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Russia's economy is weathering sanctions, but tough times are ahead

MARY LOUISE KELLY, HOST:

Here's a puzzle for you. Soon after Russia invaded Ukraine, the U.S. and its allies launched unprecedented sanctions on Russia. They booted big banks out of SWIFT, the international payment clearing network, and big international companies pulled out of Russia. Well, the fallout was swift. The Russian ruble tanked. But - and here's the puzzle - today, one day shy of four months into the war, the ruble has rebounded. It is now, in fact, the world's best-performing currency. So what gives? Well, with us to discuss is Ilya Matveev. He's a political scientist who studies Russian economic policy. He recently left Russia, and out of fear for his safety, he asked us not to disclose his current location. Ilya Matveev, welcome.

ILYA MATVEEV: Hello.

KELLY: Hi. Let's start big picture, I mean, beyond just the value of the ruble, which is actually doing quite well, how is the Russian economy doing four months into the war?

MATVEEV: Right. So one thing is that the Russian economy has not collapsed. This is certain. But I wouldn't say that it is doing OK. In fact, the effect of sanctions is devastating, and long-term economic prospects are very poor. And the strong ruble is a bad indicator of Russian economic performance generally because it only reflects the fact that imports have fallen so sharply that importers simply do not need so much foreign currency because they're unable to import goods from the European Union and from the United States and from Western countries. So the strong ruble only reflects the fact that there is no use for foreign currency in Russia right now. And this is, of course, a very bad thing for the economy.

KELLY: As best as you can tell from outside Russia, are ordinary Russians feeling the impact of sanctions yet? Has their life dramatically changed?

MATVEEV: Yes, their life has changed, and there is rampant inflation. So yearly inflation is looking to be around 20%, 25%. There are shortages of some essential goods. Other goods are now very, very expensive. Also there is cascading unemployment from the closure of factories belonging to Western companies and other Western businesses. And all these effects are going to get worse progressively in the coming months. There are effects of sanctions, and people feel them.

KELLY: So a basic question - but does this mean, in your view, that sanctions are working? And I guess we should lay out what the sanctions from the West were designed to do.

MATVEEV: So it depends on the criteria. If the goal is a quick and complete collapse of the Russian economy, then, no, sanctions are not working because the Russian economy is still functioning. But if the goal is to weaken Russia economically over time, then sanctions are 100% working. So the big question is how do sanctions impact the ability of Russia to wage this war in Ukraine? And I think that there is a connection because the blockade of imports is so wide that some components that can be used in military production are now also not coming to Russia from Western countries, from Japan, from South Korea. So in terms of military production, I think the sanctions have impacted Russian military industrial complex.

KELLY: You're talking about - what? - things as basic as parts that Russian planes need to fly, that type thing.

MATVEEV: Microchips, some high-precision equipment, some complex components that are needed to produce advanced military technology. So I think that this logistical blockade helps to limit the ability of the military industrial complex to produce more and more arms. The simpler arms are still being produced, but more complex, more advanced weaponry, I'm not so sure.

KELLY: You know, another thing that people in the West might have hoped sanctions would do is change Vladimir Putin's behavior, change his calculation for whether this war in Ukraine is worth it. So far, we see no sign that that is the case.

MATVEEV: Right. So this is very unlikely. And I don't think that it was a realistic goal. Putin is very determined to wage this war, and he's prepared for a prolonged conflict. And sanctions as such cannot change his calculation. For him, it's something like an existential struggle, and the sanctions yet are not an existential threat to Russia.

KELLY: I want to ask about big international companies and their exodus from Russia. Americans have watched as Starbucks has closed, as McDonald's has closed. And yet last week, a Russian company relaunched McDonald's restaurants under new management, slightly different name. I'm told the menu is very close to the original. Might that be a model for how Russia survives the departure of big international companies?

MATVEEV: So, obviously, I didn't have a chance to taste the new McDonald's in Russia.

KELLY: (Laughter) No, me neither, not yet.

MATVEEV: Yeah, but people say it's more or less the same. So the thing is, it depends on the company. McDonald's can be reopened under the new name, but automobile makers, not so much. Renault...

KELLY: The French car company, yeah.

MATVEEV: Yeah. So Renault plays a huge role in Russian automobile production. They're exiting Russia right now. And in fact, I'm not sure that Russia will be able to replace Renault and to continue the production of Renault brands. So Russian automobile production is one of the worst hit industries. And as of now, basically 95% of automobile factories are not working in Russia. And these are tens of thousands of jobs that are basically lost. So to start the production of foreign car brands without foreign producers, this will be a challenge. And I don't think that ultimately it's possible. The Russian automobile industry is in very deep trouble.

KELLY: You sound quite pessimistic.

MATVEEV: Yes, I'm very pessimistic, yeah, because these reports sometimes appearing in Western newspapers that I saw KFCs in Moscow, and they are full of people, therefore sanctions do not work. So I think that these reports are really not indicative of what's really going on in the Russian economy because sanctions are devastating, and decades of cooperation with Western companies are lost. And a company like Siemens arrived in Russia - so a German company - arrived in Russia before the Russian Revolution in the 19th century. So it's more than 150 years of cooperation. And now Siemens is exiting Russia, and Siemens is a supplier of the best, most comfortable modern railways and railway cars and commuter trains. So what is Russia going to do without Siemens? I have no idea. Maybe Chinese companies will come. But when? How many years will we have to wait? So the gap between Russia and the world, yeah, will be widening with every year.

KELLY: We've been speaking with Russian political scientist Ilya Matveev. Thank you so much.

MATVEEV: Thank you. Transcript provided by NPR, Copyright NPR.

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