Western Sanctions Will Crush Russian Economy, Specialists Say

If Moscow invades Ukraine, experts say the new measure could cause broad economic pain for Putin.

The U.S. on Tuesday said it is prepared to impose sanctions and export controls on critical sectors of the Russian economy. Senior administration officials said the U.S. could ban the export to Russia of various products that use microelectronics based on U.S. equipment, software or technology, similar to the U.S. pressure campaign on Chinese telecom giant Huawei Technologies Co. U.S. officials have previously said that measures under consideration also include cutting off Russian banks’ access to the dollar and possible sanctions on Russian energy exports.

It is unpleasant but it can be solved by the financial institutions in Russia, Finance Minister Anton Siluanov said this month about the prospects of more sanctions, insisting that Russia was prepared. I think they will cope in case of such risks, he added.

One sector Moscow hasn’t been able to sanction-proof is technology. The global chip industry is largely dominated by companies from the U.S. and its allies in Europe, Taiwan and South Korea. Russia has only a few, mostly outdated semiconductor factories and is dependent on parts and patents from Western companies.

The export controls of microelectronics under consideration by the U.S. would be implemented through a powerful policy tool known as the Foreign Direct Product Rule, which the Trump administration used to cripple Communist China’s Huawei. European officials have said they would also apply export bans, including on high-tech goods, although discussions continue about how wide-ranging they would be.

A Ban on Sales of The Machine Tools

Such export restrictions would limit Russia’s ability to buy machine tools, smartphones and other consumer electronics, analysts say. They would exact an economic toll and hurt efforts to modernize the Russian economy.

The rigid fiscal policy crimped growth and investment while the government has given priority to supporting state-owned enterprises. As a result, Russia’s GDP has grown slower than the world average since 2014. Russians are also poorer than before the Crimean annexation: by the end of 2020, real incomes had fallen by 9.3% from their 2013 level.

Past sanctions have also hurt. The International Monetary Fund estimates they have shaved off 0.2 percentage point from Russian growth a year between 2014 and 2018.

Ultimately, analysts say, Russia’s efforts won’t be enough to soften the blow of major new sanctions.

A Lose of One-Fifth of GDP

While down from 80 per cent, the share of the dollar in exports of goods and services is currently at 56 per cent, ING Bank estimates. The private sector is even more exposed and the dollar still dominates the local foreign-exchange market.

If the Biden administration cuts off Russian banks’ access to the dollar, that would disrupt the country’s links to the rest of the world and lead to a steep contraction of GDP, said Janis Kluge, expert on Eastern Europe at the German Institute for International and Security Affairs. Most of global trade, including oil and gas sales, is settled in dollars. Side effects would include capital flight, a ruble crash and high inflation, he said.

Restrictions on Russian energy companies would hit directly at the heart of the country’s economy, where the oil-and-gas sector contributes as much as one-fifth of GDP.

Go back