3 reasons middle class Russians are seeing their finances crumble right now

• Middle-class Russians are hurting financially from Western countries enacting sanctions.
• The ruble is falling, so it's harder to pay off debt, and rising interest rates make it hard to get loans.

While superyachts owned by Russian billionaires hightail it to the Maldives to escape possible seizure, middle class Russians are watching their life savings vanish in just a few days.

"It's going to be a very severe recession," Steven Durlauf, a University of Chicago economist, told Insider.

And it's the Russian middle class — not Putin or his oligarchs — who will feel the most pain.

Sanctions that western countries enacted in response to Russia's invasion of Ukraine are already disrupting the Russian economy — it's hurt the value of the ruble, taking away opportunities for Russians to pay off their debt, and making loans harder to come by.

The US and its allies are specifically targeting Russian oligarchs with their financial attack, but average, middle-class Russians are going to suffer too, Durlauf and other economists say. That could lead to short and long-term economic pain for people who aren't necessarily in favor of the war — in fact, thousands of Russians have protested against it.

The war and resulting sanctions come at a time when Russians' savings are already low. Over the past year, according to economists, many Russians borrowed money to fuel their spending, which helped the country's economy recover from pandemic setbacks.

This left them in a vulnerable position when the ruble started tanking. Russian companies lost $70 billion in one day, and the stage was set for inflation to surge. While wealthier Russians are insulated from the worst effects of sanctions, and poorer Russians have little recourse to change their situation, it's the middle class that will feel the burn over the coming months as their economy hurtles toward a likely recession.

These are factors that will "make Russia poor, simply because it can't engage in the process of international trade, which is an important part of the economy," Durlauf said.

Many Russians were already in debt, and they'll be less able to pay it off

Russians have a lot of debt, and not a lot of savings, Yevgeny Nadorshin, the chief economist at Moscow-based PF Capital, told Insider.

During the pandemic, Americans ramped up their savings, and that led to an increase in consumer spending in the last several months that propped up the economy. Russians spent a lot during this time too, but instead of drawing from their savings, they took out loans, Nadorshin said — something they likely won't be doing now that interest rates are spiking.

"Loans supported consumer demand, consumer demand supported economic growth," Nadorshin explained. "Savings were not popular last year in Russia. That's a pretty different story from the United States nowadays."

Because many households do not have any financial safety cushion, their level of savings is low enough to create instability in Russia's financial system, Nadorshin said.

Because of inflation, the ruble won't go as far for Russians

Inflation is likely to pick up because it will be more expensive to import and to produce goods in Russia, many of which rely on foreign materials. At the same time unemployment is sure to escalate.

The combination "will generate a situation where in real terms, consumer income will start decreasing again," Nadorshin said.

The ruble has been in free-fall since Russia attacked Ukraine because Western nations and international investors began dumping their Russian investments and employing sanctions. The ruble plunged nearly 30%, trading for as low as 119 rubles per dollar. That's down from 81.15 rubles for a dollar last Wednesday, right before Russia invaded Ukraine.

The ruble decreasing in value is a big deal for consumers, Nikolai Roussanov, a finance professor at the University of Pennsylvania, told Insider. Gasoline prices rising and the value of the ruble falling are a "double whammy," he said.

"Inflation will rise," he said, and "the rising cost of living will happen across the board… even the prices of domestic goods will rise because it will be harder to get raw materials."

In effect, there will be a decrease in standard of living for middle-class Russians. Russia has a social welfare system, Durlauf said, so citizens will continue to have basic access to medical care, but they'll have less spending money.

"Income inequality will increase because if you have [an] increase in unemployment, people who are unemployed are gonna have large declines," Durlauf said.

He also pointed out that while wealthier Russians tend to shield their assets using complicated schemes, middle class Russians typically have on-the-books savings such as stocks and domestic bank accounts. "Wealth inequality in some strange way might reduce just because you're having — at least on paper — substantial, financial asset depreciation."

The stock market was a relatively new way to save, but it has shut down

Only in recent years has the stock market provided an avenue for wealthy and middle-class Russians to save, with the number of retail investors hitting 15 million in October 2021 — an addition of 6.2 million new retail investors in 2021 alone, according to S&P Global.

"During the past few years, many people — like millions of new investors — brought savings to the stock market," Nadorshin said. "The amount of active accounts has increased significantly, and passive accounts, where not so many operations are conducted, also have increased significantly. Many of them have lost, and have lost a lot. For their current level of savings, that's partially a disaster."

But that's a problem mostly isolated to the middle class. Durlauf said that the wealthy have the ability to protect themselves, and that poor Russians don't own stocks or financial assets in the first place.

"It's the middle class that's being hammered if their rubles or their stocks are deteriorating in value," he said.

Durlauf hedged that these economic conditions are up in the air, however, because it's not certain how the Russian public will react to the war and subsequent economic turmoil.

"You've seen thousands of people have been arrested as demonstrators," he said. "As economic conditions deteriorate, there could be more civil upheaval and we [might] have more protests that will condition something about the government's response."