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Russians flock to shop as the rouble weakens

FILE PHOTO: Russian rouble coins are seen in this illustration taken, February 24, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

A huge line of shoppers snaked outside an IKEA store near Moscow this week in the brilliant sunshine. Families hurried to spend their rapidly depreciating roubles at the Swedish shop that is leaving the crisis-torn country in similar scenes across Russia.

The news: Russians are ready for a bleak future of rising inflation, economic hardship, and a tightening of import restrictions.

  • The rouble has lost a third of its value this week as a result of unprecedented Western sanctions implemented in retaliation for Russia’s invasion of Ukraine. The steps froze a large portion of the central bank’s $640 billion in reserves and prevented many banks from using the global payments system SWIFT, sending the rouble into free collapse.
  • Outwardly, cities across Russia appeared to be tranquil, with little trace of the crisis wreaking havoc on the banking industry and markets. Except for the long lines of individuals eager to stock up on stuff – usually high-end apparel and hardware – before the shelves run out or prices rise even higher.
  • However, the spending surge seen this week may be waning.

What’s going on: While there is no visible panic, the abolition of rouble savings and the doubling of interest rates to 20 per cent will put a strain on mortgage holders and consumers.

  • Financial conditions, which represent the availability of credit in the economy, have tightened dramatically this year, according to Oxford Economics, which predicts domestic demand will drop by 11 per cent by year’s end and unemployment would rise by 1.9 percentage points in 2023.

Facts and figures: Sanctions, according to Zach Witlin, an analyst at Eurasia Group, are already affecting consumers through price hikes and problems in digital payments.

  • While consumers are not directly targeted, “fear and caution are exaggerating the impact,” with the exit of foreign brands such as IKEA creating a “snowball effect,” he added.
  • According to the Federal Customs Service, automobiles, machinery, and auto parts accounted for about half of Russia’s $293 billion in imports last year.
  • Because of the government’s stringent import cuts in recent years, imports in 2021 will be 7 per cent lower than in 2013, before the first sanctions were imposed in response to Russia’s 2014 invasion of Crimea.
  • It has also increased trade with China, the only country that has increased exports to Russia since 2014.
  • However, when the rouble falls in value, insurers refuse to cover enterprises exporting to Russia, and shippers avoid Russian ports, whether to export or import, further drops are inevitable.
  • While sanctions affect only a few Russian enterprises, “all of them will feel the chilling effect,” according to Matt Townsend, a sanctions partner at law firm Allen & Overy. “This is why sanctions are a very effective measure to isolate a country.”
  • According to JPMorgan, the immediate economic shock will trigger a 35 per cent GDP drop in the second quarter and a 7 per cent decline in 2022. However, “growing political and economic isolation will curtail Russia’s growth potential in years to come,” it noted.
  • RBC Global Asset Management cautioned that this might happen if limitations “limit the acquisition of technology needed to support Russia’s highest value industries.”

What’s important: The Biden administration is working on regulations that will limit Moscow’s ability to import smartphones, aeroplane parts, and auto parts.

  • However, international corporations such as Apple and Microsoft, as well as consumer goods companies Nike and Diageo, have cut ties with Russia, limiting access to the consumer products that Russians have grown accustomed to over three decades.
  • Chinese companies, which have stayed put so far, could gain market share, but they, too, could face secondary sanctions because many of their products, such as cellphones, rely on technology developed in the United States.
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