Why Russia is sinking


The conflict between Russia and Ukraine started almost seven months ago. In response to the act of invasion, most of the world’s countries have decided to implement economic sanctions against Russia, led by the US and the EU countries.

These sanctions were and still are highly criticised in these countries as their results seemed counterproductive, and Russia seemed profitable.

The reality is quite different.

1/ Every trick has its limits

After the announcement of these sanctions, the ruble value (Russia’s official currency) had seen its value plummeted, and investors lost confidence.

In response, several Russian companies forced their customers to pay in rubles to increase the currency’s value. Gas and oil suppliers, now see their customers turning away because they prefer to change their energy mix. A decision that is less costly in the long run.

The Russian Central Bank also bought a lot of rubles while selling foreign currencies to pump up the value. But now, the Central Bank has no more foreign currency reserves and will be unable to maintain this artificial rise in prices.

Thus, the ruble should surely lose its value over time while the energy mix is changed or alternative suppliers are found.

2/ Reality through propaganda

At the end of July, a report published by Yale University explained that the myth of a resilient Russian economy in the face of a Western economy worn down by the energy war was “simply false”: the damage is massive.

Moscow is seeing its GDP decline by 11.2%, its exports collapse (-30.9%) and a rate of inflation of 22%.

Data source: World Bank.

A new report, written at the request of the Kremlin, confirms these figures. Despite intense propaganda, Russia finds itself in a scenario that could lead to losing its growth engines.

Declines in oil, metals, and wood chemicals exports could be so long-lasting that these sectors will cease to be the engines of the economy.

In conclusion, economic sanctions are an effective tool if conducted in a grouped and intense manner. This success could now lead other countries to reconsider their military plans as economic retaliation could reduce the profitability of an attack.

The question is: will countries be able to sanction their major trading partners?