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Facing Default, Putin Offers False Portrayal of Russian Economy

A woman pushes a trolley with her belongings along a street in the separatist-controlled town of Volnovakha in the Donetsk region, Ukraine, March 15, 2022. (REUTERS/Alexander Ermochenko/File Photo)
Vladimir Putin

Vladimir Putin

Russian president

“[W]hile strengthening our economic, technological and scientific potential, we are ready to work openly with all bona fide partners based on the principles of mutual respect for each other's interests, the primacy of international law, and equality for all nations and peoples.”


In a June 22 video address to the annual forum of BRICS (Brazil, Russia, India, China and South Africa), Russian President Vladimir Putin painted a rosy but distorted picture of Russia’s economy and relationships with foreign partners.

“I would like to stress that Russia's strategy has not changed: while strengthening our economic, technological and scientific potential, we are ready to work openly with all bona fide partners based on the principles of mutual respect for each other's interests, the primacy of international law, and equality for all nations and peoples,” Putin said.

But that statement leaves a false impression of Russia’s economic woes. Moreover, Putin’s war on Ukraine, condemned by the United Nations, is widely regarded to be a violation of international law.

Putin’s claim that his policies have strengthened Russia’s economy and relationships with foreign partners is misleading.

While it’s true that Russia has found willing buyers for its oil – importantly, China – it is undeniable that Western sanctions have slammed the country’s economy.

For starters, more than 1,000 foreign companies have fully or partially ceased operations or left Russia since the invasion began on February 24. As of June 24, only about 400 foreign firms were continuing to do business in the country, according to a Yale University School of Management tracking database.

The sanctions will likely wipe out 15 years of gains in the Russian economy, Reuters reported on June 8, citing recent analysis by the Institute of International Finance, a global association of trade groups and banks.

As a result of the ongoing “exodus of companies, a Russian ‘brain-drain’ and collapse in exports,” Russia’s economy “will shrink 15% this year and 3% in 2023,” the report said.

Some analysts predict that despite oil purchases by China and India, Russia could soon default on debt obligations. Helda Salemon, a senior researcher at the Netherlands’ Hague Center for Strategic Studies, tweeted on June 24 that Moscow will likely not be able make payments on Eurobonds due June 27:

“A revolutionary default: because of #EU and US sanctions, #Russia is heading to a default on its $ 40 billion bond payments next Monday (27 June), something not seen since the 1917 Russian Revolution. In effect this will turn Russia into a ‘toxic asset’ for (Western) #investors,” Salemon said.

The Eurobonds at issue are denominated in U.S. dollars, meaning Russia must make monthly interest payments in U.S. currency. However, in April, the U.S. Treasury Department banned Russia from making dollar debt payments, a measure which, Bloomberg News reported, was “intended to force Russia into either draining its domestic dollar reserves or spending new revenue to make bond payments, or else go into default.”

By May, the sanctions on Russia had already led to the freezing of half the country’s $640 billion in foreign reserves. “The central bank says it’s also sold some of its foreign currencies to support the ruble, leaving questions on how long it can pull from its local coffers to pay its debts,” Bloomberg reported.

Russia claims that it has been paying debts in rubles. To receive Russian debt payments in rubles, however, creditors will have to open ruble accounts. According to Reuters, “[i]t is unclear as yet whether foreign investors – many of whom will have to navigate sanctions imposed by their own governments – will be willing or even permitted to open such accounts.”

Inside Russia, inflation has spiked, and tech components are scarce. This has caused a range of problems, from crashing computers to grounded flights. It has also left Russia unable to restore or refurbish some weapons and other military equipment, The Wall Street Journal reported. The paper said the war had “erased” two years’ worth of tank production.

According to the Trading Economics global tracking website, Russia’s inflation rate stood at 17 percent in late May, and consumer and business confidence were in negative territory.

On June 23, Novaya Gazeta Europe – a reorganized version of the independent newspaper the Russian government banned for its coverage of war in Ukraine – provided insight into the lives of ordinary people in Russia with a report from the central region of Samara.

More than 14% of Samara’s population lives below the officially set poverty line, and 44% have a monthly income of a mere 19,000 rubles, or about $351. Between January and March this year, the number of poor in Russia increased by 100,000 compared to 2021, reaching 20.9 million, Novaya Gazeta said.

The report included interviews with Samara residents who said they had given up many types of food and other products that are now are considered luxury items thanks to rising prices.

A local woman identified by her first name Anna told Novaya Gazeta, that she always loved peaches but now she can only afford buying them once a month on the pay day. “Last year nectarines were a little over 100 rubles, ($1.85) now they are 300 rubles ($5.54) for a kilogram. So, I just walk by,” Anna said.

Another Samara resident, a woman called Sasha said that most of her favorite imported cheese is gone but she can’t afford even a local produce because “a kilogram of local cheese costs 3,000 rubles.” That is $55 for 2.2 pounds.

But of most concern are the rising prices on medications, Anna said, as her daughter is suffering from diabetes and the price of insulin has risen by 28% since the February invasion.

So far, China and India have helped the Russian economy to stay afloat by increasing their purchases of Russian oil, taking advantage of significantly discounted prices after European customers moved to exit Russian oil in punishment for the war.

In May, China and India bought some 2.4 million barrels of crude from Russia at roughly 30% discount to the global benchmark price.

The Chinese and Indian purchases of Russian crude “have helped ease the pressure” on Russia’s economy, while undercutting “European and American efforts to isolate the Kremlin” and risking “serious diplomatic fallout that neither country wants,” The New York Times reported in a June 24.

The benefits the two countries are gaining from cheap Russian crude may be temporary, and the “real test” of their partnership with Russia “will come when the sanctions take full effect” by the end of the year, The Times said.