Hiltzik: Western sanctions threaten Putin’s economic ambitions

For years, Vladimir Putin worked diligently to strengthen what was called “Fortress Russia”, reducing its public debt and building up its gold and foreign currency reserves as a bulwark against political and economic challenges.

Over the past few days, Fortress Russia has begun to crumble. What seemed impregnable until the moment Russia launched its invasion of Ukraine on February 24 now appears to resemble a Potemkin village, a reference to the fake colonies allegedly erected to deceive Catherine the Great about the dynamism of her domain in the 1780s.

In the largest of the international sanctions imposed on the aggressor, the Russian central bank was prevented from accessing more than $400 billion in foreign exchange reserves held abroad in the form of bank deposits and securities – a share massive use of the $630 billion in foreign exchange reserves accumulated under Putin’s regime. leadership.

Russia holds an additional $132 billion in gold domestically, but monetizing this treasure will be extremely difficult given the financial restrictions imposed on the country’s central bank and largest commercial banks.

In concrete terms, the restrictions mean that Russia has lost most of its ability to defend the ruble against its ongoing collapse, to buy goods abroad or at home, or to pay its debts.

“Russia will not be able to convert these funds into rubles to counter the sell-off we are seeing today,” said Robert Person, professor of international relations at the US Military Academy at West Point.

“And because they’re frozen, they can’t repatriate those funds and spend them domestically to support the economy or fund the war,” Person says, emphasizing that he’s speaking personally, not on behalf of the government. American. “Russia has money; he simply cannot access or spend it.

The real-world consequences have become evident in recent days. Long lines of depositors materialized at the gates of Russian banks, as citizens rushed to withdraw their funds before the banks ran out of currency.

The value of the ruble has deteriorated by the hour, falling to 110 to the US dollar from around 82 just before the invasion, making it harder for Russians to buy foreign goods and raising the specter of hyperinflation. Standard & Poor’s has downgraded the rating of Russian government bonds to “junk” status, with other rating agencies set to follow suit.

The Russian central bank has more than doubled benchmark interest rates to 20% in a bid to attract deposits into its financial system. But with the restrictions imposed by the United States, the European Union and other sovereign entities, even traditionally neutral Switzerland, on trade with Russia, it is not clear where these deposits could come from.

Sanctions against the Russian government and the country’s financial plutocrats, or ‘oligarchs’, were mooted in the run-up to the invasion of Ukraine, then implemented in stages after the tanks crossed the Ukrainian border and the shelling began.

Putin’s personal assets held abroad have been frozen, as have those of senior ministers, hundreds of members of the Russian Duma or legislature, and prominent financial figures. Some, but not Putin, have also been banned from traveling to European countries. The United States cut Sberbank, Russia’s largest bank, from the US financial system and froze the assets of VTB, the second largest bank. Other banks face less restrictions.

The United States has banned some of Russia’s largest private and state-owned companies from raising funds in the US market, including Gazprom, the world’s largest gas company, Gazprom Neft, among its biggest oil producers, and its largest. major shipping and rail companies. Public companies are not allowed to list shares on EU stock exchanges.

The United States has blocked the export of high-tech products such as computers and computer chips to Russia.

The United States and other major countries have disconnected major Russian financial institutions from SWIFT, the acronym for the Society for Worldwide Interbank Financial Telecommunications. The cut will have a chilling effect on Russian transactions, as communications via SWIFT allow these transactions to be concluded quickly and efficiently, but technically would not block them completely.

By far the most important international sanction is the freezing of Russian central bank assets abroad. It is truly a hammer blow – and a blow that has stunned international trade pundits with its scale and the speed with which it has materialized.

“Tackling the central bank is a huge step,” Daniel Fried, a former US ambassador to Poland and currently a member of the Atlantic Council, said Saturday during a council roundtable. “We are in a new place. It is an economic cold war against Putin’s Russia, which is fully deserved.

“This is really a historic set of actions by Western allies,” says Daniel Glaser, a former US Treasury official who specializes in terrorism financing and financial crimes. “I’ve been involved in this for over 20 years, and it took us a week to do what took us five years to build against Iran” from the 1990s.

What makes the harsh sanctions so extraordinary, Glaser told me, is that they are not aimed at a small country like Iran, but at a developed country that is a member of the G20, or Group of 20 developed countries. “What is important is that it is a coordinated and fairly open attack against Russian reserves.”

During the post-war years, major national economies became more integrated and interdependent. “Globalization” has not always been seen as a global boon. For Putin, however, it was an indispensable brick of fortress Russia – he deliberately tried to make foreign economies, especially in Western Europe, more dependent on Russia, mainly through its exports of petroleum and natural gas.

Now and for the first time, however, global interdependence has been weaponized for geopolitical purposes. “We are seeing the benefits of globalization,” says Richard M. Nephew, a sanctions expert at Columbia University. “We say, ‘Yes, you are in our system, but we are also in yours.’ ”

Putin’s efforts to inoculate Russia against sanctions included using revenue from oil and gas sales – the country’s main exports – to quickly pay off the country’s international debt to the point where it amounted to less than 18% of its gross domestic product, making it one of the least indebted countries in the world, according to Person.

Meanwhile, Putin has been assiduously accumulating Russia’s currency holdings, increasing them by more than 36% since the end of 2018.

Russia has the ability to circumvent or blunt certain sanctions. Oil and gas sales are still allowed under the sanctions regime, at least until the end of June – a loophole that may reflect the need for European buyers to stock up on oil and gas during the crisis. winter and spring.

Russia could also try to evade some sanctions with the cooperation of China, a country that has not openly joined the sanctions campaign. Russia holds about $84 billion in Chinese government bonds, according to Person, but these can only be converted into Chinese currency and therefore only spent on Chinese goods.

But Putin may not like to tie his country’s fortunes to China.

“If Russia wants to turn itself into a vassal of China,” says Glaser, “I’m sure the Chinese would be happy to dictate their terms to them. But I don’t think China will be particularly interested in saving Russia from the West.

The key imponderable in sanctioning Russia may be the duration of the coordinated financial attack. One of the questions is what Russia can do to induce the West to roll back the restrictions. A withdrawal of troops from Ukraine would certainly be necessary, but it is not certain that the strictest sanctions will be lifted as long as Putin remains the Russian president.

Another unknown is the impact Russian sanctions will have on the rest of the world. “It’s almost inevitable that this kind of disruption to the international economy will have unattractive consequences around the world,” Glaser says.

“These actions are not free for the West,” he told me. “But when you compare the devastating impact you’re already seeing on the Russian economy to the mild, longer-term impact on the global economy, it’s almost like comparing apples and oranges.”