Russian citizens are already feeling the punishing effects of economic sanctions imposed by Western powers over the invasion of Ukraine, and the financial situation for most people is likely to deteriorate.
The ruble is now worth less than a penny and the economy is teetering, with Russia expected to default on billions of dollars in foreign debt. Multinational companies across all sectors are pulling out of the country, taking their products, services, and jobs with them.
“Pretty much anybody who has participation in the banking system, which is a vast majority of the population, feels it one way or another,” Wharton finance professor Nikolai Roussanov said. “This is felt by all strata of society, maybe in different ways.”
Roussanov joined Wharton Business Daily on SiriusXM to discuss the impact of the sanctions on Russian citizens. The G7 nations of the United States, Canada, Germany, Italy, France, United Kingdom, and Japan are leading at least 20 other countries in placing unprecedented economic sanctions and export controls on Russia following President Vladimir Putin’s unprovoked conflict with Ukraine. After weeks of massing troops along the border, Putin ordered the invasion on February 24.
Roussanov said Russian citizens are seeing their purchasing power erode sharply because of the depreciation of the ruble. They are prohibited from withdrawing hard currency in excess of $10,000 due to emergency regulations imposed by the Russian Central Bank, and they can no longer use bank cards issued by Visa or Mastercard, which have suspended operations in the country. And product shortages are beginning to show in stores ranging from supermarkets to luxury goods.
“The disappearance of goods from stores, as well as rising prices, is going to make it quite unpleasant in the short run,” he said. “In the longer run, the question is whether jobs will start disappearing as well.”
“Human capital is what drives productive growth and wealth creation in the country, and that human capital is being dissipated pretty rapidly.” – Nikolai Roussanov
Western companies doing business in Russia aren’t included in the formal sanctions, yet many of them have shuttered voluntarily out of a sense of “self-sanction,” Roussanov said. Without a timeline to return, they could face government seizure. The New York Times reported that Putin said assets of those companies should be put under “external management” and transferred “to those who want to work” – in short, nationalizing them.
Roussanov warned that such action would accelerate the so-called brain drain that’s already happening in Russia – well-educated and talented young professionals are leaving the country in search of better career opportunities abroad.
“I think that in the long term the impact is terrible, even beyond what I’ve already mentioned in the short term, because the one thing we’re already seeing is the erosion of human capital,” he said. “Human capital is what drives productive growth and wealth creation in the country, and that human capital is being dissipated pretty rapidly.”
Other questions remain about the energy sector of Russia’s economy. Russia is a main exporter of oil and natural gas to Europe, and those receiving nations can’t easily or quickly find alternatives. It’s also unclear how China and India will interact with Russia. China, the world’s second-largest economy, is considering support for Russia to offset the sanctions. And Russia has offered to sell deeply discounted crude to India.
Meanwhile, Russian citizens are feeling the pain.
“It’s pretty general knowledge that a lot of the hardships are due to the Western sanctions, and perhaps more so than it is in reality,” Roussanov said. “The Russian public perceives that as Western pressure on them and something done to them externally — fairly or not.”