Ukraine vs Russia – Russian Economy After Sanctions

Hello, friends! The war is raging on in Ukraine. But the destruction is caused in Russia too. The common Russians are in a bad condition. The Russian currency, Ruble, has crashed in the last few days, now, there are long lines outside the ATMs in Russia. The Banks are out of cash to give to people.

Table of Contents

People have started hoarding phones and electronic items they are buying as many as they can because they are the only things whose value wouldn’t depreciate. The hard-earned money of the people has started losing its value. Thousands of Russians that deal with foreign countries aren’t getting their salaries.

There’s so much inflation people are worried that Russia might end up like Venezuela.

Why is it happening in Russia? When a country goes to war, how does it affect the economy of the country? How are the citizens affected? These are seldom discussed topics. You will be shocked because you can’t even imagine in today’s day and age, what a Superpower Country has to go through when that country goes to war. Even though the war isn’t fought in the country.

Come, let’s take a look.

“Sanctions from the west are already having a major impact on Russia’s economy.””A 30% loss in value is seen in Ruble.””Many people are worried about their income.””Microsoft, Apple, Samsung, HP, Intel, all stopping new sales.””At McDonald’s, final orders, it’s suspending business in Russia.””All western businesses are shutting down. Everyone who can is leaving. We’ll be left isolated.””Netflix has pulled out.TikTok, won’t allow posts by Russian users. The Ruble: worth less than a penny!”

A study conducted by the Centre for Economic Recovery, claims that in the first four days Russia had to incur expenses to the amount of $7 billion for starting this war. Approximately more than ₹500 billion. This was only for the first four days. With the continuation of the war, the same study has estimated that this cost can eventually cross $20 billion per day for Russia.

It means that each day Russia has to spend $20 billion to fight this war. This is only the direct expense borne by the Russian government. The Russian taxpayers’ money is used for fighting this war. But this is only the tip of the iceberg.

Let me list out the impact of the responses from the rest of the world. 33 countries have closed off their airspace for Russian airplanes. It means that Russian aircraft aren’t allowed entry into the airspace of those countries. It includes the USA, Canada, and numerous European countries. The result? According to the estimates, about 150,000 Russian tourists in these countries were there for a visit, it is now extremely difficult for them to return.

Companies Leave Russia

Airbus and Boeing are two major companies in the world building aircraft. They’ve said that they would stop sending their spare parts to Russia to the Russian airlines, and would suspend their operations in Russia. In the near future, it would be very difficult for anyone to fly into Russia or to fly out of Russia. Moving on, the major clothing companies and shoe brands, like H&M, and Puma, have suspended their operations in Russia.

BMW, Volkswagen, Mercedes, Jaguar, Toyota, and Honda, the major car companies, have said that they would stop exporting their cars to Russia, and their operations in Russia, such the car production, for example, were also stopped. Ikea, a major furniture company from Sweden, has closed down all its stores in Russia. Airbnb, quite useful for travellers, has now stopped its operations.

Netflix has made it impossible for Russians to sign up for new accounts. They’ve withdrawn the option. The big tech companies, Apple and Microsoft have said that they would stop selling their products in Russia. Samsung, a South Korean company, Samsung has said that it wouldn’t ship its products to Russia. Imagine that these major multinational companies, we use their products and services in our daily lives, for the Russians, suddenly they can’t access them anymore.

The oil giants, like BP and Exxon Mobil, had similar responses too. BP has said that it would dump the 19% stake in the Russian state-owned energy company. It shows that foreign companies are pulling out their investments in Russia. And the other foreign companies that were thinking about investing some money in Russia, have since dropped the idea. These affect the economy of a country and the funds that are available to it. Apart from this, the two most powerful bodies of football, FIFA, and UEFA, have decided to suspend the Russian team from all international soccer events.

Meaning that the Russian team wouldn’t participate in the FIFA World Cup. Formula 1 racing, the Grand Prix was supposed to be held in Russia, it stands canceled now. Visa and Mastercard, two of the biggest payment processing networks in the world, millions of their credit cards are used worldwide, the two companies have decided to block Russian banks.74% of payment transactions in Russia, were processed through Visa and Mastercard. They wouldn’t work now. The international payment transfer companies Remitly and Wise, two have also suspended their Russian operations.

Apple Pay, Google Pay, and Samsung Pay. The Russian banks against whom sanctions have been issued, cannot use these platforms either. Making normal payments for their daily lives has become difficult for people. That’s why people ran to the ATMs, to withdraw cash. And you can imagine what happens when a large number of people try to withdraw cash.

Banks don’t have so much cash. If everyone wants to withdraw their money from the bank, it wouldn’t be possible. This situation is known as Bank Run. This is happening in Russia now. ATMs are running out of cash and people are desperate. Seeing all this happening, the stock market of any country would crash horribly.

That’s why, for a week now, the Russian stock market is closed. Ever since Russia invaded Ukraine, the Russian stock market hasn’t opened up for trade. Fearing a major crash when they open next, they’re keeping it closed as long as they can.

Now, the examples that I told you about now, were of multinational companies that decided to suspend their operations in Russia Companies. But apart from these, Governments have also taken action against Russia. Governments have declared sanctions against Russia. Broadly speaking, sanctions mean imposing a penalty or punishment on a country for violating international law or for their aggressive behavior. These punishments can be imposed on a country via various means. But mostly, they are economic sanctions. They target and attack the economy of a country.

SWIFT Block

A major sanction imposed on Russia currently, is the SWIFT block. The Russian banks have been cut off from the SWIFT system.

