After the invasion of Ukraine, which inflicted unspeakable damage on millions of people, Russia is now the most sanctioned country in the world. More than 2,000 additional Western sanctions have been introduced against a group of individuals, companies and institutions. In addition, measures have been implemented to exclude Russia from international payment systems, the use of major reserve currencies or access to key technologies such as semiconductors. Thus, “it seems inevitable that Russia will experience a deep recession: Moscow had built a war reserve of $ 643 billion, diversifying holdings in foreign currencies other than Western ones to resist external threats.
There are several reasons to believe that Russia’s economy will be weaker, although sanctions have led to different results in the past. Analysis of government statements by the Global Sanctions Database suggests that half sanctions do not achieve the desired result. Those that are successful are usually imposed quickly and multilaterally, in order to limit the ability of the target country to adapt, and it can be said with certainty that this has been the case in Russia.
An empirical study by German academics Neuenkirch and Neumeier highlights the importance of international collaboration: the authors estimate that UN sanctions will lead to a reduction of more than 2 percentage points in per capita GDP growth over a 10-year period. “By comparison, the unilateral actions taken by the United States will cause a decline of less than 1 percentage point over a shorter time horizon of seven years. Russian growth was already weak with an average of just 1.8% over the past decade. . The coordinated action of sanctions imposed by the West suggests it may even stop in the next decade, “says Brown.
The supply side of the Russian economy will almost certainly be affected. The mass exodus of multinationals will lead to structurally higher unemployment and lower production. Investments will suffer from uncertainty and technological restrictions will force the country to become more self-sufficient. However, “the annihilation of supply means it will also have to import more goods, pushing inflation higher. Getting the foreign currency needed to finance these imports will fundamentally depend on Russia’s ability to export oil and gas, which accounts for around 15 -20% of its GDP. Western countries are accelerating the pace to end their dependence on Russian energy, a particularly difficult undertaking for the EU. which imports about 40% of its natural gas from Russia. China and other emerging markets will be able to partially offset the resulting decline in demand, but Beijing is likely to get a significant discount from Moscow and may proceed cautiously for fear of being involved in secondary sanctions, “Schroders’ economist explains. noting that there are numerous emerging market cases that have faced similar supply-side disruption.
Sanctions, economic mismanagement or a combination of the two impose great pressure on imports, ultimately generating shortages of both foreign exchange and goods. Structurally higher inflation inevitably follows, leading to weaker economic growth and sustained depreciation of currencies. Examples of this include Argentina and Venezuela, but perhaps the most relevant comparison is Iran, Brown cites, recalling that Iran was a major oil exporter in the 1970s with about 11.5% of global production. Aggressive modernization reforms led to an annual GDP growth of nearly 10%, but they also sowed the seeds of the 1979 revolution. Oil production decreased by 4,
The sanctions subsequently inflicted a heavy toll on Iran. Oil embargoes and technology restrictions have seen its main industry suffer from chronic underinvestment. Today, production is a third below pre-revolution levels at full capacity and the IMF estimates the break-even price of oil to be $ 400 a barrel. Inflation plagues the country, fueled by widespread shortages and the depreciation of the Iranian currency, the rial, which in 40 years has fallen from 70 to 42,000 against the dollar, a compound annual decline of 17%. On the black market, it is trading close to 300,000. “The significant fall from grace of Tehran is a warning that Moscow cannot ignore. The sanctions may have mixed effects, but they leave deep and lasting scars on the target country. Even if remorse sets in, a government turnaround is unlikely to make a difference. Her reputation has been destroyed in the eyes of the world and she may never recover, “Brown concluded. (All rights reserved)
