The Russian economy suffers the repercussions of the invasion of Ukraine
AAs Russian tanks drive through Ukrainian villages and missiles bombard the country’s cities, the United States and Western countries have pushed back economically against violating international norms. The result? Serious damage to the Russian economy.
President Joe Biden has repeatedly said that the United States will not send troops to fight the Russians unless the Kremlin decides to violate NATO’s territorial integrity. So, instead of directly fighting the forces of strongman Vladimir Putin in Ukraine, the Western powers decided to wage an economic war against Moscow to subjugate the country’s economy.
“We are inflicting pain on Russia and supporting the people of Ukraine. Putin is now more isolated from the world than ever before,” Biden said in his State of the Union address. “Together with our allies, we are currently applying powerful economic sanctions. We are cutting off the largest Russian banks from the international financial system.”
The economic situation in Russia has been so dire that trading on the Moscow stock exchange has been halted indefinitely, and it’s unclear when regulators plan to reopen trading. The day after Russia invaded Ukraine, the MOEX Russia index plunged as much as 45%.
Perhaps the most significant action the United States and the European Union have taken against Russia has been to attack Russia’s foreign exchange reserves.
Bruce Jentleson is a former State Department official, professor at Duke University, and Distinguished Fellow of the Woodrow Wilson International Center for Scholars. He told the Washington Examiner that he thinks Biden was competent in enforcing sanctions against Russia after the invasion. He said he was impressed with how the United States targeted and froze much of the more than $600 billion currency reserve that Putin has built up as a cushion.
Jentleson also pointed to the multilateral nature of the sanctions Russia faces.
“There have never been any sanctions before, other than those authorized by the United Nations Security Council, that have received such support,” he said.
For example, Switzerland, which has long prided itself on its geopolitical neutrality, took the historic decision to freeze the assets of Putin and hundreds of other EU-sanctioned individuals shortly after the invasion. Additionally, Singapore, which has never adhered to any sanctions not authorized by the UN, has imposed financial restrictions on Russia in light of the war.
Additionally, the World Bank said it had “stopped all its programs” in Russia and its European ally, Belarus, in response to the invasion.
Another measure taken by the West against Putin’s Russia is to exclude certain financial institutions from the SWIFT network.
Removing SWIFT has generally been viewed as a nuclear option in the sanctions world. However, by no means all banks have been excluded from SWIFT, according to Scheherazade Rehman, a professor of international finance at George Washington University.
The Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, is the leading secure messaging system that facilitates cross-border financial transactions and money transfers. SWIFT is supervised by the National Bank of Belgium and is used by 11,000 banks and institutions worldwide.
Rehman pointed out that while seven Russian banks were barred from SWIFT, including Russia’s second-largest bank, there was no overall blockade on the entire Russian financial system because some European countries, especially l Germany and Italy don’t want major oil and gas disruptions.
“SWIFT is a messaging system. It cannot differentiate payment types, so it cannot differentiate oil and gas payments from other retail payments [payments]“, she told the Washington Examinernoting that the West has allowed two of these banks to continue using SWIFT because they are the main payment channels for Russian oil and gas.
Some experts believe that US and Western pressure has not gone far enough despite the sanctions tranches.
Nate Sibley, a researcher at the Hudson Institute’s Kleptocracy Initiative, said he believes there is an “inaccurate” perception of how strong sanctions could be and “need to be”. He noted that there are still Russian banks that operate without any sanctions, adding that to tightly clamp down on Putin’s regime, there would be full blocking sanctions against the country’s financial sector.
He also pointed out that Russia earns a lot of money by exporting products such as chemicals, machinery equipment and precious metals. He said those industries, in addition to large swaths of Russia’s energy sector, escaped sanctions.
Sibley said he thinks the Biden administration should have used some of the sanctions it now applied before the invasion as a form of deterrence.
“They’re continuing the kind of deterrent policy when they’re kind of in punitive territory now,” he said in an interview with the Washington Examiner.
Another backlash against Russia is the way companies have divested themselves of Russian interests. For example, BP announced that it would exit its 19.75% stake in Rosneft, which accounts for about half of BP’s oil and gas reserves. Shell also said it was abandoning all investments in Russian projects due to the invasion of Ukraine.
These companies were not ordered to divest, but rather did so because they saw the negative business consequences of remaining tied to the Russian regime, Jentleson said.
Regardless of differing views on how aggressive US sanctions policy is, average Russian citizens are feeling the effects. After the invasion, and as the ruble plummeted, Russians were seen lining up at ATMs from St. Petersburg to Siberia, trying to withdraw money from banks.
The visceral economic effects of rising interest rates and inflation will no doubt fuel domestic discontent over Putin’s war.
Rehman said that as the ruble falls, inflation will get worse for the Russian economy.
“This is absolutely going to hurt the Russian people a lot. And you may not see it right now, but in the medium to long term, it’s a devastating blow to the Russian economy and especially to the Russian people, which in and of itself could incite a backlash against Putin strongly internally,” Rehman said. “The fact that we have taken on the Russian central bank is very significant, an unprecedented step that we have taken.”
Ardavan Mobasheri, a professor of economics at the University of Richmond, said cutting off international capital and markets would lead to increased scarcity for Russia and its 144 million people. Furthermore, he said the middle and working class would feel the effects of the sanctions through higher prices – not just the oligarchic elites in Moscow.
“It’s in everything from consumer products to even some services,” he said. “They’re going to smell it, from bread to pasta to vodka to electronics.”
He said if the examples of other heavily sanctioned countries are taken into account, such as Iran, Venezuela and Cuba, Russia’s upper-class citizens might feel a little discomfort. They will try to find ways around the sanctions and protect themselves from the economic backlash.
“You could see, in terms of the oligarchs, if you want, some elements of their ability to survive and, ironically, maybe even thrive,” Mobasheri told the Washington Examiner.
Is there an exit ramp for Putin? Some argue that the billionaire oligarchs who hold large stakes in Russian industry could be pressured to push Putin to change course, although Sibley says not so fast.
While it is worth targeting Russian oligarchs under an international sanctions regime, these oligarchs do not wield the same influence over Putin and the Russian government as in the past.
Sibley explained that while Russia was an oligarchy where Putin had to respond to these economic titans ten years ago, that has changed in the last five years. At that time, Russia went from a kleptocratic oligarchy to a dictatorship.
“It really seems like a one-man decision to me,” he said of the Kremlin’s invasion of Ukraine, calling Putin a “totalitarian lunatic.”
As for the future, Sibley said he expected either an elite coup or civil unrest from the Russian people in response to the Western economic pressure campaign.
Likewise, Rehman said how the Russian people react to the crushing economic malaise and Putin’s foray into Europe will be critical to what unfolds in the weeks and months to come.
“Conquering a country is one thing. Holding it successfully is something completely different,” Rehman said. “The purpose of all this is to inflict so much pain on the Russian economy and the Russian people that they, in turn, do not support this war, and this is already happening.”