Russia Feels Sanctions Impact; inflation collapses economy

(Bloomberg Opinion) — Russia is headed for one of its biggest inflation spikes this century after the wave of sanctions over its invasion of Ukraine caused the ruble to collapse and disrupt its trade.

In the first week since the military offensive began in late February, prices for new domestic cars soared more than 17% and the cost of televisions jumped 15%. In the seven days that ended on March 4, some medicines and vegetables became more expensive between 5% and 7%.

Overall, inflation in the period hit 2.2%, according to a Wednesday report from the Federal Statistics Service, the biggest weekly rise since it began tracking the data in 2008 and more than double the previous record.

The price increase is so far one of the starkest measures of the damage caused to Russia’s economy by the war. For a country increasingly isolated from the outside world, the risk of shortages has prompted the government to impose a temporary suspension on re-exports of foreign medical products and restricted exports of some raw materials.

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The ruble’s retreat of almost 40% so far this year will further devastate household finances, threatening a cost-of-living crisis reminiscent of the 1990s.

Bloomberg Economics predicts that around July, inflation will hit an annual high of 19%, compared with 9.2% last month, and that it will end the year at around 16%. Before the war, it saw price growth below 10% and reached 5.8% by the end of 2022.

Bank of America Corp. expects inflation to rise to 20% over the course of this year, while the National Institute for Economic and Social Research in London sees it rising even above that level. Russian inflation has not been at 20% since 2001.

Meanwhile, retailers have started restricting purchases of “socially important” staples in recent days, following reports of hoarding after the ruble’s drastic devaluation.

A host of international companies have left Russia in response to its invasion of Ukraine, raising fears of shortages. Efforts by the Bank of Russia to stop the collapse of the ruble by raising interest rates to 20% and announcing drastic restrictions on foreign exchange purchases have so far failed to stem the slump.

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The rise in inflation is already manifesting itself on the streets of Russian cities. Abu Ghosh, a Middle Eastern cafe in Moscow’s historic Arbat neighborhood, posted on Instagram that he had seen the prices of some ingredients rise by 300%.

And a cafe in an upmarket area of ​​Moscow said it would now have to change prices every Friday due to exchange rate volatility.

“We buy coffee every week at the current exchange rate, so our prices will be variable,” the local, Chernyi Cooperative, said in a post on Instagram.