Business·Analysis

Russian people face 'catastrophe' as ruble crashes and sanctions bite

While it can still export energy, Russia's resource-dependent economy is hinged on imports for many basic needs. Collapsing supply chains and a crumbling currency mean the rich, middle class and poor face devastating consequences, say Canadian Russia-watchers.

Canadian Russia-watchers say devastating effect on rich and poor came as shock

A sign displays foreign currency exchange rates to the Russian ruble at an exchange bureau in Moscow on Monday. Sanctions from Western countries over Russia's invasion of Ukraine have pushed the ruble to a record low and led to widespread economic consequences. (Andrey Rudakov/Bloomberg)

Everyone expected the Russian attack would be devastating for Ukrainian lives and businesses, but Canadians who study Russia and its economy say they have been startled by the invasion's catastrophic impact on Russians thanks to sanctions imposed by Western nations.

A plunging currency, a doubling of interest rates, empty shelves, a closed stock market, lineups at banks that are in danger of going broke — Canadian Russia-watchers say the repercussions of the invasion on Ukraine are affecting Russians at every level and are only now being understood.

One question everyone is asking is whether this will weaken President Vladimir Putin's grip on power.

"I think it's a catastrophe all around, but I think it is a catastrophe in particular for the common people, for, you know, the regular folks," said Norman Pereira, whose family escaped through China from the St Petersburg area in 1919 during the Russian Revolution.

Collapse plagues every aspect of life

The 80-year-old professor emeritus of Russian studies and history at Halifax's Dalhousie University still has family in Russia whom he keeps in touch with and is married to a Russian. Pereira, whose name is of Sephardic Portuguese origin, says the crash in the ruble and other economic impacts are already beginning to plague every aspect of life — and that's apart from battlefield casualties.

Like others I spoke to, Pereira was surprised by the brutality of the invasion, the weight of Western sanctions against Russia and the widespread consequences for the Russian economy.

"I misread the situation, I didn't think Putin would act so rashly. It's a disaster, a tragic mistake," he said in a phone conversation on Monday. "That may be putting it too kindly."

Pereira says that in a country where more than half of the population live on $6,000 US or less a year, it is the poorest who always suffer the most. But he says the growing middle class, especially in St. Petersburg and Moscow, has also been hit hard by the sanctions.

Customers line up at a currency exchange kiosk in Moscow on Monday. Many withdrew cash from their own banks, but foreign currency was in short supply as the ruble plunged. (Andrey Rudakov/Bloomberg)

"The sanctions may not affect the people at the top very much, but it's going to affect the middle class, and it'll affect the people in the countryside. They're always the ones who take the brunt of it anyway."

In a country whose leader has become increasingly dictatorial, it is hard to see how a revolt by the middle class could make Putin relinquish his hold on power. Despite that, many — including Russian chess grandmaster and human rights activist Garry Kasparov — have proposed that the only real solution to the current crisis is the fall of the Putin regime.

One theory, sometimes called the J-curve hypothesis, is that rebellions don't arise when people are subjected to continuous grinding poverty but when living standards fall sharply after a period of economic improvement, "when expectations are not fulfilled," said Joan DeBardeleben, who studies relations between Russia and Europe at Carleton University in Ottawa. "I think that makes a lot of sense in this case."

She added, "Of course this is a question of where the anger gets directed." Steered by government propaganda, Russian nationalists may blame damage to their economy caused by things like the sale of shares by Western oil companies and bank runs on the forces Putin claims he is fighting in Ukraine.

"So it's not a foregone conclusion that the anger that might result from these kinds of impacts would necessarily be directed at the state authorities or towards Mr. Putin himself," DeBardeleben said.

WATCH | Russians feel impact of broad sanctions: 

Russian economy buckles under sanctions

4 months ago
Duration 2:06
The growing list of international sanctions has caused the value of Russia’s currency to plummet and interest rates to double, frustrating citizens who are isolated by flight bans and the lack of access to cash or many credit cards.

