'Running Out Of Spare Parts': Plenty Of Pain Ahead For Russia's Economy

At first glance, Russia may seem to be adapting to the tough new sanctions imposed by Western countries over its unprovoked invasion of Ukraine.

The ruble, which tumbled in the first days of the war to a record low, rebounded to its highest level since early 2020 this week. Grocery stores in Moscow are still filled with food, albeit at much higher prices, and revenue from the sale of oil and gas continues to flow into the budget.

But Russia's economy is anything but out of the woods, Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance (IIF), told RFE/RL's Russian Service in an interview. The country is entering what is likely to be a very tough period as the impact of the sanctions gradually sets in, she says.

"Everyone is running out of spare parts, export markets have disappeared, many [companies] cannot continue production," Ribakova said, citing evidence form a recent Russian central bank report.

The United States, the European Union, and other allies have barred exports to Russia of key technology, such as microprocessors -- or chips -- used in the production of many manufactured goods, including cars and planes.

Meanwhile, many Western companies have voluntarily announced they will no longer do business in Russia, such as suppliers of components or services to the manufacturing industry.

'State Of Denial'

It could take Russian companies months to find new suppliers and those new parts may not perfectly match the production process, causing further delays, Ribakova says.

Russians living in the country's richest cities, like Moscow, may be in a "state of denial" about the bleak economic outlook because they don't yet see the signs, like impending layoffs, that people in other areas are starting to feel.

"In Moscow it may seem that nothing [bad] is happening. But if you are in the Kaluga region or near St. Petersburg, where there are car assembly plants, everyone there knows that in a couple of months they will be out of work," Ribakova said in the interview on April 27.

Kaluga, about 160 kilometers southwest of Moscow, had been one of the most successful cities in Russia in attracting foreign investment on a per capita basis due in part to its proximity to the capital and ease of doing business. Now, those foreign manufactures, including auto producers, are shutting down production, potentially leaving thousands of people in Kaluga out of a job.

The IIF expects Russia's economy to decline by 15 percent this year due to the impact of sanctions, one of the most bearish forecasts by experts. Such a drop would be the sharpest since the early 1990s, when Russia was struggling to make the difficult transition from a state-controlled economy to a free market.

Energy Sanctions

Ribakova says the Russian ruble has been holding up well so far due to in large part to policies to support the national currency amid crushing sanctions.

The central bank immediately raised interest rates to 20 percent, the highest in two decades, making ruble deposits more attractive but also discouraging companies and individuals from borrowing. It has since cut them to 14 percent.

The central bank also imposed limits on converting rubles to other currencies, banned foreigners from selling their ruble-denominated stocks and bonds, and forced Russian exporters of oil and gas to sell 80 percent of their hard-currency earnings for rubles.

The invasion of Ukraine has caused a spike in oil and gas prices, benefiting Russia and its ability to protect the ruble. As a result, Russia has earned billions of dollars more from the sale of oil and gas during the first four months of 2022 compared with the analogous period last year. Oil and gas exports can account for as much as half of Russia's federal budget revenues.

 

European countries are now discussing phasing out Russian oil imports by the end of the year and cutting natural gas imports by two-thirds over the same period, a potential blow to Moscow's export revenues.

Russia will try to reorientate those oil sales to Asia but will earn less due to the cost of transporting it by tanker halfway around the world, Ribakova says, adding that China, the world's second-largest economy, may not want to significantly increase its dependence on Russian energy.

Beijing seems to have an "unspoken rule" of limiting its energy dependence on any one country to 15 percent, and Russia is already slightly above that level, she says.

When Will It End?

Russia's long-term economic outlook will depend in part on how long its invasion of Ukraine lasts, Ribakova told RFE/RL. If the war doesn't end soon, the West will not only move ahead with plans to end energy dependence on Russia, it could also deploy the roughly $300 billion in frozen Russian central-bank funds to rebuild Ukraine's economy.

The United States and Europe imposed a freeze on those central-bank holdings in the first days of the war and have continued to pile more sanctions as the war continues. Ribakova calls sanctions a "stigma" that is "much worse" for a country's image than a debt default.

 

She points out that because of the reputational risk, most foreign companies did not return to Iran even after some years-old sanctions were removed -- and that the same may happen with Russia.

"I think that in our lifetime Russia may never return to global markets in the same way," she said.

Written by Todd Prince based on an interview conducted by Sergei Khazov-Cassia of RFE/RL's Russian Service