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A woman walks past a currency exchange office in St. Petersburg that stopped exchange operations with the Euro.The Associated Press

As Russian President Vladimir Putin’s invasion of Ukraine approaches its third deadly week, a financial counteroffensive unleashed by Western governments across multiple fronts has already sunk his country’s economy into a crisis that it may not recover from for years, if ever.

Evidence of Russia’s economic implosion mounts by the day. On Tuesday Fitch Ratings downgraded Russia’s credit rating to junk status and said a default on Russia’s foreign debt obligations is “imminent.”

The rating change came after U.S. President Joe Biden imposed a ban on imports of Russian oil and gas, a move he said targeted “the main artery of Russia’s economy,” which relies heavily on energy exports to fill its coffers.

Meanwhile, more Western companies pulled out of Russia, part of a widening corporate boycott against the invasion. McDonald’s Corp., Coca-Cola Co. and Starbucks Corp. closed their Russian locations Tuesday. A day later, Canadian e-commerce company Shopify Inc. suspended operations in Russia and Belarus.

McDonald’s, Coca-Cola, Starbucks join consumer giants suspending business in Russia

West wages economic war on Russia with unprecedented sanctions

All told, more than 300 companies had pulled out of Russia as of Wednesday, according to a running list compiled by Yale School of Management professor Jeffrey Sonnenfeld.

The sanctions imposed on the Russian government, officials, individuals, companies and the country’s central bank have been swift and unprecedented. “While there’s robust debate about whether these sanctions will achieve their political goals and convince Mr. Putin to change his behaviour, their economic impact is far more clear cut,” Neil Shearing, chief economist at Capital Economics, wrote in a note this week.

In short order, Russia has become the world’s most sanctioned country, leapfrogging past Iran for the top spot, with more than 5,500 outstanding sanction actions against it.

Last week, French Finance Minister Bruno Le Maire said the goal of the sanctions was to “cause the collapse of the Russian economy.” While Mr. Le Maire later backtracked his comments as “inappropriate,” that stated goal has only moved closer to reality since then.

Mr. Putin calls the sanctions an “act of war.” In response to them, Russia compiled and released a running tally this week of what it deems “unfriendly” countries, including Ukraine, the United States, Britain, all EU countries, Canada, Norway, South Korea, Taiwan and Micronesia, to name a few.

The problem for Mr. Putin is those “unfriendly” countries and regions make up the largest share of Russia’s exports and its imports, an analysis of International Monetary Fund trade flow data by The Globe and Mail shows.

The onslaught of actions taken against Moscow has left forecasters scrambling to revise their growth forecasts for the Russian economy, an almost impossible task when most of the country’s financial and trade links to the rest of the world have been temporarily – and in some cases permanently – severed.

In a new analysis to be released Thursday, the Institute of International Finance, the trade association for the global financial services industry, predicts the sanctions have triggered a severe recession in Russia that will see its economy shrink by 15 per cent in 2022. If that forecast comes to pass, it would be a collapse worse than the 2008-09 Great Recession and Russia’s 1998 debt default crisis combined.

Russia’s currency has been caught in the downdraft. The ruble CADRUB has lost more than half its value since the invasion began, as Western investors have dumped Russian assets and several Russian banks have been banned from using the SWIFT international payments system.

At the same time, Western governments have targeted Russia’s central bank with sanctions that have cut it off from accessing half the country’s US$643-billion in foreign exchange reserves, which are held in Europe and North America.

The ruble’s collapse is worsening the cost-of-living crisis ordinary Russians were already facing, by making everyday imported goods more expensive – assuming those goods can even be found amid empty store shelves. Even before the invasion, the annual inflation rate in Russia was running at around 8.5 per cent.

“If it were sustained in the coming weeks and months, [this rate] could see the Russian annual inflation rate almost double in the coming months,” Michael Metcalfe, global head of macro strategy at State Street Global Markets, wrote in a research note.

How Canada helped facilitate support for banking sanctions against Russia

The official gauge of Russia’s inflation rate is already showing immediate evidence of the impact of the sanctions and currency rout. In the span of just one week between Feb. 26 and March 4, consumer prices climbed 2.2 per cent, according to figures released Wednesday by Russia’s statistics service, Rosstat.

Bloomberg said prices for imported cars and TVs alone climbed 15 per cent during that period.

However, some analysts argue the inflation rate in Russia is already far higher than what official numbers show. Steve Hanke, a professor at Johns Hopkins University, calculates theoretical inflation rates for troubled currencies using a formula that relies on the purchasing power of local currencies. His implied annual inflation rate for Russia stands at 135 per cent.

With no access to half of Russia’s foreign exchange reserves, and faced with surging inflation, the central bank signalled its desperation to save the ruble by doubling Russia’s policy interest rate to 20 per cent last week.

It also shut down the country’s stock market to ease turmoil, though Russian companies that continued trading for several days on U.S. and British exchanges went into freefall, wiping out most of their value.

So far, the central bank’s moves have failed to stabilize Russia’s teetering financial system.

The bright spot for Russia’s economy throughout the attack on Ukraine – if the relief can be called that – has been the massive daily inflow of euros Russia receives in exchange for gas being pumped to European countries. Europe depends on Russia for 40 per cent of its gas imports and one-quarter of its oil imports, and Western sanctions have largely avoided disrupting that flow.

Analysis by Bruegel, a Belgian think tank, estimates the daily value of natural gas imports from Russia to be nearly £800-million ($1.1-billion).

But there are signs that influx of cash is also in jeopardy. On the same day the U.S. imposed its import ban on Russian oil, the European Union presented a plan that would see it reduce its dependence on Russian gas by two-thirds by the end of the year.

Even if the war in Ukraine were to end tomorrow, few analysts expect Western companies and investors, who have seen billions of dollars wiped out as a result of Mr. Putin’s aggressive actions, to rush back into Russia.

Of the 10 most active countries for foreign direct investment in Russia in 2020, according to GlobalData, a London-based consulting firm, all but China have severed some economic ties to the country.

That will leave Russia’s weak and isolated economy starved of investment when the country eventually tries to revive its shattered fortunes.

As Robin Brooks, chief economist at the Institute of International Finance, tweeted Wednesday: “Russia is on course for unprecedented impoverishment.”

With files from Reuters

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