Russia's economy had just recovered when Putin's attack on Ukraine shattered his country's middle class

• Countries around the globe are sanctioning Russia over its invasion of Ukraine.

• The country had seen a robust pandemic economic recovery, but that's in jeopardy now.

• The longer-term impact of sanctions could end up squeezing the country's working and middle class the most.

Just two months before Vladimir Putin ordered troops to invade Ukraine, the World Bank said that the Russian economy had recovered and then some — going above "its pre-pandemic peak."

Now, though, the country is in economic turmoil. As the US, UK, and EU continue to pile sanctions on Russia in hopes of harming Putin's power, Russia's economy is due for a crunch. Look no further than the Russian economist Alexander Butmanov drinking to the death of the stock market on TV.

The Russian ruble has been tumbling to record lows following sanctions, and Russians were scrambling to withdraw as much foreign currency from ATMs as they could. Customers of Russian banks that were hit by sanctions couldn't use Apple Pay and Google Pay. Even Switzerland has broken from its neutral status to sanction Russia.

A spokesperson for UK prime minister Boris Johnson said that sanctions are meant to "bring down the Putin regime," Insider's Catherine Neilan reports.

Threats to seize yachts, property, and other Russian assets are indeed likely to frustrate the country's oligarchs. However, the economic fallout of the invasion will largely fall on middle-class Russians who have little power to shield their financial positions and who may not even support the war. After all, they had just regained a financial foothold following the pandemic peak — and then the latest crisis struck.

Russian households were already taking out loans in order to spend before the war boosted prices

Evgeny Nadorshin, the chief economist at Moscow's PF Capital, said that the "fire power" of Russian households was largely used up during economic recovery, as consumer demand spiked and Russians spent.

Household consumption in Russia shot up at its quickest in a decade, rising over 9% in the second quarter of 2021, according to the World Bank.

But a "significant part" of the Russian recovery came from the "extensive demand for loans," according to Nadorshin. Indeed, Russian banks saw record profits in 2021, according to the Moscow Times, raking in about $33 billion. That came alongside huge demands for consumer loans, which went up by 20.1%. According to the Moscow Times, borrowing was increasing at the quickest monthly clip since pre-pandemic.

"Some people have taken out loans or mortgages in foreign currencies because the interest rates on the ruble are higher," Nikolai Roussanov, a finance professor at the University of Pennsylvania, told Insider. Now, they could struggle to repay those loans because they're worth more as the ruble crumbles.

That's paired with a low level of savings, according to Nadorshin, who thinks that savings may have slipped into negative territory in February — meaning households owed more than they had saved. And all of that is coupled with the Russian stock market tanking.

"The middle class is being hammered if their rubles or their stocks are deteriorating in value," Steven Durlauf, an economist and professor at the University of Chicago's Harris School of Public Policy, told Insider.

Russian borrowers and homeowners saw rates soar last week

In the last week alone, interest rates have more than doubled to 20%. The country's second-biggest lender, VTB, said that mortgage rates would go up by 4% to 15.3% on February 28, according to Reuters.

Mortgages boomed in Russia last year, with demand growing by 30% — a record, according to the Moscow Times. In December 2021, Russia's Central Bank reported that the mortgage growth rate reached 3.2%, a record. Similar to the US, rates were low (and subsidized) and demand was high.

Like countries around the world, Russia's home prices also boomed and then some. They rose at a nominal rate of 14.6% in 2021, according to the Knight Frank Global House Price Index. When adjusted for inflation, that's still 7.1%. In comparison, the index has US house prices rising at 13.3% when adjusted for inflation.

But, unlike the US, middle-class Russians who were eager to borrow and buy a home are now facing down the ramifications of sanctions and a war waged by their president.

"For the whole period the sanctions are in place, it's very likely that Russian economy will not be able to grow rapidly," Nadorshin said. According to him, "stagnation" is the best way to describe the country's economic prospects.

"Anything better than that will be already good and optimistic," he said. "As a result, unfortunately, labor productivity will not grow rapidly in Russia. This will be a hit to the middle class generally."

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