U.S. sees sanctions driving Russia to be closed economy, on lookout for gaps By Reuters

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© Reuters. Plastic letters arranged to read “Sanctions” are placed in front the flag colors of U.S. and Russia in this illustration taken February 28, 2022. REUTERS/Dado Ruvic/Illustration

By David Lawder and Andrea Shalal

WASHINGTON (Reuters) – Massive sanctions imposed by the United States and its allies on Moscow over its invasion of Ukraine are turning Russia into a closed economy that is ill-equipped to produce its own consumer and technology goods, a senior U.S. Treasury Department official said on Friday.

The official, speaking on condition of anonymity, told reporters that restrictions on foreign exchange put in place by the Russian government meant the international valuation of the rouble, which fell sharply early in the war but has recovered somewhat in recent days, was not being set by supply and demand.

Emerging black market activity showed a sharply depreciated value of the currency, and reflected the weakness of the rouble as a financial instrument, the official added. Sharply higher domestic inflation indicated an erosion of the rouble’s purchasing power.

The official said the international valuation of the rouble is disconnected from the performance of the Russian economy because of controls to preserve scarce foreign exchange. The official said the coordinated sanctions have had a very significant impact on the Russian economy, and outside analysts were now forecasting a contraction of about 10% in Russian gross domestic product this year.

The official said Washington was comfortable with enforcement of the sanctions and export controls thus far, but remained on the lookout for any violations.

The rouble had become a deeply impaired currency in terms of purchasing power, the official said, noting that weekly inflation averaged about 1.5% in the last three weeks for a cumulative increase of nearly 6%.

The rouble’s value against the dollar has largely recovered its losses since Russia’s invasion started on Feb. 24. The rouble touched a more than five-week high in early Moscow trade on Friday before settling in the 83-84 range to the dollar.

The United States intended for the sanctions to be debilitating to the Russian economy and cripple the Russian military’s ability to procure parts and equipment for the war effort, the official said, adding that technology export restrictions administered by the U.S. Commerce Department would contribute to that goal.

Washington planned to maintain humanitarian exemptions from the sanctions, given growing food insecurity problems and Russia’s role as a major wheat producer, the official said.

Other exemptions were intended to protect Western financial institutions that hold Russian assets, through a license to allow Russian debt payments to be made.

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