Russian economy starts to crack under weight of sanctions

Russia’s economy is beginning to show fractures under Western sanctions, which have not stopped gaining intensity in recent weeks: car production has sunk, the risk of a debt default is worsening and inflation threatens to soar, as shown by data published this week. Wednesday (6).

The announcements of international groups that withdrew from Russia were widely publicized, but there were still no reflections of their serious repercussions on real economic activity.

A few weeks after the mounting battery of sanctions, after the start of the Russian offensive in Ukraine, the effects are starting to be felt.

The Russian Ministry of Finance announced that it had paid off a debt of 650 million dollars in rubles after a foreign bank refused to make the payment in dollars, which exposes Russia to a risk of ‘default’ at the end of a grace period. 30 days from April 4th.

For many weeks, Russia avoided the risk of default, as the US Treasury allowed the use of foreign exchange held by Moscow to pay off debts abroad. This week, however, the Treasury tightened sanctions, no longer accepting the dollars that Moscow holds in US banks.

The Russian ministry, in turn, issued this warning to creditors of “hostile countries”: the money will be paid in rubles deposited in a Russian account, and these countries will only be able to convert these rubles on the condition that Russian funds abroad be unlocked.

“There is no reason for a real default”, assured this Wednesday Kremlin spokesman Dmitry Peskov, who also assured that “Russia has all the resources to pay its debts”.

– ‘Putin is impoverishing Russia’ – “It’s hard for Russia to avoid a sovereign default,” says Timothy Ash, an analyst at fund manager Blue Bay Asset.

“A default could not immediately bring down the markets and the Russian economy, but it will have long-term consequences”, says the analyst, who predicts “an impact on investments, growth, the standard of living”, among others.

“Putin has been impoverishing Russia for years,” he concludes.

Another impressive figure for the day is new car sales, which fell 62.9% year-on-year in March, symbolizing an entire sector in serious trouble, as the West banned exports of components and spare parts to Russia.

In addition, many producers announced the suspension of the sale of components and cars to Russia, such as Audi, Honda, Jaguar and Porsche. Others announced the stoppage of production, such as Renault, BMW, Ford, Hyundai, Mercedes, Volkswagen and Volvo.

The factories of Avtovaz (Renault-Nissan group), the biggest car maker in Russia, which employs tens of thousands of people, are practically at a standstill due to a lack of imported components.

– Record inflation -According to data from Avtostat, cited by Russian newspaper Kommersant, prices for new cars rose on average by 40% in March, and up to 60% for luxury cars, whose supply is being limited by logistical problems , but also by sanctions.

March inflation figures are expected this Wednesday night (Russian local time), but it looks like they should hit a record.

Alexei Vedev, a research associate at the Gaidar Institute at Ranepa University in Moscow, sees annualized inflation at 20%, after surpassing 9% in February.

“It was a month of panic for consumers” who massively bought products that they believe will disappear, he points out.

Furthermore, according to Andrei Yakovlev, from the Moscow High School of Economics, the real crisis will only affect the real economy from June or in the middle of the second semester: “in May, many companies will be able to suspend their activities” due to lack of imported components. , especially in the automotive industry, which employs hundreds of thousands of people.

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