Despite sanctions, Russia’s economy is still standing — for now

Six months into Russia’s war in Ukraine, severe economic sanctions initiated by the US and the EU seem to be having the twofold effect of stifling Russia’s economy and encouraging divestment by large corporations, with the US-based Citibank the latest to announce its formal withdrawal from the Russian market.

Citibank on Thursday issued a press release stating its intention to wind down its consumer and local commercial banking enterprises in Russia as part of a longer-term “global strategic refresh” first announced in April 2021. “We have explored multiple strategic options to sell these businesses over the past several months. It’s clear that the wind-down path makes the most sense given the many complicating factors in the environment,” CEO of Legacy Franchises Titi Cole said in the release, though as of July the bank was still attempting to negotiate a sale of its local commercial and consumer banking sectors to local Russian companies, the Financial Times reported at the time. Sanctions complicated the sale to at least one potential buyer, Rosbank; owner Vladimir Potanin was recently sanctioned by the UK.

Citibank’s announcement, and the decision to wind down its operations rather than continue to pursue sales, is somewhat of an indicator that sanctions and bans are having their intended effect. “Months ago, the United States banned all new investment in Russia’s economy,” senior research scholar at Columbia University’s Center for Global Energy Policy Eddie Fishman told Vox via email. “So any US companies that remain in Russia are barely keeping the lights on.”

However, that doesn’t mean the Russian economy has collapsed; Russia’s central bank has been adjusting the country’s monetary policy to keep the ruble afloat, and it’s currently the strongest it’s been against the dollar since 2018, CNN reported Sunday. After a crash early in the war, when the US froze $600 billion in foreign currency reserves, the central bank took aggressive action, hiking interest rates to control inflation. That seems to have paid off, with inflation apparently leveling out after an April high of 18 percent.

Additionally, banks and businesses from other countries including China and Japan have helped to soften the blow somewhat, either by maintaining their business ties to Russia or committing to expanded investments there. China and India have both ramped up fuel purchases including coal despite sanctions on Russia’s fossil fuel industry, as well.

Sanctions take some time to affect a major economy

Russia has also been working to mitigate the sanctions’ impact since the US originally imposed sanctions in 2014 because of Russia’s invasion of Crimea. When major Western businesses like McDonald’s, Starbucks, Visa, and Mastercard left the country early on in the invasion, there were Russian companies there to mitigate the blow, Andrey Nechaev, Russia’s former economy minister, told CNN. “The exit of Mastercard, Visa, it barely had an impact on domestic payments because the central bank had its own alternative system of payments.” Fast-food, too, is now becoming a homegrown enterprise, with McDonald’s franchises reopening under the name Vkusno i tochka — Tasty, and that’s it — and Starbucks is now going by Stars Coffee. Starting in 2014, the government pushed Western franchises to get their supplies locally; that policy has paid off, since imports are now difficult to come by.

Despite the preparations the Russian government made to help the economy weather the West’s aggressive sanctions regime, those controls aren’t sustainable forever. Furthermore, Russia still can’t import critical technological supplies, and its economy is heavily reliant on fuel exports and is currently benefiting from high prices due to inflation.

“Sanctions are having a dramatic impact on Russia’s economy,” Fishman said. “Even the most conservative estimates suggest Russia’s GDP will contract by 6 percent this year — a larger hit than the 1998 Russian financial crisis. Absent sanctions, Russia’s economy was poised for growth this year.” The country’s inability to import goods “has led to shortages of foreign components and rapidly declining industrial production. The result has been a wave of underemployment that will eventually translate into layoffs and declining living standards.”

Russia’s fuel industry ultimately has a limited lifespan, Thane Gustafson argues in his book Klimat: Russia in the Age of Climate Change. Russia’s economy is so deeply tied to fossil fuels that it has no significant alternative industry to make up for the money it rakes in from those revenues. In 2019, oil and gas exports accounted for 56 percent of Russian export income, totaling $237.8 billion. Those revenues contributed to 39 percent of the national budget, according to Gustafson. Without a strong oil and gas industry — high prices and a large customer base —…