As Sanctions Batter Economy, Russians Face the Anxieties of a Costly War

 

As Sanctions Batter Economy, Russians Face the Anxieties of a Costly War

 

The ruble plunged, the stock market was shuttered and foreign investors shed holdings in Russian companies, deepening the concern among citizens who had become accustomed to the perks of globalization.

 

By Anton Troianovski and Ivan NechepurenkoPhotographs by Sergey Ponomarev

Feb. 28, 2022

https://www.nytimes.com/2022/02/28/world/europe/russia-economy-sanctions-ukraine.html

 

MOSCOW — For two decades under President Vladimir V. Putin, Russians reaped the bounties of capitalism and globalization: cheap flights, affordable mortgages, a plethora of imported gadgets and cars.

 

On Monday, those perks of modern life were abruptly disappearing, replaced by a crush of anxiety as sanctions imposed by the West in retaliation for Moscow’s invasion of Ukraine rattled the foundations of Russia’s financial system.

 

The ruble cratered, losing a quarter of its value, and the central bank shuttered stock trading in Moscow through Tuesday. The public rushed to withdraw cash from A.T.M.’s, and Aeroflot, the national airline, canceled all its flights to Europe after countries banned Russian planes from using their air space. Concern about travel was so great that some people rushed to book seats on the few international flights still operating.

 

“I’ve become one concentrated ball of fear,” said the owner of a small advertising agency in Moscow, Azaliya Idrisova, 33. She said she planned to depart for Argentina in the coming days and was not sure whether her clients would still pay her.

 

Compounding the pain was the decision by Western countries to restrict the Russian Central Bank’s access to much of its $643 billion in foreign currency reserves, undoing some of the Kremlin’s careful efforts to soften the impact of potential sanctions and making it difficult for the bank to prop up the ruble.

 

Other moves struck at the heart of critical Russian industries. Shell, a company that for years helped Russia profit from its energy riches, said it was exiting all its joint ventures with Gazprom, Russia’s largest state-owned natural gas company — following BP’s announcement Sunday it would sell its stake in the Russian state-run oil giant Rosneft. Volvo said it would stop production at its truck factory in Russia, and Mercedes-Benz said it would drop its partnership with a Russian truck maker.

 

And in a sign of how the sanctions were hitting regular Russians in ways big and small, Apple Pay and Google Pay stopped working at many of Moscow’s subway turnstiles — the ones operated by a bank on the American sanctions list.

 

For many Russians opposed to the war, those hardships paled in comparison to the moral cost of seeing their country launch an unprovoked invasion. Antiwar protests continued across Russia, with at least 411 people detained in 13 cities, according to OVD Info, a rights group that tallies arrests, for a total of at least 6,435 detentions since last Thursday.

 

But the financial jolt offered tangible evidence of the West’s outrage, one that is now washing over Russia’s economy with unpredictable consequences.

 

The sanctions announced by the European Union and the United States over the weekend, J.P. Morgan analysts wrote to clients on Monday, “are more severe and wider than even the more extreme sanctions we had believed were in play just a month ago.” By Monday evening, the European Union had added more Russian business tycoons to its sanctions list, including two owners of Alfa Bank, Mikhail Fridman and Petr Aven, who had cut a relatively Western-friendly image.

 

Some analysts worried that the wide-ranging sanctions, combined with Ukraine’s ferocious resistance on the battlefield, could lead Mr. Putin to escalate the crisis. The Defense Ministry issued a statement saying that the bombers, submarines and land-based launchers that make up Russia’s nuclear “triad” had been put on “enhanced combat duty,” as Mr. Putin had ordered on Sunday. Rumors circulated that men could be called up if the military got bogged down in Ukraine.

 

“I realized that this government has gone utterly mad,” said Ivan Petrov, 28, a Moscow machine learning engineer who flew to the Egyptian resort of Hurghada over the weekend, fearing the war in Ukraine could escalate to the point that he might get drafted. His next goal: Find a job in the West.

 

Russia’s Central Bank, its reserves largely frozen, more than doubled its key rate to 20 percent to try to stabilize the ruble. A dollar cost more than 110 rubles at kiosks in Moscow on Monday compared with about 80 a week earlier, potentially devaluing people’s savings given the likely increase in the price of imported goods. In trading in London, shares of Sberbank, Russia’s largest bank, lost three-quarters of their value. The vice president of the country’s real estate agents’ association declared that Russians could say “goodbye to the mortgage.”

 

To stem the flight of capital, Mr. Putin on Monday signed an order rolling back some of the free-market capitalism that had integrated post-Soviet Russia into the world economy. Russian exporters were required to convert 80 percent of their foreign-currency revenues since Jan. 1 into rubles; residents of Russia were banned from depositing money into accounts outside the country.

 

“Our financial system and our economy have collided with a totally non-standard situation,” Elvira Nabiullina, the head of the Central Bank, said afterward.

 

What is at the root of this invasion? Russia considers Ukraine within its natural sphere of influence, and it has grown unnerved at Ukraine’s closeness with the West and the prospect that the country might join NATO or the European Union. While Ukraine is part of neither, it receives financial and military aid from the United States and Europe.

