The Heightened Economic Pain in Russia

Are you worried about what the Russian-Ukrainian war means for your portfolio? Do you feel waves of frustration as the US inflation numbers have markedly increased, and everything from groceries to gas prices is digging deeper into your wallet?

This might help you feel a bit better.

After facing over 2,778 internal sanctions and experiencing tens of thousands of casualties, Russia will likely repent its invasion decision for years to come.

Several international parties (ranging from the US to the EU) have restricted Russia’s access to financial institutions. The US has also cut off Sberbank, which accounts for nearly a third of Russian banking, and the EU has banned all transactions to the nation. Aside from government action, hundreds of international companies have announced their departure from the Russian market, taking away McDonalds, Apple, Intel, IBM, UPS, Caterpillar, Starbucks, and Nestle (among others).

Over time, these sanctions will trickle down to the Russian consumer, slow down the Russian economy, and serve as a cautionary tale for other countries contemplating a similar geopolitical intervention. But they come at a high cost to the world at large — and to our readers in particular.

Don’t Dismiss the Underrated Power of Economic Sanctions

By now, Russia has realized that it had severely underestimated Ukrainian military forces, placing a swift and easy victory in Kiev out of reach. It had also underestimated the possibility that the Western nations would come together and present a unified front with unprecedented economic sanctions.

The Russian government may be telling its citizens that the sanctions are good for the Russian economy, but the reality is that their full impact is yet to be experienced. Three months of the war have certainly felt like a lifetime for those whose lives have been irretrievably changed since February 24. However, three months is not long enough for an entire country to have run out of supplies and inventory.

Think about something simple, like a home or an office printer. In order for it to work, you need toner ink and paper. Paper needs processing chemicals that make it white while also giving it the right texture to not jam the printer. Now, consider more complicated things, like replacement parts for subway trains, maintenance materials for elevators, wheat stock for planting, medications to manage diabetes, and reagents required to run blood tests. None of those things are manufactured 100% in Russia, and virtually anything that’s made or assembled in Russia uses imported parts, chemicals, and ingredients.

That situation is not unique to Russia. In the modern day and age, no single country is an island — and the interconnectedness of cross-border supply chains has been amply demonstrated with COVID disruptions. This interdependence heightens the economic cost of being cut off from the rest of the global economy to a level that may prove to be unbearable.

In other words, the sanctions are hurting Russia right now — and the pain will only get worse with every passing month.

We Can Expect More Sanctions in the Near Future

And then, there will likely be more sanctions. As of May 8, 2022, the G7 leaders (including Canada, Japan, Germany, the US, Italy, the UK and EU) have pledged a commitment to pursue further economic isolation of Russia. This could potentially go as far as placing a full ban on Russian oil and gas exports, a move that would come at tremendous cost for the countries that rely on Russian oil while stifling a key component of Russia’s economy.

The US has also targeted Russian oligarchs (including Putin’s own daughters) by seizing yachts, freezing access to bank accounts, and blocking real estate sales as a means to frustrate Putin’s close inner circle.

Signs of Internal Dissent Growing in Russia Amidst Wartime Censorship

Economic sanctions, coupled with tensions between civilians and the Kremlin, could potentially act as a debilitating cocktail for Russia.

The Russian propaganda machine has paved a way for justifying the invasion of Ukraine to the captive audience at home. Many Russians believe state-run media reports. In their world, there is no war in Ukraine. Instead, their country is carrying out a “special military operation” to “liberate” the people of Ukraine. Putin’s government has a history of dismissing civilian journalism as hoax attempts, and many officials in his close circle have taken pride in shutting down independent radio stations and newspapers over the past decade. This explains the shockingly high approval ratings for Putin, even as the war drags on.

Those who disagree with their government face a tough path. To the Russian people, speaking out against the “special military operation” (or even just calling it a war) can serve as a one-way ticket to prison.

In March, the Russian government introduced a new 15-year sentence to those who spread “false” information about its military. The new law is vague enough to cover virtually any sign of disagreement with the official government. As a result, people have been arrested for holding up a copy of Tolstoy’s War and Peace, for wearing yellow and blue (the colors of the Ukrainian flag), and even for holding up a blank piece of paper in public. OVD-info, a Russian human rights organization, reports that over 14,000 Russians have already been detained for protesting against the war with Ukraine, with many criminal cases currently making their way through the overloaded court system.

While Russia is actively shutting down those who are speaking out against the war, the country has been unable to stop the brain drain. Thousands of technology workers have already left the country, according to the Russian Association for Electronic Communications. These workers are finding residence in other countries, including Poland, Latvia, and Armenia, among other Asian and European nations. The chances of them returning are slim.

Inflation Worries Force the Kremlin to Acknowledge “A Difficult Year Ahead”

The ever-dwindling supply of essential products, component parts, and ingredients is being made worse by inflation. The World Bank, an international institution that provides loans to low- and middle-class countries, expects Russian GDP to fall by 11.2% this year as a result of international economic sanctions.

And it’s not just the international agencies that are alarmed about the economics of wartime. An internal Russian economic ministry document noted that inflation in the country could continue to rise beyond April’s mark of 17.62%.

In fact, Putin has recently acknowledged that 2022 would be a “difficult” year for the Russian economy. Rising inflation could mean a squeeze on wallets all across the country, which spells lower real incomes, lower taxes, and greater unemployment. With 30 countries having enacted export controls on Russia, there is little chance that the Kremlin will have enough money to ramp up its military industry and keep internal strife at bay at the same time.

The Heightened Economic Pain in Russia: What Does It Mean for the United States?

While inflation continues to bite into American household budgets, there is a silver lining. The aftermath of Russian aggressions, including a rough blow to its economy, will make other countries reconsider a similar move.

In the meantime, there is no doubt that nations across the globe, including ours, will taste inflation.

To the world at large, inflation is the price of defending a budding democracy across the globe. And yet, as the war goes on and the sanctions tighten down, the continued economic costs to the United States may get higher. A team of economists at Goldman Sachs has issued a warning that the economy may fall into a recession (which is defined as two consecutive quarters of negative GDP growth) some time in the next twelve months.

In economic terms, the war in Ukraine represents a negative supply shock to the global economic system. That shock comes on the heels of the major disruption during the COVID-19 pandemic, which had already caused Americans to pay higher prices for everything from beef to used cars. As a result of the war, countries far and wide will face higher inflation — and perhaps even food shortages (especially on products that Ukraine had exported prior to the war, such as wheat).

In this time of international turmoil, we believe that sticking with your investment plan is the best way to navigate inflationary pressures and rising interest rates. A diversified portfolio that reflects your goals and risk tolerance can be a powerful tool for staying invested, taking advantage of the markets, and keeping an eye on the ball. If you would like another look at your investment choices or retirement goals, reach out to a member of the SYM Financial team and schedule a quick call today.