A single door open

Economist Dane Rowlands, a professor at Carleton University's Norman Paterson School of International Affairs, was also surprised by the power and effect of Western sanctions on Russia.

"They've gone a lot further and a lot quicker than I thought they would in terms of the breadth of the sanctions," he said on Monday. "They've really only left one remaining door open, and that's the financing of oil and gas purchases for the European countries."

Rowlands was also surprised that the Russian central bank was not expecting to see its overseas reserves cut off — one more bit of evidence that Putin underestimated the global reaction to his moves on Ukraine.

For the Russian economy, huge oil and gas resources have turned out to be a liability as well as an asset now that many foreign imports have been halted by sanctions. Sometimes seen as part of the phenomenon called the "resource curse," an economy can become so dependent on its wealth from a single source that it does not do enough to diversify. Instead, like Venezuela during the boom years, it buys what it needs.

A woman places flowers outside the Ukrainian Embassy in Moscow on Thursday after Russia launched a massive military operation against Ukraine. As a result, ordinary Russians have been hit by sanctions, and they're not sure whom to blame. (Reuters)

Now, Rowlands says, with many imports cut off and the ruble falling sharply in value, store shelves are emptying.

"Russia obviously produces a lot of its own stuff, but they don't produce that much in the sense that it's a very resource-dependent country," he said. "They sell that stuff, and they buy what they want from outside."

It's not just consumers who have been affected but also industries, including oil and gas, that depend on imports of foreign parts and electronics cut off by sanctions and by restrictions on flights. Eventually, Rowlands says, those needs could be replaced by Chinese goods, but as North Americans have discovered, switching to a new source when supply chains break down is neither quick nor easy. Developing new supply lines is a task of years, not weeks or months.

Putin unhinged?

Lisa Sundstrom is personally affected by the Russian incursion into Ukraine and the resulting sanctions. The University of British Columbia professor studies Russian protest movements.

Her fully funded research project in Russia was interrupted first by the pandemic. "Now I don't know if I'll ever get back," she said. "But my problems are very small compared to a lot of people."

Russians she has worked with have been demonstrating for peace and have now been arrested as police repression has become more intense.

Like Pereira, besides demonstrators, Sundstrom worries most about people at the lower income levels. People with debt, for instance, will now be burdened by central bank interest rates that have doubled to more than 20 per cent. Rising prices due to "massive" inflation will be devastating, she says, especially for people on government incomes or pensions.

"They're already not really enough to live on, but now they're going to be more and more useless over time," she said.

But Sundstrom says it's not just poorer Russians who are feeling the effect of sanctions. The many middle-class Russians who have grown used to being able to travel around the world will be stuck at home.

WATCH | Ex-officer who testified at Trump impeachment hearings on Putin's threats:

Ex-U.S. officer Alexander Vindman calls out Putin's 'nuclear sabre-rattling'

4 months ago
Duration 14:32
Retired U.S. lieutenant-colonel Alexander Vindman, a former national security aide who played a central role in the impeachment case against former president Donald Trump, is calling for Western nations to do more to counter Russia's attack on Ukraine.

She says many ordinary people she knows have foreign bank accounts, and now they have lost access to them, while businesses can't get access to the capital they need. This time, Sundstrom says, Putin may have angered too many.

"I think that even within the inner circle — other than the most militant hard core people who are advising him — many people in the cabinet, many parliamentarians are going to start distancing themselves from him," she said. "He seems unhinged."

As someone who has been watching the Russian leader and talking to Russians for years, Sundstrom says that apart from the progressive pro-democracy elements, Putin has always been so calculating and so careful to balance different constituencies in the country.

"It looks like he's just abandoned them now, which is pretty dangerous," she said. "But I don't want to count him out yet."

Follow Don on Twitter @don_pittis

ABOUT THE AUTHOR

Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.

now