LONDON (BLOOMBERG) - Nearly three months after President Vladimir Putin sent his troops into Ukraine, Russia faces more sanctions than any other country. But thanks to surging prices for its exports of oil and gas, the Kremlin has been able to steady the rouble and limit the impact on consumers and the war effort.
Signs of strain are spreading across the economy, from the shuttered stores of foreign brands that fled to steep plunges in car sales, mortgage applications and many tax collections. Though they won't say so publicly, Finance Ministry officials have foreseen the biggest economic contraction in a generation this year as sanctions starve companies of key components, technologies and capital.
While that slow-motion shock still may not be enough to force Putin to change course over Ukraine, the economic pressure on the Kremlin is set to rise sharply later this year, particularly with the European Union now discussing an embargo on Russian oil.
"Sanctions alone would not stop Putin's war, but sanctions combined with the military pressure puts him in a difficult position," said Daniel Fried, a former top US State Department official. "Not impossible but it does change the odds."
So far, it's the steady flow of weapons and other assistance for Kyiv that's had the most decisive impact in helping Ukraine repulse Russian attacks. Kremlin officials admit privately that they didn't expect the US and its allies to move so quickly to offer Ukraine such broad support.
Putin isn't concerned about the economic cost, these people said, as he pursues what he views as an existential struggle for Russia's geopolitical survival with the US and its allies.
"The economy has ceased to be a source of legitimacy for him," said Sergei Guriev, a Paris-based Russian economist who's advocated tougher sanctions. "To force him to think about the economy, you'd have to impose an oil-and-gas embargo."
That's a tall order, especially given Europe's dependence on Russian fuels, but oil restrictions are under active discussion.
"All of us share the objective of diminishing the revenues that Russia will have to buy goods and services to help their economy and enable them to wage war," US Treasury Secretary Janet Yellen said on Wednesday (May 18) ahead of a gathering of Group of Seven finance chiefs. "We're doing a lot of things that are effective in diminishing their access to the goods and services they need."
Russia managed to limit the initial fallout at the beginning of the war, heading off a financial crisis by hiking interest rates and imposing strict restrictions on taking money out of the country after the US and its allies sanctioned the central bank and its US$600 billion (S$832 billion) war chest.
But while Putin brags that Russia is "confidently coping" with the impact of sanctions, touting the rouble's rebound from the lows hit shortly after the invasion, his own officials aren't as upbeat.
A central bank report on May 11 said the rouble's rally is in fact a reflection of the impact of sanctions, not the opposite. The restrictions, combined with foreign companies cutting off business with Russia, caused imports to drop, the bank said. As a result, demand for foreign-exchange has all but dried up in a market where capital controls had banned other would-be buyers from participating.
A poll released this week by Bank Otkritie found 58 per cent of Russians said they'd noticed shortages of foods in stores since the war started, and a third said they're stocking up. Another survey by the independent Levada Centre found 85 per cent of those surveyed said now is a bad time for big purchases or taking out a loan, the highest level in more than a decade.
"Reverse industrialisation" was the term central bank economists coined in a recent report for what Russia's facing. Long-forgotten phenomena like shuttle-trading - the 1990s-era business when Russians flew in large groups to places like China and Turkey to bring back huge sacks of clothes and other consumer goods to sell - are likely to return, they said.
Import limits "are like a slow-acting poison", said Tatiana Orlova, economist at Oxford Economics. "Over time, these sanctions will take out lots of equipment for which it won't be possible to replace parts."
Russia has stopped publishing much of the detailed data on trade flows that would give indications of the impact of the restrictions. But figures from Russia's biggest trading partners show imports plunged 45 per cent in March, according to Capital Economics.
The embargo on Russian oil now under discussion by the EU would cost Russia as much as US$155 billion over the next three years, according to the Institute of International Finance.
The auto industry gives a cautionary look at what may be to come. Once a showcase of Putin's efforts to draw foreign companies and diversify away from oil and gas, the sector has largely ground to a halt since the war as the overseas giants have closed factories and cut off supplies of vital components.
Car sales in April fell almost 80 per cent, the largest drop on record. Even Chinese companies, which Russia was hoping would step in to fill the gap as European and US producers left, reported plunging volumes.
The Kremlin has responded by nationalising some plants and promising to revive Soviet-era brands. Aside from lifting restrictions on grey-market, unauthorised supplies, officials have given no indication where the parts will come from.
Here's a look at three key elements of the sanctions' impact on Russia:
Russia has so far been able to avoid a repeat of the blow-out seen in late 2014 after earlier waves of Ukraine-related sanctions combined with a collapse in oil prices to send the rouble plunging and triggered a wave of bank failures.
This time around, "the central bank closed all the external channels" with capital controls, which - together with the decision by Visa and Mastercard to cut off Russians' use of their cards overseas -staunched the capital outflow, according to Oleg Vyugin, a former top central bank and Finance Ministry official.
"Now everything is holding up thanks to energy exports," he said. "If there are serious limits imposed here, then we'll see the effect of financial sanctions."
Any hopes the US and its allies may have had that sanctions would starve the Kremlin of the cash it needs to fund the war don't seem to be coming true just yet. Budget revenues so far this year are near record levels, thanks to high energy prices, and the International Monetary Fund forecasts only modest deficits in the next few years. Just how much the Kremlin is spending on the war is classified, making it difficult to gauge the impact.
A deeper economic crisis that required much heavier spending on unemployment and other benefits could strain the Kremlin's resources, but not in the short term, according to economists.
"Russians will start to feel impoverishment when they start to lose their jobs," said Oxford's Orlova, warning that as Europe moves to eliminate Russian energy supplies, export volumes and thus budget revenues are also likely to fall over the next few years.
The central bank's official forecast expects Russia's economy to contract 8 per cent to 10 per cent this year, with the drop in the fourth quarter as much as 16.5 per cent. It warned that sanctions and isolation will lower the country's growth potential, as well as its actual performance.
Just how deep and lasting that hobbling will be depends on the success of the Kremlin's ability to find alternative suppliers for the millions of things it can no longer import from the US and its allies. Chips and other high-tech goods, will be particularly hard to replace, officials and economists say.
The Economy Ministry warned this week that the recession would extend into next year, the first time in memory Russia has seen a contraction with prices for its commodity exports high, Tass reported.
So far, the government has resisted calls from hardliners for sweeping nationalisation of previously foreign-owned factories, hoping to maintain a modicum of competition and avoid the legendary stagnation of the Soviet era.
Europe's plans for dropping Russian energy supplies mean Moscow will have to spend billions on new infrastructure to divert supplies to clients in Asia. "Everything's already stretched thin," said Orlova.
Whether this squeeze will be enough to erode Putin's resolve remains a question, however.
"We've seen examples from other countries like Iran and Venezuela where even prolonged application of very extreme sanctions have not substantially changed the decision-making," said Oksana Antonenko, director at Control Risks in London. "That is very much understood in the West."