A Russian Flag that says \"Sanctions\" on it over a globe showing the country of Russia
“Russia is facing a deep and prolonged economic depression that is only going to get worse the longer they remain isolated from the rest of the global economy," said Christopher M. Herrington, Ph.D., associate professor of economics at VCU.

Impact of sanctions on Russia’s economy

Russians will feel the pain of economic isolation when they are unable to find or afford real necessities, say VCU economists.

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The United States is feeling the economic effects of the Russia-Ukraine conflict in the form of soaring gasoline prices.

What’s more, Americans will continue to experience surging prices for energy and wheat products, said two Virginia Commonwealth University economists.

With the rising prices, those in the U.S. can also expect to see a sharp increase in inflation, said Oleg Korenok, Ph.D., a professor in the VCU School of Business.

But the real economic blows will be felt by Russia itself.

“The Russian ruble has become almost worthless in the last couple of weeks,” said Christopher M. Herrington, Ph.D., an associate professor. “Russia is facing a deep and prolonged economic depression that is only going to get worse the longer they remain isolated from the rest of the global economy.”

Major corporations in the United States and Europe have halted their operations in Russia, which will have substantial devastating effects as well, said Korenok and Herrington, who spoke with VCU News about the economic fallout of the conflict.

How has the Russia-Ukraine conflict affected the global economy so far? How has it affected our national economy? How will the economy be affected as this conflict continues?

Korenok: On a global level we see relatively large increases in the prices of energy — oil and natural gas — and commodities — some metals and wheat. On a national level, most visible is the increase of gasoline prices via oil prices.     

[How the economy will continue to be affected] depends on the extent of sanctions. We may see additional sanctions in the future. With the current level of sanctions, the economy will feel an increase in the price of oil via gasoline and diesel prices, which are likely to accelerate inflation. 

Herrington: We have seen immediate negative impacts in global stock markets as people adjust their expectations to account for lower future economic growth prospects. Some of this is coming directly from lower current and future revenues of firms operating in Ukraine and Russia, but there are also spillover effects to other countries. We expect continued increases in energy and food prices, so even people in countries not directly affected by war may still adjust their buying decisions going forward in response to price changes, for example, or shortages of particular goods.

A couple of markets to keep an eye on are gas and oil, as well as wheat. Russia produces about 11% of the global oil supply, and if that production slows — or if customers are unwilling or unable to purchase Russian products — that will reduce the global supply and drive energy prices even higher. Similarly, Russia and Ukraine collectively account for about one-fourth of global wheat exports. We've seen wheat prices rise dramatically this week, and those effects are going to show up in higher food prices before too long.

Can you explain some of the economic sanctions the U.S. is imposing on Russia? (How do they work? What kind of hardship does this create for Russia? How effective are such sanctions?)

Korenok: Russia gets a lot of money by selling its oil. The U.S. used to buy some of it, about 8%. If the U.S. stops buying it, Russia will have to find another buyer. It is likely to be China, but China buys oil from Russia at a much lower price.

Oleg Korenok resting his arm on the railing of a staircase
Oleg Korenok, Ph.D., professor of economics

To conduct transactions with the rest of the world, banks in Russia use SWIFT, an electronic system of transferring money. By not allowing Russia to use this system, payments will be harder to make and take longer.

As for effectiveness, sanctions did have an effect on Russia's currency; its ruble lost 40% of its value. Stocks of Russian companies lost their value on international markets and are not trading internally. Markets have been closed for two weeks. Inflation jumped by 9% in two weeks and is expected to be higher than 20%. Russian Central Bank increased its interest rate to 20%, which will make it harder to take loans. From an economic point of view, sanctions are very effective. From a political point of view, they had little effect on ongoing conflict.    

Herrington: The sanctions, combined with voluntary decisions by many U.S. and European countries to discontinue business in Russia, are going to have a truly devastating effect on the Russian economy. The ruble has become almost worthless in the past couple of weeks, and Russian consumers are going to face extreme shortages and high inflation in the very near future. Real economic activity in Russia — that is, adjusted for inflation — is expected to decline 25% to 30% this year by some estimates. Russia is facing a deep and prolonged economic depression that is only going to get worse the longer they remain isolated from the rest of the global economy.

Hollywood and the music and sports industries have hit Russia with their own form of sanctions  barring concerts, movie festivals and more. Is this merely making a statement against the invasion or can it actually cause substantial damage to Russia’s economy?

Korenok: Not just Hollywood. Many major companies are stopping or positioning their operations in Russia. This is a statement against invasion, but it will have substantial negative effects as well. Millions of people working for foreign companies may lose their jobs — for example, 62,000 people working in McDonald's in Russia. Another example, Russia has a lot of Boeing airplanes that will not be able to fly in two or three months without spare parts.  

Herrington: Individually, each of these decisions is primarily symbolic — a statement of support for Ukraine and condemnation of Russian aggression. But collectively, these actions can have real impacts on the Russian economy and on the Russian people's support of the war and their government. As more and more foreign businesses cut off activity in Russia, and the country becomes increasingly isolated, consumers and businesses will face real shortages for things they need and want to purchase. They may not necessarily miss the concerts and sporting events, but I think they will feel the pain of economic isolation very soon when they are unable to find or afford real necessities.

The global supply chain has experienced an unprecedented disruption over the past two years. Has this positioned the U.S. to withstand any disruptions caused by the conflict?

Korenok: Russia is a big commodity supplier, but plays little role in the global supply chain. The conflict will have little effect on global supply chains, given the current state of sanctions.

The U.S. economy is growing at a healthy pace and is expected to continue its growth. It is in a very strong position to withstand the effects of conflicts. Inflation, on the other hand, is quite high in the U.S. and may go higher because of increases in energy prices. Price increases are unlikely to last long as oil production increases in response to higher prices.                              

Christopher M. Herrington smiling at the camera
Christopher M. Herrington, Ph.D., associate professor of economics

Herrington: One thing that comes to mind here, and it is actually unrelated to the pandemic, is the development of the U.S. shale oil industry. We've seen tremendous growth in U.S. shale oil over about the past decade, and those domestic supplies are going to help buffer U.S. energy prices somewhat from the loss of Russian oil and gas. If not for the supply of domestically produced shale oil, we would be seeing even larger energy price increases than we are now.

Unfortunately, however, we can't increase domestic oil production quickly or cheaply, so we're still going to feel some effects from the loss of the Russian oil supply. And I think a similar lesson applies more broadly, which is that many supply-chain adjustments across many industries are possible, but they would take a lot of time and significant investments. Generally speaking, becoming "self-reliant" isn't a great long-term strategy for economic growth or resilience. Rather, we want to work toward having robust global supply chains that are — to the greatest extent possible — protected and insulated against future shocks, whether pandemics, wars or otherwise.

What would you like to add?

Korenok: Most of what I said depends on the level of sanctions in the future. I assumed that the current level will continue for an extended period of time. While this conflict has an economic dimension, it is a secondary one. The main dimension is geo-political. [Russian President Vladimir] Putin wants to rebuild the Russian empire, which used to include Latvia, Lithuania, Estonia, Finland, Poland. All these countries are NATO members, a military alliance which says that attack on one country means attack on all. If the U.S. and the European Union are not going to do all they can to help Ukraine now, they will have to face the same problem in a few years again with one of the NATO members.

I also hope that it is not hard for people in the U.S. to feel affinity for a young democracy defending itself against an empire.