limiting information and data

Wall Street Journal March 16, 2022

How to Tell If Sanctions Are Hitting the Russian Economy

The Kremlin is trying to hide the impact of measures taken against its economy by limiting information and data

By Paul Hannon and Caitlin Ostroff

The success or failure of the West’s economic war against Russia is crucial to the outcome of the fight in Ukraine. But knowing whether the sanctions are working will be difficult.

Since the Russian invasion last month, Europe and the U.S. have hit the world’s 11th largest economy with sanctions designed to cut it off from the global financial system and from the imports it needs to run its economy. Hundreds of companies have gone beyond the sanctions and stopped doing business with Russia.

Estimates of the economic damage vary widely. The Institute for International Finance, a grouping of international banks, expects Russian economic output to fall by a third this year. Economists at credit-ratings firm Standard & Poor see a contraction of 6.2% in 2022, while Moody’s Analytics estimates the sanctions-induced slowdown will cut economic output by between 13.5% and 24% depending on the duration of the conflict, and the scale of the decline in Russian energy exports.

“This is a massive act of self-harm,” said Gaurav Ganguly, an economist at Moody’s.

Russian President Vladimir Putin acknowledged Wednesday that the sanctions had damaged the country’s economy.

“Our economy will need deep structural changes in these new realities, and I won’t hide this—they won’t be easy, they will lead to a temporary rise in inflation and unemployment,” Mr. Putin said in televised remarks Wednesday before a video meeting with Russian government officials.

There are two ways to track the impact of the sanctions: with economic data or with on-the-ground details like layoffs, shortages and production cuts. Russia has moved to limit access to both.

Since Russia invaded Ukraine at the end of February, the U.S. and allied countries have imposed heavy sanctions on Russia. WSJ’s Shelby Holliday dives into how these sanctions are affecting everyone from President Vladimir Putin to everyday Russian citizens.

The Russian central bank last week suspended the release of figures on its foreign-exchange reserves for three months, saying that during that time “all publications” would use the $643.2 billion figure that was valid on March 4.

Russia’s stock market also hasn’t traded for almost three weeks, a sign that Moscow is trying to hide the economic reality. Russian stocks listed in London have fallen near zero and have since been delisted, with Russia’s largest lender, Sberbank Russia PJSC, among those removed from trading. Shares traded for as little as a penny before being delisted.

Government economic data like gross domestic product, unemployment and inflation are released with a lag. The data from February is mixed, reflecting the tensions before the invasion and the early fallout from the war. Russia saw a sharp rise in its trade surplus, reflecting much higher prices for oil and gas, its principal exports.

However, other figures pointed to a pickup in inflation, while a survey of purchasing managers at manufacturers recorded a decline in output and new orders for the first time in six months. This measure, known as the Purchasing Managers Index, is produced by a private company and will likely give the first insight into how the economy has responded to sanctions when it is released on April 1.

More current data indicates problems ahead for the Russian economy. The ruble has weakened, with one dollar buying 112 rubles, up from 75 at the start of the year. Russia’s central bank more than doubled interest rates to 20%, to encourage holders not to sell the ruble.

A weaker ruble will boost the cost of imports denominated in euros or dollars, raising inflation. At the same time, the big rate increase will make it more expensive for households and businesses to borrow, weighing on growth. The Russian central bank will meet Friday and could outline further actions.

Russia’s economic data has been considered accurate in the past. The numbers showed a 2% decline in economic output due to the sanctions in 2014, and have recorded the economy’s big swings since the end of the Soviet Union. The sanctions this time are much more severe, leading economists to predict a bigger economic decline.

But economists are worried that Russia’s clampdown on free speech and access to foreign news sources will make it harder to determine the impact of sanctions.

“When you have war, you don’t care about accurate reporting,” said Maxim Mironov, an associate professor of finance at IE Business School in Madrid who grew up in the Soviet Union and has researched Russia’s economy and corruption. “You do care about propaganda.”

One the ground, there are already some hints of the economic pain to come. According to the Yale School of Management, 380 international companies have announced their withdrawal from Russia since the invasion of Ukraine. Some of those companies have committed to paying wages for a limited period, but after that, unemployment should rise and those products will be unavailable, potentially causing inflation as supply shrinks.

Russians have lined up for imported medications, which aren’t covered by sanctions. But prices are expected to rise following the ruble’s tumble.

According to Windward, a shipping-data company, calls to Russian ports by commercial cargo and tanker vessels were 40% lower in the first six days of March than a year earlier, a sign that exports and imports are already in decline.

There are also signs that shortages of parts and equipment from Western suppliers are hitting factory output, including the suspension of production at a maker of Lada automobiles.

Offsetting any pain from sanctions will be continued exports of oil, natural gas and minerals at high prices. Western products could also be replaced by goods from China, potentially keeping prices down and providing jobs for Russians.

Many of the economists who would track the impact of sanctions have left Russia, worried that they could be punished for publishing accurate accounts of the economy. Some say they will continue to publish from abroad.

Vladimir Putin became Russia’s president in 2000, and takes credit for stabilizing the economy after the collapse of the Soviet Union. The economy shrank each year from 1990 to 1996, but grew by 10% and then 5.1% in his first two years in office, and each subsequent year until the global financial crisis.

An economic decline caused by the war in Ukraine could undercut Mr. Putin’s reputation for managing the Russian economy.