Russian economy is suffering from sanctions, Western officials say. Here’s why – National
Russia The U.S. economy is showing signs of strain amid high inflation and a tight labor market, which G7 and European officials say is evidence that Western sanctions over the war in Afghanistan are a security threat to the economy. Ukraine working.
Russia’s central bank, which is independent of the government, issued a fresh warning on Friday. Its governor, Elvira Nabiullina, said the economy remained “substantially overheated,” after its members raised its key interest rate to 18% – the highest level in more than two years – and said annual inflation had reached 9%.
“For inflation to start to decline again, monetary policy needs to be tightened further,” the bank said in a statement, hinting at further rate hikes.
The rate decision came days after eight European finance ministers written in The Guardian This week, Russia announced what it calls a “resovietization of the economy.” They say the GDP growth figures the Kremlin touts as evidence of the economy’s prosperity tell only one side of the story.
“A closer look at the signals makes it clear that not everything is as rosy in the Russian economy as Moscow would have us believe,” reads the article attributed to the finance ministers of Sweden, Denmark, Estonia, Finland, Latvia, Lithuania, the Netherlands and Poland.
Ministers said Russia had to draw on liquid assets in its national wealth fund, valued at $55 billion as of April 1 by the Russian Finance Ministry, to finance its war industry, which has become essential to the national economy. But Finance Ministry data show that value has fallen by nearly 50 percent, from $104.7 billion before the war. Bloomberg reported.
The central bank of Finland reported in May that Russia’s spending and production in the military-industrial sector has far outpaced that of other industries since 2022, “increasing economic imbalances and eroding Russia’s long-term growth potential.”
Meanwhile, Moscow has introduced oil and sugar export bans, as well as strict capital controls, to ensure domestic supplies and the retention of private funds.
The email you need for the day
The top news from Canada and around the world.
Receive daily national news
Get the day’s top political, business and current affairs news delivered to your inbox once a day.
All these elements are characteristic of the Soviet economy, the ministers write.
“History clearly shows that this is not an effective long-term strategy,” the article says.
“The short-term overheating of the economy, fueled by heavy investment in the war industry and very limited access to technology, will likely hamper productivity gains and lead to private sector stagnation, even higher inflation and increasing pressure on Russian households.”
Ministers say this proves that sanctions – which have targeted Russian assets abroad and its ability to import and export goods and materials, including energy products and military components – are working and must be strengthened and expanded.
A Canadian finance ministry official, speaking to Global News backstage, pointed to other indications that “the Russian economy is struggling,” including rising inflation, which the Russian central bank said was up from 8.6% in June and 7.4% in 2023.
Canada believes the sanctions are effective and will do “whatever it takes” to pressure Russia to end its invasion and “ensure victory for Ukraine,” a spokesperson for Finance Minister Chrystia Freeland’s office said.
“These sanctions have financially cut Russia off from a large part of the global economy and are having a real and lasting impact on the Russian economy,” Katherine Cuplinskas told Global News in an email.
Canada has sanctioned more than 3,000 entities and individuals in Russia, Ukraine, Belarus and Moldova for their support of the Russian invasion, a spokesperson for Global Affairs Canada said.
“Canada will continue to implement economic measures in coordination with its partners, including the G7,” Charlotte MacLeod said in a statement.
The United States, United Kingdom and European Union have also targeted Chinese, Iranian and North Korean entities to crack down on allegations of sanctions evasion and material support for the war.
U.S. Treasury Secretary Janet Yellen said Thursday that the threat of U.S. sanctions on Russian financial institutions is undermining its ability to acquire goods needed for its war against Ukraine.
Yellen also said she believed Russian revenues were limited by other sanctions and a cap on prices for Russian oil exports.
The G7 approved a plan last month Canadians will use future revenues from frozen Russian assets in their respective countries to finance a $50 billion loan to Ukraine. Canada will contribute $5 billion to the plan, which Russian President Vladimir Putin has called a “theft.”
The International Monetary Fund predicted this month that Russia’s GDP would grow 3.2% this year, but fall to 1.5% in 2025.
Russia has managed to keep its economy afloat through strengthened trade, energy and security partnerships with countries including China, India, Brazil and Vietnam, despite pressure from Ukraine and its Western allies to cut ties with Moscow.
But Western officials and experts say the continued emphasis on spending on Russia’s war machine leaves other sectors vulnerable.
In addition to inflation, Russia has entered a spiral of rising wages, fueled by generous pay for volunteers fighting in Ukraine and for defense workers. The country also suffers from a severe labor shortage in many sectors.
The workforce has used teenagers, the elderly and even prisoners to fill these gaps. reports indicate that some are being informed Their work will allow them to avoid mobilization or prison.
More than a million people are estimated to have left Russia since the start of the war in Ukraine, either due to the partial mobilization of troops ordered in September 2022 or because of young men fleeing the country to avoid conscription.
The central bank’s policies have helped Russia cope with the impact of sanctions, but critics say the regulator is stifling economic growth, which has just returned to 5%.
Russian lawmakers on Thursday gave preliminary approval to a bill that would allow foreign banks to open branches in Russia, a move the Finance Ministry said should help ease problems with cross-border settlements.
International settlements have been a problem for Moscow since sanctions blocked major Russian banks from accessing the global SWIFT payments system.
“The settlements are the guiding thread of the economy,” Deputy Finance Minister Alexei Sazanov told lawmakers as he presented the bill, which passed the first reading in the State Duma, the lower house of parliament.
“Without colonies, the functioning of the economy is not possible.”
— with files from Reuters
