– The impact of the economic sanctions imposed on Russia in response to its invasion of Ukraine is still uncertain.
– Russia’s ability to access dollars and euros for financing its war and essential imports has been severely hampered by the sanctions.
– The country’s trade deficit and external debt add to the financial challenge it faces.
– Russia still has significant reserves in its central bank and sovereign wealth fund to sustain itself for several years.
– However, the economic toll of the sanctions will be substantial, with GDP expected to decline by nearly 10% in the next 12 months.
– If Russia loses its oil and gas revenues, it may run out of money within one to two years.
– The sanctions will have a significant impact on Russia’s economic output and government income.
In response to its invasion of Ukraine, Russia has faced severe economic sanctions. However, there is still uncertainty about the impact of these sanctions. To understand how long Russia can endure the Western sanctions regime, an analysis of its economic capabilities and available reserves is needed.
One aspect to consider is Russia’s ability to access dollars and euros, which are crucial for financing its war efforts and essential imports. The country has been cut off from foreign investments and faces an export embargo, making it challenging to generate revenue in hard currencies. Russia can still obtain dollars and euros through oil and gas exports and settlement via Gazprombank, but it will have limited leverage in setting prices. This shortage of hard currencies hampers Russia’s ability to pay for vital imports, such as food and medicine.
The sanctions have significantly reduced Russia’s total exports of goods and services, with a decline of around 48%. The country’s non-oil and gas exports are expected to be reduced to about $25 billion. On the import side, Russia is likely to experience a drop in total imports, especially in nonessential goods. This reduction in imports could eventually turn the trade deficit into a surplus, reducing the funding needs for the Russian government.
The trade deficit adds to the financial challenge for Russia, along with its external debt. The country needs to service its debt and finance the ongoing war in Ukraine, which comes with significant costs. The Russian invasion of Ukraine already cost $7 billion in the first five days, and the total cost could amount to roughly $50 billion over three months. Additionally, Russia has significant external debt, with total debt service fluctuating around $100 billion per year. All these financial obligations need to be financed.
To cover these costs, Russia has reserves in its central bank and sovereign wealth fund. The Central Bank of Russia has $630 billion in international reserves, with roughly $468 billion in foreign currency and $132 billion in gold. The foreign currency reserves held by G7 central banks, the IMF, and the BIS have been frozen due to the sanctions. However, Russia still has access to the remaining foreign currency reserves and the gold reserves. The National Wellbeing Fund also has $174 billion in available reserves, and the Russian government has $488 billion in available hard currency.
Based on these reserves, Russia has the financial means to fund the war and survive the sanctions for several years. However, the economic sanctions will have a significant impact on Russia’s economic output and government income. GDP is expected to drop nearly 10% in the next 12 months alone. If Russia loses its oil and gas revenues, it may run out of money within one to two years.
In conclusion, Russia can sustain itself financially for a significant period as long as it can continue to export oil and gas. However, the economic toll of the sanctions will be substantial, with a decline in GDP and potential revenue shortfalls. The ongoing conflict in Ukraine and the impact of the sanctions will present significant challenges for Russia’s economy.
