How much could sanctions hurt Russia’s economy? | Mint

How much could sanctions hurt Russia’s economy?

Russia has trimmed its budget, beefed up foreign exchange reserves and sought to diversify its trade portfolio to become less dependent on the EU for export revenues (Photo: AP)
Russia has trimmed its budget, beefed up foreign exchange reserves and sought to diversify its trade portfolio to become less dependent on the EU for export revenues (Photo: AP)

Summary

Moscow has taken steps to buffer itself against the economic blow

When Russia annexed Crimea in 2014, the European Union, US and other countries hit Moscow with punitive economic measures. Russian individuals and organizations have since been sanctioned for interfering in overseas elections, cyberattacks and other actions.

Now, with Russian troops streaming into eastern Ukraine after Moscow recognized two regions there as independent, the US, UK and EU have announced sanctions and indicated there could be more to come. The initial measures include targeting Russian banks, high-level individuals and sovereign debt.

Russia has taken steps to buffer itself against the economic blow that sanctions could impose. The country has trimmed its budget, beefed up foreign exchange reserves and sought to diversify its trade portfolio to become less dependent on the EU for export revenues.

Trade:

The bulk of Russia’s export revenue comes from mineral products such as oil, natural gas and coal. This dependence makes energy exports an attractive target for sanctions.

The EU is reliant on Russia for more than a third of its natural gas imports. As of January, the U.S. and Europe weren’t weighing sanctions against Russian exports of oil and natural gas directly, given the concern that doing so could increase already high energy costs in Europe. However, in response to this week’s incursion, Germany announced on Tuesday that it was halting plans to open the Nord Stream 2 pipeline, which would have increased Russian gas shipments to Germany.

While the EU remains Russia’s biggest trading partner, Russia has made efforts to diversify, expanding ties with China. These efforts include opening a major gas pipeline to the country in 2019. Natural gas exports to China have grown since then but are still small, compared with Russia’s other big gas buyers.

The Biden administration also is weighing a ban on exports of various products that use microelectronics based on U.S. equipment, software or technology. The curbs could crimp Russia’s ability to make advances in aerospace, artificial intelligence and other high-tech fields.

Budget/Debt:

Moscow has been working to bolster its finances, which could help cushion the economy and keep the government funded in the event of sanctions. The country has run a conservative fiscal policy and has trimmed debt relative to other countries such as the U.S. and its European allies.

Reserves:

Russia has used oil and gas revenue to build up its stock of gold and foreign currency since the 2014 Ukraine crisis. Moscow could use these to help support the ruble, if sanctions cause the currency to collapse, or to help cover government expenses.

In the years since the U.S. and other countries imposed sanctions on Russia over its 2014 annexation of Crimea, Moscow has had time to retool its economy in an attempt to make it more resistant to far-reaching punitive measures, so the ultimate effectiveness of sanctions remains uncertain.

Beyond Russia, repercussions from the Ukraine conflict and resulting sanctions could harm the larger global economy, which is already struggling with inflation and supply-chain snarls. The price of oil surged on Tuesday, as did other big Russian and Ukrainian exports such as natural gas, wheat and aluminum.

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