Sanctions hurt Russians, six months on from invasion

Russia is today under almost 11,000 individual sanctions, since it invaded Ukraine in February.

The significant sanctions included removing several major Russian banks from the SWIFT payment clearing network – essential for these banks to process non-Ruble payments to and from the country; freezing Russian assets in foreign countries; restricting imports of Russian oil; and cutting off key exports to Russia like high-tech components and microchips. Over 1,000 global companies exited the Russian Federation.

Without doubt, the sanctions have had major effects on European countries as well.

A one-litre bottle of edible oil rose by as much as €1 in some instances over a matter of weeks as exports from Ukraine, the world’s largest producer of sunflower oil, ground to a halt and pushed prices of sunflower oil and alternatives up.

The contribution of food prices to overall inflation as measured by the harmonised index of consumer prices (HICP) rose from 0.2 points in April 2021 to 1.6 points a year later. And in MaltaToday’s last survey, 28.1% of people considered inflation and higher food prices as their principle worry – more than double the number of people who indicated inflation as a main concern last March, a reflection of the exorbitant price rises across the board.

Malta’s inflation was the lowest in the Eurozone as a result of government’s direct intervention to cushion fuel and electricity prices despite the €200 million cost to public coffers.

This interventionist policy was spurred by Russia’s invasion of Ukraine that sent food and energy prices skyrocketing. And it seems that the Maltese public is unwilling to share the burden of higher fuel and energy prices. A MaltaToday survey that asked whether fuel and electricity rates should increase because of the circumstances caused by the war, unsurprisingly found that 85.3% disagreed. Only 7.5% believe that ordinary people should shoulder part of the war-induced burden and another 7.2% could not reply.  The message to Finance Minister Clyde Caruana was unequivocally clear: continue subsidising fuel and electricity.

Indeed, according to a Eurobarometer survey in June, the Maltese (55%) are amongst the highest category – fourth highest after Cyprus, Portugal and Bulgaria – to say they felt the consequences of the war in Ukraine and that it had reduced their standard of living, much higher than the 40% European average. But well over 71% said they were not ready for increases in food and energy prices from the war on Ukraine, and 63% preferred maintaining price stability “even if it affects the defence of our common European values” (EU average 39%); and were less likely to favour defending freedom and democracy (32%) if it impacted cost of living (EU 59%).

But a Yale study on the effect of Russian sanctions five months on, insists that claims of Vladimir Putin’s economic resilience are simply untrue.

“Despite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent,” the study by Yale Chief Execeutive Leadership Institute’s top brass, says.

Russia has lost companies representing some 40% of its GDP, reversing nearly all of three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base.

And Putin is resorting to “patently unsustainable, dramatic fiscal and monetary intervention” to smooth over structural economic weaknesses, which has already sent his government budget into deficit for the first time in years and drained his foreign reserves even with high energy prices. “Kremlin finances are in much, much more dire straits than conventionally understood.”

Still, although the Russian ruble’s value tanked, the country increased oil exports to China and India, to shore up the currency. Despite this kind of headline metric, the reality on the ground is far more different.

For example, when French carmaker Renault, which was a partner with Russian car manufactuerer Lada, pulled out of Russia, the Putin administration nationalised the plants to build the cars itself. But since Russia can no longer import foreign components, the cars cannot have automatic transmissions, anti-lock brakes or even airbags.

So it is an example where Russians will not “starve” but their consumer goods will suffer the quality they have enjoyed previously, instead having to import substitutes from China.

And restrictions on imports of spare parts and high-tech goods mean the Russian military might have limited ability to make tanks, missiles and fighter jets.

The Yale study concludes that with Russia’s strategic positioning as a commodities exporter to Europe, it faces steep challenges to invest in the infrastructure needed to divert pipeline gas to Asia. Europe’s transition away from Russia might be painful but manageable, but the energy exports were far more important to Russia, with 83% its gas exports received by Europe. Europe has a far more diversified supply base, drawing 54% of its gas imports from non-Russian sources, including LNG from Norway, Qatar and Algeria.

Russian imports have also largely collapsed, and the country faces stark challenges securing crucial inputs, parts, and technology from hesitant trade partners, leading to widespread supply shortages within its domestic economy.

“Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia,” the Yale study insists. “Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual – the facts are that, by any metric and on any level, the Russian economy is reeling, and now is not the time to step on the brakes.”

IHI in Russia

International Hotels Investment, which owns the Maltese hotel brand Corinthia, has been in Russia for 20 years with two hotels, in Moscow and in St Petersburg, with an adjoining commercial centre.

Its last financial analysis summary forecast said private investment in Russia is forecast to fall by more than 20% in 2022, given extremely low appetite for new investment in the current environment amid withdrawal of foreign companies.

“Isolated pockets of investment to cater for import substitution are likely to emerge in some sectors but investor confidence is projected to remain depressed over the forecast horizon and a modest increase in public investment is not expected to compensate for the fall in private investment.”

For 2023, the economy is forecast to stabilise as it adjusts to the new normal of severed ties to the West. However, real GDP growth is expected to remain subdued, reaching 1.5%, as ongoing import substitution due to departure of foreign companies will cause inefficiencies.

IHI said uncertainty regarding the nature of future economic ties with the rest of the world will continue to hamper investor confidence and seriously limit the growth potential of the economy.

In 2021, Russia experienced real GDP growing by 4.7% in 2021. But IHI says the war in Ukraine and the subsequent sanctions implemented by the international community “halted these trends abruptly, as Russia was cut off from most Western production inputs. At this point, it is particularly difficult to predict the development in 2022 of export-related revenues, which are a crucial revenue source for the budget.”

IHI owns a hotel in St Petersburg, with an adjoining commercial centre which have been under IHI’s ownership for 20 years. The group also owns a 10% equity share in a hotel and residences project in central Moscow. The combined interest in St Petersburg and Moscow represents approximately 8% of the Group’s total revenue and assets in 2021.

“Sanctions imposed on Russia and counter sanctions that Russia itself has introduced are being carefully monitored and fully adhered to by the Group on the advice of its specialist legal advisors. The consequence of the current situation will depend largely on the duration of the conflict,” the group said in its latest company statement.