugar and buckwheat, some Russian towns have begun to sell out of products.

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A note “It is important that there are enough goods for everyone. We are forced to impose temporary restrictions on goods in high demand. Up to ten items per purchase” is written on a shelf of the Lenta store, a grocery store. Photo by Igor Russak/picture alliance via Getty Images

In the Russian town of Pokrov, sugar has sold out in many stores and residents expect some goods to become unaffordable as Western sanctions over Moscow’s military intervention in Ukraine take hold, according to a Reuters report.

“It’s becoming more and more difficult for Russia to import things and that leads to these empty shelves,” Manger said.

A lot of products have left the country as North American and European countries pulled stock and brands, including Starbucks and McDonald’s, have also left.

“Branded products are now going to be more and more difficult to find,” Adam Pankratz, lecturer at the University of British Columbia’s Sauder School of Business, told Global News.

“When you add on aggression and a war, things are going to get worse. You’re going to see pictures of empty supermarket shelves and missing products in stores.”

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Russian oil exports

Crude oil, refined petroleum, and petroleum gas are Russia’s top exports, according to the Observatory of Economic Complexity (OEC).

“The big elephant in the room is that Canada and the U.S. immediately imposed an embargo on Russian oil, but the rest of the world hasn’t,” Manger said.

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“People might say, ‘they can easily ship it elsewhere,’ but it’s actually not that easy,” he said, noting Russia’s oil is already trading at a 20 per cent discount.

Due to Russian oil being heavy crude, it’s only useful for specific refineries, according to Manger.

Additionally, some countries could be hesitant to purchase Russian oil in fear of being targeted by secondary sanctions from the West.

Despite sanctions, however, some countries across the globe have continued to purchase Russian oil.

“Russia is selling at a discount, but they’re selling to India and China,” Pankratz said. “It’s coming from Russia because they’re buying it at a discount because the Russians can’t sell it elsewhere.

“The reality is that the world still needs oil.”

With files from the Associated Press and Reuters

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