Are sanctions on Russia beginning to bite?

The series of economic sanctions levelled against Russia will take some time to filter through the economy but could have a significant impact on the country in the future, analysts say.

Idea is not to kill the economy but increase pressure on Russian authorities, analyst says

Russia's involvement in the crisis in Ukraine has roiled financial markets and led a number of countries, including Canada, to impose a series of sanctions against Russian banks and companies. There is some anecdotal evidence it might be having an effect on the country's economy. (RIA-Novosti/Alexei Druzhinin/Associated Press)

Economic sanctions levelled against Russia will take some time to filter through the economy but could have a significant impact on the country in the future, analysts say.

"I do believe that ultimately, these sanctions have the potential to become quite powerful in terms of their impact on the Russian economy, but it will take some time," said Robert Kahn, a senior fellow in international economics at the Council on Foreign Relations.

"We’re not seeing it in a macro economically significant way yet — businesses being closed and pulling out — but we're certainly seeing investments being reduced," said Kahn, adding that he expects there to be a pretty significant recession over the next year and a half.  

Russia's involvement in the crisis in Ukraine has roiled financial markets and led a number of countries, including Canada, to impose a series of sanctions against Russian banks and companies, including asset freezes and loan bans on a score of individuals and companies. On Wednesday, Canada announced new economic and travel sanctions against Russian banks and high-ranking officials. 

Russia has responded in kind, and in another act of defiance Thursday banned imports of a variety of food stuffs from the U.S., EU, Canada, Australia and Norway. 

All this has prompted investors to withdraw, since the beginning of the year, around $75 billion from Russia in what’s known as "capital flight." 

But what effect that has had on the economy is difficult to determine, Kahn said. In fact, in terms of the aggregate data, it's hard to make a case one way or the other how the sanctions are impacting the business community, Kahn said.

Takes time to show up in the data

"When you see a decline in investment, that then affects output," he said. "It takes some time for it to really show up in the data. Anecdotally, there are lots of stories that it’s starting to hit." 

For example, The Associated Press reported that another large Russian tour company just went bankrupt, the fifth major tour company to go bankrupt in less than two months.

However, part of the difficulty of determining the impact of sanctions is that the Russian economy was already weak prior to the crisis.

The economy is "performing poorly, it seems to be tipping into recession," Kahn said.

"Some people will argue: 'Well that would have happened anyway.' So you don’t know what would have happened without [the sanctions]. But I think anecdotally, we’re starting to hear a lot of stories where it’s starting to really crimp production plants and the like."

The sanctions in place are not the kind of comprehensive sanctions that cut off entire sectors and force people to sell assets, Kahn said.  

"Those are the kinds of things that could cause a sudden stop to an economy," he said. "They have purposely not gone down that path. They’ve tried to basically start relatively modest and incrementally put in sanctions that are aimed at future transactions."

The most recent round coming from the U.S. and EU at the end of July prohibited U.S. citizens and companies from dealing with debt carrying maturities longer than 90 days, or with new equity. 

"So the goal of it was to put in place forward-looking restrictions and the threat of more. You can imagine that the costs of that are going to build over time."

Lubomir Mitov, chief economist for Europe for the Institute of International Finance, recently wrote that the immediate impact on the companies sanctioned by the U.S in mid-July should be "broadly manageable."

"But their broader impact on Russia’s economy is likely to be much larger and longer lasting," he wrote in the report, titled Russia: Sanctions Begin to Bite.

Those sanctions banned four companies — including Rosneft, Russia’s largest oil producer, and Novatek, the largest independent natural gas producer — from raising medium- and long-term financing from U.S. markets.

"Beyond this year, the sanctions, if sustained or escalated, are likely to have significant adverse impact on all four entities," he wrote.

'Aren't really Iranian-like'

All have a high dependence of foreign funding, including from the U.S., and all have significant liabilities to foreign creditors, he wrote.

"The sanctions aren’t really Iranian-like, so they’re not really killing the economy right now," Mitov said in a phone interview. "The idea here is not to kill the economy right now but to rack up the pressure on authorities in Russia and businessmen around Putin to understand the cost of what they’re doing."

As new sanctions by the U.S. and the European Union start to bite, companies worry about a looming recession and a future without access to the West's massive financial markets.

"The more tense the geopolitical situation, the more expensive [foreign] currency will be," said Konstantin Sonin, an economist at Moscow's Higher School of Economics. "And with sanctions, it becomes harder for financial institutions to give credit, and there will be fewer business projects and fewer goods being produced. Income and salaries drop and consumption doesn't increase."

With files from The Associated Press


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