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Are Russian sanctions working?

ALINA SELYUKH, HOST:

Let's turn now to Russia. In response to its war in Ukraine, Western countries levied unprecedented sanctions targeting Russian leadership, its economy. The war continues - nearly six months now. So how are the sanctions working? Oleg Itskhoki joins us now. He is an economist at the University of California, Los Angeles.

Hello. Hello.

OLEG ITSKHOKI: Hi, Alina. Good to be here.

SELYUKH: So you're Russian American. You have been following this quite closely. Are the sanctions working the way the Western leaders expected?

ITSKHOKI: Yes. So it's very important to kind of stand back and ask the question, what are the sanctions intended for? What's their purpose? Obviously, the primary goal was to stop the war. And the sanctions that were imposed right in the first days of the war - these were very unprecedented, steep sanctions on the foreign reserves of Russia. Those had the potential of inflicting a full-scale financial banking crisis in Russia that would have had the capacity to really change the bargaining power and create pressure to stop the war in the first weeks of it. So that clearly didn't happen.

SELYUKH: Why did it not happen?

ITSKHOKI: The Russian Central Bank did a lot of measures to offset that. But at the same time, what was equally important was that the sanctions were disproportionately concentrated on the import side of Russian economy. And import did collapse in the aftermath, but they were not really imposed on Russian exports. And so the revenues from Russian exports of oil and gas kept flowing in. And, in fact, oil prices went up, and that increased their revenues. And obviously, under the circumstances of high foreign currency revenues, the probability of a bank run is lower. And so this is a big reason why the sanctions did not cause a financial crisis right away.

SELYUKH: As a fellow Russian American, I have been talking to folks back in Russia, and I often hear how strangely normal things can seem to an average person. So thinking of people's day-to-day lives, how are sanctions affecting that?

ITSKHOKI: That's right. The fact that a banking and financial crisis was avoided in the beginning of the war back in March - what it meant was that all the further changes were kind of gradual and slow. But it's not to say that they were not affecting the economy. In fact, there was a rather steep inflation. The real cost of living at this point have increased by 12%. Maybe the overall increase would be towards 20% by the end of the year. It was partly a result of the depreciation of the ruble in the first weeks, which then reverted. But more importantly, it is the result of restrictions on imports and a lot of the products disappearing and other products becoming more expensive. So this happened slowly. And so what the typical Russian would see is that certain varieties of products disappear from stores and certain varieties of products becoming more expensive.

SELYUKH: Are there particular examples that you've heard or have been following?

ITSKHOKI: Yes. So at different points in time, print paper disappeared because the particular type of glue that was used in the production was imported from Finland. And it disappeared. And so paper became a deficit good. At some point in time it was, you know, simple nails for construction. A lot of the production chains suffer from inputs being unavailable. So this creates shortages in productions here and there. But none of this is an instantaneous, sharp crisis that we typically think of when we think about a financial crisis. This is really a slow-moving deterioration in economic activity. And this is - you know, it's not felt from one day to the other, but it accumulates over the weeks.

SELYUKH: I guess the big question is, what is the timeline that you're watching now? We were talking about long-term impacts of sanctions back at the start. We're still talking about long-term impacts of sanctions. How long is this long term?

ITSKHOKI: Yeah. So to be very clear, the impact on ordinary Russians will not stop the war. So the war will stop when the government doesn't have fiscal resources to carry on with it. And to be very clear here, Russia was receiving an unprecedented windfall of oil revenues in the previous five months. But at the same time, it was spending nearly the same amount on the war and on supporting the economy. And so what we're seeing in the data is, indeed, there are signs that the fiscal budget is at the verge of a deficit. And really, the sanctions work when they force political leadership in Russia into making these difficult choices between financing the war and financing the economy. There are no signs that the war will end in the coming months, but the sanctions are working exactly in the sense that they're making it increasingly more difficult to continue economically.

SELYUKH: Oleg Itskhoki is a professor of economics at the University of California, Los Angeles. Thank you for being with us.

ITSKHOKI: Thank you. Transcript provided by NPR, Copyright NPR.

Alina Selyukh is a business correspondent at NPR, where she follows the path of the retail and tech industries, tracking how America's biggest companies are influencing the way we spend our time, money, and energy.