What is this SWIFT system?

SWIFT stands for Society for Worldwide Interbank Financial Telecommunications. It is a payment system used internationally by more than 11,000 financial institutions. More than 200 countries used this globally. The central bank of almost every major country uses this SWIFT system. The USA, Japan, India, China, and any country you can think of.

But the SWIFT system doesn’t actually move the money. It merely communicates the source, amount, and destination when money is to be moved. You can think of it as SMS or FB Messenger for the payment transfer. It gives instructions to a bank to transfer the amount of money to the destination bank. That’s why every bank has a SWIFT code. You might already know this. The SWIFT code is 11-digits long. The first four of the 11 characters represent the name of the bank. The next two are the country code. The seventh and eighth represent the location code, And the last three are for the branch code where the money is to be transferred.

For example, SBI’s main branch in Delhi has the SWIFT code SBININ: India’s country code. BB: the location code and 104 is the branch code. Overall, the SWIFT code can be considered the postcode of a bank. If you have to transfer money from SBI to an American friend’s account in an American Bank, along with their account number, you will write down the SWIFT code of the bank, and when you send the money, SWIFT will work by communicating to the bank the fact that money is being transferred and the amount of transfer. Since Russian banks have been cut off from SWIFT, it means that neither can Russian banks accept money from international sources nor can they send money.

But the interesting thing is that Russia isn’t the first country this has been done to. Before this, Iran was blocked from SWIFT access. It resulted in Iran losing one-third of its foreign trade. But it isn’t like Russia wasn’t prepared for this. Because when Russia invaded Crimea in 2014, lighter levels of SWIFT sanctions were imposed on Russia. Since then, Russia worked on creating its domestic messaging system for payments. This would lead to severe effects in the short term, but in the long-term, Russia will come up with some way or the other, it will develop its payment processing system.

Russia’s FOREX Reserves

Another major example of these sanctions is freezing the assets of Russia’s central bank. The thing is, the central bank of every country has some foreign exchange reserves. Known as Forex Reserves. It basically means that the banks keep some money in foreign currency.

The reason for maintaining forex reserves is that payments have to be made to other countries or for facilitating any global trade. Like every country, Russia’s central bank maintains reserves in US dollars.

It keeps some amount with itself in US currency. America and other countries have frozen these dollar reserves. They have said that they wouldn’t accept the USD Russia has. That the forex it has will now be a complete waste. It amounts to $630 billion.

Sanctions against Oligarchs

There’s another very shocking and interesting way to impose sanctions. President of Russia Putin, his friends, and Russian billionaires, own assets outside Russia. They have properties in foreign countries.

Private airplanes and huge yachts, the US and other countries have decided that all these assets these properties, and these private planes, would be seized. As a specific example, a Russian oligarch named Egor Sechin, had a superyacht worth $120 million, think of this as a uber-luxury boat, the French government has now seized it. They’ve kept the yacht with them. The news also had that a superyacht worth $600 million, owned by the Russian billionaire Usmanov, was seized by the German government.

But this turned out to be false. But fearing this, the Russian billionaires, are moving their yachts to countries where the Western governments cannot seize them. Like the Middle East or the Maldives. According to the news, at least 5 superyachts of Russian billionaires were found in the Maldives. Apart from this, any property they own in foreign countries is being seized. Flight bans are imposed on the Russian oligarchs. They wouldn’t be allowed to travel anywhere outside Russia.

There’s a simple reason behind taking these actions, to pressurize Putin to stop this war. When these Oligarchs and Russian billionaires are targetted, people who are said to be controlling Putin, it’s possible that they can convince Putin into stopping this war.

Europe’s dependency on Russia

One thing that proved very hard to cut off from Russia, was oil and gas. For European countries, one-third of their gas supply is from Russia. They import gas from Russia. And if they cut that off, the gas price in the European countries would skyrocket. And where would they get gas from?

Despite that, Germany suspended the approval of the Nord Stream 2 Pipeline, a pipeline that’s already built, but they hadn’t begun using it. How can they overcome their existing gas dependency on Russia? They are trying to come up with alternatives. America said that they have large oil and gas reserves and that they are willing to send to Europe so that Europe can cut off its dependency on Russia.

Conclusions

But anyway, as I told you earlier, what is the result of this? These measures are so harsh that the Russian Ruble, Russia’s currency, is crashing so fast that you wouldn’t believe it. In 2012, $1 was equal to ₽30. At the beginning of 2022,$1 was around ₽70, but since this war began, as of the day of this recording,$1 is poised to cross ₽150. Their currency is losing its value this rapidly.

The money that people had earned and saved is now losing value. There’s high inflation. People fear hyperinflation. Apart from this, people can’t use the basic payment systems. People are trying to get cash from the banks but can’t. It has a terrible impact on the common citizens of Russia.

What can the citizens do? People are going to supermarkets and are buying electronic items like laptops and smartphones because these are the assets whose value isn’t depreciating. The money they have with the banks is losing its value, but the currency is losing its value. But if they hoard the electronic items at home, they’d be sure that they wouldn’t lose value. They’ll be able to sell it in a foreign country at the same price. People started doing this. In the near future, the standard of living of an average Russian would fall.

Many people would be pushed into poverty because of this. Unemployment and inflation are also rising. Knowing all this is important for those people who think that starting a war is a good thing for the country. Russia invaded Ukraine. The war is being fought in Ukraine. But the common Russian people are paying the price with their own money.

Thank you very much!