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Russia & its Economy: Impact of Economic Sanctions

The economy of Russia has faced significant headwinds in recent years due to the imposition of wide-ranging economic and financial sanctions by Western countries. These sanctions have adversely impacted foreign investment flows and led to a slowdown in Russia’s economic growth over 2014-2020 compared to the pre-sanctions period.

Specifically—the sanctions triggered massive capital outflows and cut off access to foreign financing for Russian banks and companies. This resulted in a sharp depreciation of the Russian Ruble – declining over 50% against the US Dollar at one point.

The currency devaluation imported inflation into Russia’s economy with consumer prices rising as the Ruble lost purchasing power. The Central Bank of Russia had to expend sizable foreign exchange reserves to defend the Ruble’s value. The sanctions thus exposed Russia’s overdependence on oil and gas revenues.

However—Russia has demonstrated considerable resilience and the economy is recovering – adjusting to the new normal of functioning under sanctions through import substitution strategies in certain sectors like agriculture and defense manufacturing. Still, the sanctions constrain Russia’s growth potential in the longer run by discouraging foreign investment and technology transfers into the economy.

Foreign investment inflows declined sharply as international investors grew wary of regulatory and political risks. For example— foreign direct investment fell from a peak of $70 billion in 2012 to just $15 billion in 2020.

The sanctions triggered capital flight and cut off Russian banks and companies from global capital markets. This placed immense pressure on the Ruble which lost over half its value against the Dollar in 2014. The currency depreciation stoked inflation with consumer prices rising over 12% in 2015. The Central Bank expended $50 billion of reserves to stabilize the Ruble.

At the industry’s economy level— sanctions dealt a blow to Russia’s manufacturing sector which relies heavily on imported technology and components. The EU embargo on defense equipment cut deals worth billions. Sanctioned Russian oil firms had to sell crude at steep discounts. However—import substitution in agriculture, machinery and select defense items has boosted some domestic producers.

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Featured Reports

Understand the macroeconomic situations that affect the global positioning of countries.

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