Russia heading for recession, economy shut down despite ruble rebound, US says

Plastic letters arranged to read ‘Sanctions’ are placed in front of the colors of the United States and Russia flag in this illustration taken February 28, 2022. REUTERS/Dado Ruvic/Illustration

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WASHINGTON, April 1 (Reuters) – Punitive sanctions imposed by the United States and its allies on Moscow for invading Ukraine are pushing Russia into recession and returning it to a closed economy, a senior Treasury official said on Friday. American.

The official, speaking on condition of anonymity, told reporters that the Treasury viewed Russia as struggling with high inflation, declining exports and shortages despite a recovery in its ruble against the dollar. The official dismissed the rebound as being driven by strict capital controls and foreign exchange restrictions, not market forces.

Inflation which reached 6% over the past three weeks is a better indication of Russia’s sanctions performance, revealing the ruble’s diminishing purchasing power, the official said, adding that ruble exchange rates on the black market were well below the international rate. .

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After Western democracies imposed initial sanctions immobilizing about half of the Russian central bank’s $630 billion in foreign currency assets and cutting off several major Russian banks from the SWIFT international transaction network, the ruble lost half of its value against the dollar.

It has since recovered to its pre-invasion value, hitting a five-week high in early Moscow trading on Friday before settling in the 83-84 range against the dollar.

But the Treasury official said that will not prevent a sharp contraction in Russian economic output that outside analysts now forecast at around 10% this year – much worse than the 2.7% contraction it suffered in 2020, the first year of the COVID-19 pandemic. .

“The economic consequences facing Russia are severe: high inflation that will only increase and a deep recession that will only get worse,” the official said.

SHUT DOWN RUSSIA’S ECONOMY

The Treasury official said the cumulative effect of sanctions on banks, wealthy oligarchs linked to Russian President Vladimir Putin, key industrial sectors and U.S. export controls that prevent Russia from accessing critical technologies, was pushing Russia toward its Cold War existence as a closed economy.

But Russia, which mainly produces commodities and raw materials, was ill-equipped to produce its own consumer and technology goods, the official said.

“As a closed economy, Russia will only be able to consume what it produces, which will be a sharp adjustment,” the official added.

The process will not happen immediately. China, India and other countries still trade with Russia and could replace some goods and parts that Russia would normally buy from Western companies.

However, its access to semiconductors, software and other technologies is limited due to US export restrictions which will also prevent China from selling such chips to Moscow since all of its semiconductors are made with the technology or software. Americans. Read more

The United States wanted the sanctions and export restrictions to be debilitating for the Russian economy and cripple the Russian military’s ability to procure parts and equipment for the war effort, the official said .

Washington was comfortable with the enforcement of sanctions and export controls so far, but remained alert to any violations.

The Treasury comments come as senior Biden administration officials traveled the world to pressure world leaders to keep up the sanctions pressure on Russia. Read more

Washington planned to maintain humanitarian exemptions to sanctions, given growing food insecurity concerns and Russia’s role as a major wheat producer, the Treasury official said.

Other exemptions were intended to protect Western financial institutions that hold Russian assets, through a license authorizing the payment of Russian debt.

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Reporting by David Lawder and Andrea Shalal; Editing by Daniel Wallis

Our standards: The Thomson Reuters Trust Principles.

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