Russia's Economic Collapse: How Sanctions & War are Crushing Putin

over the last few days, you've likely seen a lot about Russia's invasion of Ukraine and the ongoing attempts to

grab more control a lot of this focus has been on the military side of things which is obviously important after all it's the military conflict which is actively killing people and destroying parts of Ukraine however there's another important factor and that's money this whole conflict has been expensive for both countries but notably Russia has been hit hard they're not only footing the bill for their military but also facing serious sanctions which are destroying the Russian economy so let's split this blog into three parts firstly, we're going to take a look at the sanctions imposed on Russia by the rest of the world in response to Putin's war against Ukraine secondly, we're going to take a look at how Russia's economy has responded and then thirdly we're going to look at whether Russia's economy can survive this war and if so how [Music] so, let's get into it starting with the sanctions as you probably already know governments around the world have imposed a whole load of sanctions on Russia in response to Putin's war in Ukraine this time though unlike Russia annexation of Crimea in 2014 it's not just the west who are sanctioning Russia western governments have been joined by a whole load of other countries Monaco and Switzerland have committed to mirroring EU sanctions while Singapore Japan and south Korea have recently unveiled their own set of sanctions even China has limited dollar-denominated state bank financing for Russian commodities presumably in anticipation of secondary sanctions the western sanctions though have been particularly hard and they've included cutting certain Russian banks out of swift the international payments messaging system freezing the assets of Russia's central bank ministry of finance national wealth fund and basically every high-profile figure in the Russian government including Putin himself and restrictions on various Russian supermajors including a whole host of Russian arms and manufacturing companies they've also moved impressively fast less than a week ago Biden was talking about how Europe wasn't ready to expel Russian banks from swift because they were worried about Russian loans and a week later well here we are these sanctions were also accompanied by a whole load of action from private sector companies shell bp and equinor all exited their stakes from Russian gas producers while both visa and Mastercard blocked Russian banks from their networks now we should say that these sanctions are very complicated with a whole load of technical exemptions but all you really need to understand is that these sanctions are unprecedented and economically destructive for Russia and to prove that let's start by looking at Russia's central bank part of the reason why Putin went ahead with his war with Ukraine was because Russia's central bank had accumulated a serious amount of foreign exchange reserves on Thursday when Russia invaded it had foreign currency reserves totaling 630 billion us dollars despite only being the 11th largest economy Putin therefore thought that whatever sanctions the west imposed assuming they didn't actually freeze central bank assets he'd have enough foreign exchange reserves to finance his war and protect the Russian economy now you might be thinking it was pretty silly of Putin to assume the west wouldn't freeze the central bank assets but just a week ago this did look like a pretty safe assumption just four countries central banks have ever been this heavily sanctioned Iran Venezuela North Korea and Syria and in all four cases these countries have relatively small economies and were economically isolated beforehand so the idea that the west would aggressively sanction the central bank of a g20 country that's so intertwined with the global economy seemed pretty unlikely unfortunately for Putin though that's exactly what happened the west and Japan have frozen roughly half of Russia's central bank reserves totaling some 300 billion dollars this will obviously really hurt Putin's ability to finance his war which given that it's apparently already taken longer than he imagined is pretty terrible news for him the other sanctions which basically limit countries' abilities to trade with Russian banks and companies are also bad news for Putin because they drastically limit demand for Russia's currency the ruble that's why on Monday the ruble fell 40 to an all-time low of 118 ruble to the dollar with Russia's central bank unable to use its foreign exchange reserves to prop up the currency and this sort of currency depreciation is bad news for ordinary Russians who are now looking at serious levels of inflation but it's made worse by the fact that the Russian public hadn't been prepared for this at all Russian state media has spent the last week insisting that Putin's war with Ukraine is a relatively minor special operation leaving ordinary Russians unprepared for these wartime sanctions to try and counter this and stem the currency collapse though Russia did three things firstly it doubled interest rates from 9.5 percent to 20 secondly, they banned foreign investors from selling their Russian investments yep, you heard that right if you owned Russian assets you simply weren't allowed to sell them while this might temporarily prop up the ruble it's bound to discourage businesses from investing in Russia in the future which is clearly a bad thing for Putin thirdly they forced all Russian exporters to convert 80 of their foreign exchange reserves into the ruble essentially that means that any Russian company selling goods abroad has to use 80 of their money to buy more rubles obviously this artificially increases demand for and therefore, the value of the ruble but this only even works as long as Russia is still exporting a significant amount of stuff especially oil and gas which at the moment are exempt from western sanctions but this could change and worryingly for Putin even these drastic measures only pushed the ruble to a hundred per dollar on Tuesday still 25 below its January level, you get the point Russia's economy is clearly struggling with the sanctions so what happens next well it most importantly depends on what happens on the battlefield if Putin retreats or some sort of ceasefire is agreed then you can expect most of the sanctions to be lifted and economic life to return to something approaching normality but if the war continues as looks likely then well, who knows what happens while some countries including India Pakistan and China have made clear that they plan to continue trading with Russia this position might change if the war intensifies it's also possible that the west could introduce secondary sanctions on the countries which continue to trade with Russia or the scale of fighting might just force those countries to reconsider their position ultimately though there's still a whole load of uncertainty which is only going to continue hurting Russia which is exactly what the sanctions were designed to do it's not just the Russian economy though there's a whole load of speculation about what this means for the rest of the world the potential for rising inflation and even fuel and food scarcity.

Post a Comment