 

Are these tensions just starting now? Antagonism between the two nations has been simmering since 2014, when the Russian military crossed into Ukrainian territory, after an uprising in Ukraine replaced their Russia-friendly president with a pro-Western government. Then, Russia annexed Crimea and inspired a separatist movement in the east. A cease-fire was negotiated in 2015, but fighting has continued.

 

How did this invasion unfold? After amassing a military presence near the Ukrainian border for months, on Feb. 21, President Vladimir V. Putin of Russia signed decrees recognizing two pro-Russian breakaway regions in eastern Ukraine. On Feb. 23, he declared the start of a “special military operation” in Ukraine. Several attacks on cities around the country have since unfolded.

 

What has Mr. Putin said about the attacks? Mr. Putin said he was acting after receiving a plea for assistance from the leaders of the Russian-backed separatist territories of Donetsk and Luhansk, citing the false accusation that Ukrainian forces had been carrying out ethnic cleansing there and arguing that the very idea of Ukrainian statehood was a fiction.

 

How has Ukraine responded? On Feb. 23, Ukraine declared a 30-day state of emergency as cyberattacks knocked out government institutions. Following the beginning of the attacks, Volodymyr Zelensky, Ukraine’s president, declared martial law. The foreign minister called the attacks “a full-scale invasion” and called on the world to “stop Putin.”

 

How has the rest of the world reacted? The United States, the European Union and others have condemned Russia’s aggression and begun issuing economic sanctions against Russia. Germany announced on Feb. 23 that it would halt certification of a gas pipeline linking it with Russia. China refused to call the attack an “invasion,” but did call for dialogue.

 

How could this affect the economy? Russia controls vast global resources — natural gas, oil, wheat, palladium and nickel in particular — so the conflict could have far-reaching consequences, prompting spikes in energy and food prices and spooking investors. Global banks are also bracing for the effects of sanctions.

 

In a stark sign of the fury in the West over Russia’s attack on Ukraine, even Switzerland — a favorite destination and banking hub of Russian oligarchs and senior Kremlin officials — ditched its traditional neutrality and joined in European sanctions, including personal ones against Mr. Putin and Foreign Minister Sergey V. Lavrov.

 

There were signs of anger in the elite, though not among the security establishment closest to Mr. Putin. Ms. Nabiullina, who has said in the past that her outfit choices are meant to send messages, wore funereal black. Oleg Deripaska, a sanctioned metals tycoon close to the Kremlin, wrote on social media that he wanted to know “who’s really going to pay for this whole party.” Vyacheslav Markhayev, a lawmaker from Siberia, declared that the Kremlin “hid plans to start a full-scale war against our closest neighbor.”

 

“Countries should spend money on treating people, on research to defeat cancer, and not on war,” Oleg Tinkov, the billionaire founder of one of Russia’s biggest consumer banks, wrote on Instagram.

 

Stanislav Usaty, owner of a marketing agency in St. Petersburg, said he expected to lose many of his clients because of the higher exchange rate, especially companies selling imports; he said he would probably need to lay off staff. Aleksandra Gridina, the owner of a travel agency in the city, said she would need to raise prices for international tours that her clients had already booked.

 

“It’s a catastrophe for our business,” she said.

 

Still, while there was confusion at the subway turnstiles and lines formed at A.T.M.’s and banks, there was no full-fledged financial panic among the general public. And it was far from clear whether the sanctions would help turn more Russians against the war — or whether they would only increase their resentment of the West, confirming the Kremlin narrative that the United States and Europe were determined to dismantle their country.

 

“Times change, much has happened, but one thing has not changed,” a reporter on the state-run news channel Rossiya 24 said on Sunday. “When a united Europe tried to destroy Russia, this always ended up bringing about the opposite result.”

 

The backbone of Mr. Putin’s power is made up of security officials who rarely leave Russia and stand to gain from greater state control over the economy. In the broader public, he draws his core support from pensioners and state employees, who are less sensitive to economic volatility than those in the private sector.

Shopping for groceries in Moscow on Monday, Valentina V. Petrova, 85, who said she used to work on Russia’s Proton space rockets, said the economic troubles did not faze her.

 

“I think the president did everything right,” she said.

 

Mr. Petrov, the engineer who flew to Egypt, said his parents also supported the war. And older Russians, he noted, had seen their share of ups and downs.

 

“They survived many other Russian crises,” he said. “They’re calm about this.”

 

Anton Troianovski is the Moscow bureau chief for The New York Times. He was previously Moscow bureau chief of The Washington Post and spent nine years with The Wall Street Journal in Berlin and New York. @antontroian

 

Ivan Nechepurenko has been a reporter with the Moscow bureau since 2015, covering politics, economics, sports, and culture in Russia and the former Soviet republics. He was born and raised in St. Petersburg, Russia. @INechepurenko • Facebook

 

Sergey Ponomarev is a freelance photographer for The New York Times. Follow him at sergeyponomarev on Instagram. @SergeyPonomarev • Facebook