‘It’s going down the drain’: Sanctions are taking their toll on Russia’s economy

McDonald’s is one of hundreds of foreign businesses to suspend operations in Russia.-/AFP via Getty Images

In the days after Russia invaded Ukraine, Alexey Skripko figured he’d better act quickly to buy the new computer he needed for his small Moscow business.

The United States and its allies had placed sweeping economic sanctions on his country, sending the Russian ruble’s value plummeting. He feared prices would soon start rising, particularly for items like laptops and cellphones made with semiconductors containing American technology that the Biden administration had banned from sale to Russia.

“I paid about 70,000 rubles for a pretty good desktop system,” said Skripko, 47, whose firm does language translation for conferences and conventions, estimating the price was the equivalent of just under $1,000. “The day after, it was like 90,000 rubles. Now, I hear it’s more than 100,000.”

Skripko didn’t stay to find out exactly how high the price could go. He and his family fled to Armenia shortly afterward, appalled by Russian President Vladimir Putin’s decision to launch the war. The new computer sits in their abandoned Moscow apartment, and Skripko has trouble imagining what Russia will even be like if and when they return to it.

“I talk to some people who are still there and they are in a very bad mood,” he said in a phone interview from the Armenian capital of Yerevan. “The Russian economy obviously is suffering. I’d say it’s going down the drain.”

Putin’s invasion of Ukraine has triggered the most far-reaching sanctions ever leveled on a large country, an unprecedented worldwide shunning whose eventual impact both on Russia and the global economy is still a matter of speculation. As the United States announced another round of sanctions on Thursday, President Biden reiterated at a NATO summit in Brussels that the goal was “to cripple Putin’s economy and punish him for his actions.”

The United States has led dozens of nations in an escalating series of moves to cut off Russia from the global economy while also targeting the personal wealth of Putin and the government officials and billionaire oligarchs who support him. Those sanctions — and the voluntary move by hundreds of foreign companies, from McDonald’s to Apple, to suspend their operations there — are starting to inflict a toll inside Russia that experts said will continue to increase, ratcheting up the internal pressure on a still-defiant Putin to end the war.

That toll encompasses easily measurable effects like rising prices at the grocery store and the plummeting value of the ruble, as well as harder-to-quantify drawbacks such as an exodus of people like Skripko, a “brain drain” that could haunt Russia for decades.

“My expectation is it’s going to get worse and worse and worse for a number of months,” said Chris Miller, codirector of the Russia and Eurasia Program at the Fletcher School at Tufts University. “Any sort of macro indicator you’re going to look at is going to show a deep recession this year.”

The Russian economy is expected to contract by 15 percent in 2022, a bigger year-over-year decline than the United States endured even at the depth of the Great Depression, according to a report last week by the Institute of International Finance (IIF), a trade group for the world’s financial industry. Inflation in Russia is expected to rise by nearly 15 percentage points this year, almost double the decades-high rate the United States is experiencing right now, predicted the Organisation for Economic Co-operation and Development, a group representing 38 nations with advanced economies.

And the International Energy Agency said on Thursday that Russia’s oil exports — the country’s major source of income — could decline by as much as 3 million barrels a day, roughly 38 percent of its prewar output.

The sanctions work at the highest levels of international finance and trade, including freezing most of the Russian central bank’s assets held in foreign currency and barring several of its major private banks from the SWIFT global payments system. They’ve caused Russian interest rates to double to 20 percent, constraining companies and the government from purchasing vital materials and putting them at risk of defaulting on their debt.

But the effects also are designed to trickle down into the lives of average Russians. The sanctions are driving up the cost of everyday goods like groceries and medicine while depriving people access to foreign products and even their own savings as Putin’s government set withdrawal limits for banks, seeking to stop money from leaving the country. Videos on social media have shown empty store shelves, shuttered foreign luxury-brand storefronts in malls, and customers scrambling to buy essentials.

Egor, 43, a Muscovite and critic of the war who asked that his last name not be published out of fear of government retribution, said prices have increased by 20 to 30 percent since the invasion, fueling a level of consumer panic.

“Everyone expects the prices to go up even further and they try to buy things while they still can at the current prices,” he said.

Russian officials appear to have been caught flat-footed by the scope of the coordinated sanctions by the United States and its allies, which are far more extensive than those imposed after the annexation of Ukraine’s Crimean peninsula in 2014. Foreign Minister Sergei Lavrov said Wednesday that nobody predicted what he called the “thievery” of about half of the nation’s estimated $640 billion in foreign reserves being frozen.

