»There Is No Good Scenario« Russian Economist Says Sanctions Have Hit Hard

Vladimir Putin has unleashed war on Ukraine, but even if he does find military success, serious financial repercussions are looming. In an interview, Russian economist Konstantin Sonin predicts horrendous inflation and years of decline for Russia.
Interview Conducted By Claus Hecking
Lines in front of ATMs at Alfa Bank in Moscow: "Sanctions have never hit such a large financial system so quickly and so hard before," says prominent economist Konstantin Sonin.

Lines in front of ATMs at Alfa Bank in Moscow: "Sanctions have never hit such a large financial system so quickly and so hard before," says prominent economist Konstantin Sonin.

Foto: Victor Berzkin / AP

DER SPIEGEL: Professor Sonin, last week Russian troops invaded Ukraine, and numerous states introduced sanctions against the country. How is the mood in Russia's economy and business community?

Sonin: Partly grim, partly resigned. Most businessmen and experts did not expect this. They had prepared for action against Ukraine, but not for a full-scale war. Now they are shocked. For years after the end of the Soviet Union, many of these people tried to set up modern, forward-looking companies and institutions. Now they fear it will end badly, that all their work will be flushed down the toilet. And I'm afraid they might be right. There is no good scenario.

About Konstantin Sonin

Konstantin Sonin, 50, is an economist and professor at the University of Chicago Harris School of Public Policy. At the end of 2014, the prominent Russian economist had to vacate his post as vice rector of the prestigious Moscow Higher School of Economics. He recently returned to Moscow for a sabbatical.

DER SPIEGEL: What do you mean by that?

Sonin: Suppose things now go the way (Russian President Vladimir) Putin wants: Russian troops kill (Ukrainian President Volodymyr) Zelenskyy and take Kyiv. Then there will be years of fighting and terrorist attacks, because hundreds of thousands of Ukrainians now have guns ...

DER SPIEGEL: ... and if Kyiv isn’t conquered?

Sonin: Then that means: Russia is losing the war, thousands of soldiers on both sides will die. In both cases, it will take a long time to lift the economic sanctions imposed on Western countries and restore trust – if that succeeds at all. At best, I expect the economy to stagnate for years. A recession is more likely, along with massive inflation. This year it could quickly be 30 or 40 percent.

DER SPIEGEL: Are the sanctions already affecting Russia?

Sonin: It looks like they are. I've seen photos of long lines in front of ATMs. Many cards apparently no longer work, people cannot withdraw money. My own app at VTB Bank doesn't work either. And the stock exchange is closed. You know, the state media doesn't report on the shelling of Kyiv and Kharkiv, and they're not allowed to use the word "war.” But they cannot hide that the ruble is plummeting. A week ago, one U.S. dollar was worth about 78 rubles. If you wanted to have dollar cash on Monday, you had to pay 125 to 130 rubles at some banks and exchange offices – if they still give dollars at all. That unsettles people.

DER SPIEGEL: Russia's government and central bank built up currency reserves of more than $600 billion before the start of the war ...

Sonin: ... it is true that Russia was economically stable when Putin started the war. Many people have trusted in it. But the sanctions are apparently working: above all those against the central bank and against large commercial banks. Sanctions have never hit such a large financial system so quickly and so hard before.

DER SPIEGEL: After Europe, the United States and a number of other countries, including Japan, where around one-eighth of Russia's currency reserves are stored, has also announced that it will restrict transactions with the Russian central bank.

Sonin: That makes the situation even more difficult. Of the major economic and currency areas, only China has not imposed sanctions on Russia. And would you be paid in renminbi as a Russian trading partner? In a currency manipulated by the Chinese government? But I think that in the long run, one sanction that few are talking about will hit Russia even harder: the supply embargo for many high-tech goods. It will cripple the economy for years to come.

DER SPIEGEL: Will Putin stop gas and oil supplies to the West?

Sonin: I don't think so, because the government needs the money, more urgently than ever in this situation. Without gas and oil revenues, the economy could collapse. It is more likely that it will work the other way around – and that the West will itself impose an import ban, for example in view of the pictures we are seeing from Kharkiv.

DER SPIEGEL: But we Germans in particular would have to pay dearly for such a boycott.

Sonin: That's true, but I think it would have less of an impact on the West than, say, the 1973 oil crisis.

DER SPIEGEL: Could the sanctions persuade Putin to give in and withdraw his troops?

Sonin: Unfortunately, no. These sanctions will not change Putin's mind. Economic concerns were not important to him when he started his war. And they aren't now. All that matters to him is achieving his goals. But other government officials and many citizens will feel the effects and they will change their minds about this war. Nobody can say today what consequences this will have for our political system.

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