Why Russia's Economy has not collapsed

Why Russia’s Economy has not collapsed yet:

JP Morgan expects Russia’s economy to fall by 35%. Inflation has risen to 12 percent and Russia’s budget is having deficit despite extravagant oil prices.

Russia is kicked out of the international financial system, Russia’s military complex is collapsing and the entire economy is about to implode. Russia’s economy might not be the in the top 10 largest economies but its much more more powerful than many other economies. up until 2014, Russia's economy was 8th largest economy and was growing at annual rate of 4 to 5 percent.But then russia decided to pursue its geopolitical interests so it took over Crimea.

The next day, US and the EU put sanctions on Russia and attacked its currency pushing it’s GDP to plummet . Overnight, Russia’s GDP lost half of its value. It went from 2.3 trillion dollars to 1.3 trillion in the next 2 years. That's like US GDP falling from 23 trillion dollars to 13 trillion dollars in the next 2 years. Thats nothing less than a catastrophe. In less than 2 weeks, Russia went from a respected country to the most sanctioned country in the world almost 14K sanctions were imposed on Russia, even North Korean was shocked.

The west imposed more sanctions on Russia, than Iran, north Korea, Syria, Venezuela combined. The world economy is interconnect. No country can survive on its own, even the United States. Your car might be built by General Motors, but every part of it is delivered from different countries, the same thing goes to your phone, computer, clothes, the plane you take, the road you drive on and so on and forth. So imagine for a moment that your country, can no longer trade with the world!

Most Russian banks are kicked out of the swift system, so most business and companies no longer can send or receive funds from the rest of the world, except the post soviet countries. Imagine you have a business in Russia, what would you when you see news such as this?(complication of news videos of compannies that are leagving russia )

Over a thousand international companies that hired tenths of thousands of Russians left the country overnight. But you cant just pack up and leave. You cant take with you factories, cars, buildings. Your only choice is to sell as much as you can. Convert your rubles to dollars and send them overseas back to your home country, before even that becomes impossible. Everyone was selling rubles like they were mining gold to the point where there was so much supple and so little demand that the Russian ruble lost half of its value, jumping from around 70 rubles per dollar to 144 rubles per dollar.When they saw the value of their rubles depreciated so fast, that caused a compound effect, pushing even the average Russians to sell their rubles, pushing the ruble to lose further more value. But that was the beginning.

The United States restricted major chip manufacturers to sell chips to Russia. Chips are the backbone of the modern world .Everything you use is mostly built on chips! Your phone, computer, airpods, cars, planes, lamps, refrigerators, microwaves, like everything including all the weapons that the Russian military has been using to invade Ukraine.So if russia no longer has access to chips, it can no longer produce weapons, build cars, planes or even the refrigerators. So analysts were confident that by the end of the year, the Russian economy will entirely collapse.

The crisis might even be worse than 1998 crisis. To make the crisis worse, Russia stopped selling oil and gas to Europe which was its main source of revenue, in an attempt to pressure the west to stop supporting Ukraine. But the problem is that the entire Russian economy is based upon selling natural resources to Europe to keep its domestic economy growing. In response, the EU SET a 60 dollar price cup for Russian oil.

That was a catastrophe for the Russian economy. Russia is now facing a deficit in its budget. It’s struggling to sell its oil and gas and is making minimum profits. Experts are predicting that the Russian economy is about to face a crisis as serious as 1998! But what is the 1998 Russian Financial crisis? Russia’s 1998 crisis When the Soviet Union collapsed Russia's budget had a deficit of over 20%, which the Russian government solved by printing money. You are probably guessing how that ended!

However the Russian government couldn't solve all of its problems by just printing money so it wanted to use a more moderate approach by raising money from the public through selling government bonds. Russia was collapsing and the economy was doing absolutely horrible. The Russian government couldn't just sell its bonds, so to attract investors the Russian government offered a 20% interest on it’s bonds, which went up to 150% which was insanely high for a government bond.

The idea behind it was the government is going to raise money by selling these bonds and then take that money and invest in soviet era factories that have been used ineffectively and turn them into efficient factories and then use the profits from these factories to pay back the the investors who purchase these bonds. But none of these factories could bring that kind of profit to pay back up to 150% of interest to investors so what the government did instead is, it issued new government bonds to pay it is previous government bonds and so on and so forth to the point where it turned into one giant pyramid scheme were the government kept raising money to pay it’s previous investors. When everything was about to explode, the government allowed foreign investors to get to the Russian market and sold a third of government obligations to them.

The Asian financial crisis that took place in 1997 destroyed many economies. Oil prices fell down from $25 per barrel to $9 and since oil was the main sources of revenue for the Russian government, the Russian government founded itself in a situation where it can’t fill its budget and had to borrow more money to meet its obligations. But the crisis wasn't that long because in 1999 oil prices tripled which overfilled the Russian budget with more money than it could imagine.

On 24th of February 2022 when Russia invaded Ukraine, Experts were confident that the current crisis will be as bad the crisis of 1998! almost a year has passed since the invasion, So what is the state of the Russian economy NOW? is it really collapsing? Surprisingly, the Russian economy did way better than most people expected.

Instead of 35 percent decline in GDP, it fell only by 3 percent, The Russian military is still capable of producing sophisticated weapons and Russian ruble bounced back to pre war level. Russia looks in a way better shape than anyone expected.

Seems like Putin and his team really prepared for such a scenario. does that mean, thousands of western sanctions didn't effect Russia? the answer is both yes and no! in the first 100 days of the war, Russia earned over 100 billion dollars selling oil and gas which filled its budget with enough money to save the economy and keep its military operations. That was a calculative move for Russia. Russia waited for this opportunity to start the invasion, but it didn’t go as the the kremlin planned, so Russia is now stack in a prolong war that it can’t afford. Sanctions don’t immediately effect the country.

Russia still had an inventory of cars, planes, chips and foreign reserves but as time went by, Russia’s reserves begun depleting. It can’t fill them due to western sanctions. Russia has already started using its rainy day fund to close it’s budget deficit. Russia began selling more of its foreign reserves to support the rubble and was forced to turn its economy into a war time economy, something that Russia clearly never planned for. Russia’s entire automobile industry for example has crumbled, it’s now producing cars without seatbelts and airbags because they can’t import them due to sanctions.

The only way to buy a normal safe car is to import it through a third country and sell it at a higher price. It will no longer be able to produce high tech guided missiles since it won’t have access to chips any longer. Foreign investment, innovation or business is pretty much over. Who would invest in a country that's in a state of war and cant seem to win it. So, while 2022 was not catastrophic for Russia. This year, things will get significantly worse. Russia’s economy will start declining year after year and in a matter of a few years,

Russia will be no different than North Korea. That was the United State’s objective since the beginning of invasion and that’s what seems to happen. Will Putin survive this war? Does Russia has a chance to win this war? share your thoughts in the comments below. Thanks for your time!