Putin has branded the sanctions as “akin to a declaration of war.” He recently acknowledged the impact of what he called an attempted “economic blitzkrieg” of his country even while calling the sanctions a failure and vowing not to give in.

“Clearly, in the new realities we will have to make deep structural changes in our economy, and I will not pretend that they will be easy or that they will not lead to a temporary increase in inflation and unemployment,” Putin said in a March 16 speech. He laid out efforts to boost the Russian economy, ruling out price regulation but promising payments to low-income families with children, an increase in the minimum wage, and other government steps “to ensure the availability of goods on the consumer market.”

Konstantin Sonin, an economist at the University of Chicago, said the Russian government has put its economy on a war footing and he expects more centralized decision-making than usual in Russia as the impact of the sanctions builds. Some sectors already have been hit hard, like airlines and auto builders, with wage cuts and possible job losses soon to follow.

“The thing that makes it so hard to predict is people will have to cut their consumption,” said Sonin, who was on sabbatical in his native Russia before cutting it short and returning to the United States after the invasion. “People will have to spend a larger fraction of their budgets on food so as a result they will cut on everything else . . . on all kinds of luxury goods, all kinds of non-necessities.”

One necessity in high demand has been sugar.

A staple that can be stored for years, sugar is used by many families to make jams out of fresh fruits and berries in what Sonin described as a sort of national sport. The price of sugar jumped by as much as 37 percent in some areas and an average of 14 percent nationwide in the week ending March 18, after a 13 percent hike the previous week, according to Russian government statistics that might understate the increases.

In response, Russia has banned sugar exports and is investigating producers for possible “unjustified” shortages. A top government official publicly declared this month that there was no risk of food shortages and told Russians “it is not worth driving up artificial demand with purchases for the future.”

In one video that went viral, a grocery store worker recorded what happens when a grocery cart full of bags of sugar is rolled into a store and customers, largely elderly people, fight over them.

“I think right now people are preparing for a very long haul,” Skripko said of his friends still in Russia. “It makes perfect sense to buy what you can buy for the rubles that you have now because you’re not going to have more rubles going forward, but prices are going to be higher.”

Miller, the Tufts Russia expert, said he’s not expecting major shortages of consumer goods. And Egor said he’s recently found grocery store shelves in Moscow stocked with food, even sugar, although at higher prices.

People continue to go to restaurants and try to live a normal life, he said, noting a majority of Russians still seem to support the war and believe Putin’s assurances that things will be OK. But those like Egor who don’t agree “are in a very gloomy mood, and that’s to put it mildly.”

His job depends on foreign companies and his work has dwindled to almost nothing. Nobody is hiring.

“The level of uncertainty is so high that no one actually knows what’s going to happen the next day,” he said.

Historically, Russian companies have tried not to lay off workers, preferring to cut hours and wages instead, Miller said. But it’s not clear how long some companies will be able to avoid job cuts if they can’t import essential products like semiconductors while facing high interest rates to borrow money to stay afloat, he said.

The IIF report said the war has accelerated the nation’s loss of highly skilled workers over the past decade, which picked up following the annexation of Crimea. The Russian Association for Electronic Communications estimated that 50,000 to 70,000 information technology workers have left the country since the invasion of Ukraine and 100,000 more could follow in April.

Battering the Russian economy like that is part of the goal of the sanctions, according to the Biden administration.

“We can’t predict exactly when or how this will change Putin’s calculus,” a senior administration official told reporters Thursday. “But what we can ensure is that this is going to be a failure; he’s going to emerge weaker, and we’re going to emerge stronger.”

Sonin said there’s no doubt the Russian economy is weaker. And while billionaire oligarchs can weather the loss of wealth from personal sanctions, others who have been sanctioned will be hit harder, such as less wealthy Russian Parliament members with foreign investments or properties.

“Their Miami apartment, their Barcelona villa, this might be half of their life earnings,” he said. “I don’t know how much sway they have over Putin, but they were certainly made unhappy.”

Still, Sonin said, the impact of sanctions is limited when dealing with an authoritarian leader like Putin.

“I think this is an imperfect strategy and a costly strategy,” Sonin said, noting the economic pain average Russians are facing and the difficulty of precisely targeting such measures. “Even if your sanctions are totally ideal, the best-targeted sanctions, this is still not a missile.”