Two weeks ago, we identified three wars occurring in Ukraine: military, information, and economic. Last week we discussed the Information War. Today we look at the Economic War.
The sanctions are having an impact. Bloomberg Economics predicts Russia’s GDP will shrink by 9% this year. (It was scheduled to grow at 2.4%.) Inflation is currently at 9% and will likely spike higher. Interest rates have doubled. The ruble has fallen to its lowest value ever, from 80 rubles to the dollar to 133. Foreign companies are fleeing Russia. The ratings agency, Fitch, downgraded Russia bonds to junk status. In response, the Russian Central Bank (RCB) has stepped in to bolster the ruble. Citizens are no longer allowed to convert rubles into foreign currency. The government has restricted exports; and the stock market has been closed for two weeks. In Russia’s favor is that it still makes money from oil and gas, and the devalued ruble means it gains even more revenue per barrel. Russia also has one of the lowest national debts in the world, hovering around 18% of GDP (the US is around 130%). The Russian Central Bank has foreign reserves of roughly $640B, though much of it is inaccessible due to sanctions. And Russia’s internal reserves, the National Wealth Fund, is accessible but is only $175B.
Economic Warfare has come to the fore with globalization and computer transactions. Globalization has increased the leverage nations have on each other, especially on trading partners. Computer finance means transactions are fast and frequent, speeding up the impact sanctions and other financial measures have.
In the long-run, Bloomberg Economics predicts a greater downturn ahead. Russia will remain cut-off from its main trading partners, except Belarus and China. Purchasing power will continue to decline due to inflation. And the economy will continue to shrink—before the invasion, the Russian economy ranked 11th in the world; by the end of the year, it will be 22nd. Structural problems in the Russian economy preclude a quick recovery. Putin has to finish this war quickly. Ukraine has to make it last into “the long-run.”
Source:
Paul Abelsky, “Two Weeks into the War, Russia’s Economy Has Rarely Fared Worse Than Now,” Bloomberg News, 11 Mar 2022; accessed from https://www.bloomberg.com/news/articles/2022-03-11/two-weeks-into-war-russian-economy-rarely-fared-worse-than-now
“Russia Built an Economy Life a Fortress but the Pain is Real,” Associated Press, 10 Mar 2022.
Renaud Foucart, “The Cost of War: How Russia’s Economy Will Struggle to Pay the Price of Invading Ukraine,” The Economic Times, 14 Mar 2022.
Mona Alami, “How Bad uis the Russian Economy, really?” Arab News, 15 Mar 2022.
Eric Werker, “The Russian Economy is Headed for Collapse,” The Conversation, 10 Mar 2022.
Photo: Bloomberg
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