Russia’s economy has avoided collapse so far, but trouble is looming. Here’s why

Russia’s economy has averted a devastating collapse so far despite unprecedented sanctions sparked by the war in Ukraine, allowing Vladimir Putin to rally his people against the West and in support of his invasion.

Yet experts — and even top Russian officials — say trouble is right around the corner. Reserves that have propped up the economy to this point are starting to run out, and Moscow’s mayor is warning of mass job losses. The head of Russia’s central bank said this week that the impacts of existing and future sanctions are about to be felt in “the real economy” soon.

“It’s largely an artificial propping up of the economy that’s taken place” up to this point, said Lisa Sundstrom, a political science professor at the University of British Columbia who studies Russia.

“The question now is, how long can this continue?”

After Western nations announced their first rounds of economic sanctions in the days after Russia invaded Ukraine on Feb. 24, the Russian ruble lost nearly half its value and stock markets were closed for the first month of the war to avoid a crash.

Two months later, the ruble has largely recovered, becoming the best-performing currency globally in March. Trading also bounced back once the stock markets were reopened last month.

Economists say steps taken by the Kremlin and the Russian Central Bank — raising interest rates to 20 per cent, forcing Russian businesses to exchange 80 per cent of their overseas earnings into rubles — contributed to the recovery.

Russia has also dipped into the half of its estimated $620 billion in foreign currency holdings not invested in the U.S. and Europe — currently frozen by Western sanctions — to protect the ruble and fuel government spending.

Russia is also continuing to export oil and other energy products to India, China and Europe, bringing billions of dollars into the economy every month.

Freezes on Russian imports and exports by the West have led international financial organizations to predict Russia’s GDP will shrink between 10 and 15 per cent by the fall — a dip that University of British Columbia economist James Brander calls “a serious recession, but not a catastrophe.”

“The Russian economy is being harmed, but it’s not at a level where it affects the war effort,” he told Global News.

“For most people, it’s an inconvenience. And for Putin, I don’t think it’s a problem at all at this stage, and I don’t think he actually cares that much.”

On Monday, Putin told a televised meeting with senior officials that the West’s hope of an economic collapse has failed, echoing similar comments he has made in public this month.

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He said the widespread sanctions aimed to “rapidly undermine the financial and economic situation in our country, provoke panic in the markets, the collapse of the banking system and a large-scale shortage of goods in stores.

“But we can already confidently say that this policy toward Russia has failed,” he continued. “The strategy of an economic blitzkrieg has failed.”

After widespread protests at the start of the war, domestic support for Putin appears to have risen. The latest poll by the Levada Center, an independent pollster in Moscow, suggests 83 per cent of Russians approve of the leader, up from 69 per cent in January.

The Kremlin has introduced severe penalties for protests and any media reports that deviate from the Kremlin’s description of the invasion as a “special military operation.” That, and state media’s attacks on the West, appear to have made an impact, according to Levada.

“The confrontation with the West has consolidated people,” Denis Volkov, the pollster’s director, told the New York Times when the poll was released on March 31. He added some of the respondents in favour of Putin said they normally did not support the president, but had decided now is the time to do so.

Sundstrom says even independent polling in Russia is not always accurate, as it does not measure why people respond the way they do — suggesting fear of speaking out against Putin may be playing a role.

But she adds that because the government has done enough to keep the economy “at an acceptable level” for the average Russian, it has allowed Putin to benefit from a “rally around the flag” mentality that often lifts the popularity of wartime leaders.

“I think the consensus out there is that a lot of the popularity is real,” she said.

“At the same time, if you think that everybody around you likes the leader, then you will like the leader yourself. You kind of think that it’s the right thing to do.”

Sundstrom says Putin’s popularity could drop off “pretty quickly” if domestic discord grows — particularly if the economic situation worsens.

Moscow Mayor Sergei Sobyanin warned on Monday that around 200,000 people are at risk of losing their jobs as Western companies pull out of the capital in protest over the war. He announced $40 million will be spent on helping those workers laid off by foreign firms find temporary employment and new jobs.

The Russian Central Bank’s chairwoman, Elvira Nabiullina, sounded even more dire in her reports to Russian lawmakers this week.

Inflation in Russia now stands at 17.6 per cent and is on track to accelerate to 22 per cent this year, while the economy is set to shrink by 9.2 per cent in 2022, according to a poll of economists conducted by the bank in April.

Nabiullina told the Duma, Russia’s lower house of parliament, on Thursday that nearly every product made in Russia relies on parts imported from overseas, which have largely been banned amid the sanctions. Bans on Russian exports are also due to be felt as soon as the second quarter of this year, she added.

Plus, she warned that “the period during which the economy can live on reserves is finite.” She explained the reserves not frozen by the West are largely invested in gold and Chinese yuan, which can do little to further resuscitate the ruble.

Brander, the UBC economist, said it will take years for Russia’s manufacturing sector to find ways to make up for the lack of Western parts and create new supply chains.

“As time goes on, it’s going to be harder and harder to produce in Russia,” he said.

“My only worry is that (the economic pain) won’t accumulate fast enough,” he added, pointing to how little impact such shortages will have on the Ukrainian battlefield right now.

The European Union, meanwhile, is mulling how to curb imports of Russian oil, seeking a phased approach in line with the four-month transition away from Russian coal the bloc announced earlier this month.

If approved, it would strike a blow to a revenue stream for Russia currently estimated at over $800 million per day, according to the Belgian economic institute Bruegel.

Sundstrom says the accumulation of these looming catastrophes may very well lead to real impacts on average Russians, threatening Putin’s support.

“At a certain point, the rubber is going to hit the road when the government finds itself unable to pay people’s pensions, provide parts for manufacturing, all these things that Russians rely on day-to-day,” she said.

“What happens after that, we really don’t know at this point.”

— with files from Reuters