The State of Russia

The State of Russia

About 70 days into Russia’s invasion of Ukraine, a transformative shift in the war narrative can be observed. Today, it is as much Russia vs USA as it is Russia vs Ukraine.

The New York Times reported last week that “when Defence Secretary Lloyd J. Austin III declared [..] that America’s goal is to see Russia so “weakened” that it would no longer have the power to invade a neighboring state, he was acknowledging a transformation of the conflict, from a battle over control of Ukraine to one that pits Washington more directly against Moscow.”

Over the longer term, Austin’s description of the United States’ strategic goal is only set to reinforce Putin’s oft-stated belief of the West’s desire to choke Russian power and destabilize the Kremlin.

No trust

To that end, western economies levying waves of sanctions against Russia in response to Putin’s war over Ukraine seems to have crippled the economy’s internal workings, with severe discrepancies now being observed between private-sector and government-released data.

The Wall Street Journal recently noted that Russia’s release of “inconsistent data showed the economy in March was either doing fine or just treading water. Private-sector data has shown a sharp slowdown.” That indicators such as economic growth and industrial output in Russia would take a hit and factors like unemployment would rise owing to the war was the overarching narrative among global economists.

The official release, however, claimed a rise in economic output of +1.6% in March, year-over-year. This, against the backdrop of two consecutive decelerations of -4.3% in February and -5.8% in January, makes for rather inconsistent reading.

While some may argue that the effect of the sanctions will take a while to feature in the economy’s numbers, Putin closing down his economy has raised several doubts about the efficacy of the official statistics in the first place – not that the west needed any more reason to not have complete faith in the man’s words.

The Russian response

PBS reports, “As the West moved to cut off Russia’s access to its foreign reserves, limit imports of key technologies and take other restrictive actions, the Kremlin launched some drastic measures to protect the economy. Those included hiking interest rates to as high as 20%, instituting capital controls, and forcing Russian businesses to convert their profits into roubles.”

The rate hike, coupled with the other emergency measures helped pull the rouble up from the depths it had plunged to in early March, at which time it had lost almost 30% of its value against the dollar since the start of the year.

Image: USD/Russian rouble; Source: CNBC

As in most bullwhip oscillations though, “the Russian rouble rose to a more than two-year high against the euro (last week), supported by capital controls as Russia appeared to make a last-gasp effort to avoid a default.”

Since its February hike, the Russian central bank, crippled by slow growth and rising inflation, has now cut rates twice, down to 14% currently. This number, Reuters reports, is expected to go down to as low as 10.5% by year-end. “The external environment for the Russian economy remains challenging and significantly constrains economic activity. With price and financial stability risks no longer on the rise, conditions have allowed for the key rate reduction,” the central bank said last week.

Yet, with considerable risks linked to further escalation of external trade and financial restrictions still looming, severe challenges to the Russian economy remain – with economists now expecting a double-digit contraction in Russian GDP and inflation in excess of 20% by the end of the year.

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