Russia Is Starting to Feel Squeezed by Sanctions

Vladimir Milov, a Russian opposition politician who favors strong sanctions against Russia to stop the war in Ukraine, asked me this week to imagine I’m in the Amazon rainforest when a giant anaconda coils itself around me. What I should do, he said, is try to strangle the anaconda before it strangles me. “You don’t stop every five minutes and release your grip to see if it’s working. You just do it until the job is done.”

Likewise, Milov told me, the United States, the European Union and other allies should squeeze Russia with economic sanctions for as long as it takes to stop the Russian war machine in Ukraine.

The bad news is that complete success may take a very long time, Milov said. The good news is that the sanctions have already begun to squeeze. One way to see that is in the sliding value of the Russian ruble. As the chart below shows, the ruble has had its downs and ups. It fell immediately after Russia’s invasion, then surprisingly strengthened, mostly because a jump in oil prices increased Russian oil revenues. Lately, though, the ruble has lost some of those gains.

One reason the ruble has weakened is that Western sanctions on Russia’s energy sector are working. On Dec. 5, a European Union embargo and a Group of 7 price cap on Russian oil took effect. Russia, like other countries, sells its oil for dollars. It’s earning fewer dollars than before, but its need for foreign currency to pay for imports remains high. Since dollars have become relatively scarce, the value of the ruble in dollars has fallen.

“The ruble will continue to weaken because there’s no fundamental demand” for it, Milov said.

Milov is an economist and an ally of Aleksei Navalny, the Russian opposition leader who was poisoned in 2020, evacuated for medical care and then imprisoned on his return to Russia. Milov served in the government of President Vladimir Putin in the early 2000s but soon after joined the opposition. He lives outside Russia because there’s a warrant for his arrest if he returns. He has a large following inside the country on YouTube, which is an important way that ordinary Russians get an uncensored picture of the world.

It isn’t just opponents of Putin who see the Russian economy weakening under the strain of the war, sanctions and softening oil prices. Mikhail Zadornov, who was minister of finance from 1997 to 1999, recently gave an interview to RosBusinessConsulting in which he predicted a 10 percent decline next year in the volume of oil production, which “will significantly affect both the budget and the economy.” Restrictions on what Russia can import are also pinching, he said. “It is clear that many enterprises were moving by inertia on stocks of materials and equipment. Now these stocks have run out or are running out. There are no new deliveries.”

Zadornov added, “Our television says with sarcastic joy that the Europeans are freezing. I do not quite understand what is there to rejoice. In fact, we are losing the markets that we have been building since the days of the Soviet Union.”

He is a credible source not only because of his service as finance minister but also because he was installed as chairman of Otkritie FC Bank, one of the nation’s biggest banks, after it was nationalized in 2017. (The central bank is selling it now, and Zadornov is stepping down.) “Zadornov is being explicit and open about many of these things. That is unusual,” Milov said.

Russian authorities may be fine with a certain amount of ruble weakening because, in some respects, it had gotten too strong for Russia’s own good. While a strong ruble holds down inflation and makes imports more affordable, it also reduces the number of rubles that Russia gets from its exports. Milov speculated that the authorities might allow the ruble to weaken to around 80 to the dollar (equivalent to 1.25 cents per ruble) before intervening to prop it up through measures such as raising interest rates and buying up rubles in the foreign exchange market.

But there’s no assurance that the ruble’s slide will stop when Putin wants it to. Milov predicted that intervention to support the currency would fail, and the ruble would continue to slide.

Ulrich Leuchtmann, the head of foreign exchange research for Commerzbank in Frankfurt, said there’s no normal market for the ruble because the Russian government manipulates its value with extensive controls on capital flows. (One downside: These controls frighten foreign investors away.) The government also fails to publish balance-of-payments data that would give investors a clue about supply of and demand for the currency, he said.

Yevgeny Nadorshin, the chief economist at the PF Capital consulting company in Moscow, told The Times last week that the Russian economy could be entering a deeper downturn that can’t be cushioned by increased government spending as before.

“The first seven months of this war, Russia was not feeling any significant economic pinch. It had decent momentum,” Edward Moya, a senior market analyst at OANDA Corporation, a foreign exchange broker, told me. “Now you’re starting to see that change.”

Western sanctions on Russia are like the mills of God. They grind slowly, but they grind exceedingly fine.

The Readers Write

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Rice University
Houston

Quote of the Day

“But these citizens of 2050 are being taught an economic mindset that is rooted in the textbooks of 1950, which in turn are rooted in the theories of 1850.”

— Kate Raworth, “Doughnut Economics: 7 Ways to Think Like a 21st Century Economist” (2017)

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