In the span of a single day, on February 28, the ‘Russian Fortress’ collapsed. The ruble collapsed about 30 percent and the Russian authorities closed all financial markets. Russians rushed to ATMs to withdraw as much money as possible, desperate to exchange it for something other than rubles.
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Unable to do so, they raided stores to buy whatever they could find before prices skyrocketed. The flow of news from Russia was already limited and biased before Putin’s war. Now, it has practically stopped. New censorship laws have made it impossible for independent journalists to work.
Most of the foreign correspondents have left, and the remaining Russian journalists risk 15 years in prison if they share any information that goes against the Kremlin’s account. Still, the outlines of Russia’s economic disaster are stark. In the days after Russia’s invasion, a united West responded with far harsher sanctions than it had imposed after Russia’s annexation of Crimea and incursion into eastern Ukraine in 2014.
The most important sanctions have been financial. The US has banned transactions with four of Russia’s largest state-owned banks; has prevented the trading of Russian sovereign bonds; has limited lending capacity to 13 major Russian companies; it has blocked the access of key banks to the Swift financial messaging system and, more importantly, it has frozen the foreign currency reserves of the Russian central bank. In one fell swoop, Russia was left out of the international financial market. No Westerner will dare to interact with Russian financial institutions for the foreseeable future.
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Other sanctions have prohibited the export of about half of the key technological inputs that Russia buys from US suppliers. And hundreds of Western tech companies have voluntarily declared they will stop doing business in Russia.
Other sanctions have targeted Russian elites. Sanctions generally introduce three types of risks for companies or investors in a sanctioned country. First, there is a risk that the measures, which can be changed at a stroke of the pen, continue to evolve in unpredictable ways. Second, there is the risk that no one will guarantee transactions or investments in the sanctioned country. And third, there are reputational risks, and potentially even criminal ones, for any entity that continues to work with the regime that was sanctioned.
In the face of these risks, dealing with Russia has become too toxic. Reputable Western companies are not only unwilling to continue buying from or selling to Russia, they are also abandoning major investments in the country. Almost all of the Western oil majors are leaving the country.
Before Putin’s war, Western sanctions on Russia were about 30 percent as severe as sanctions on Iran; however, in a single day, they increased to about 90 percent.
Russia’s sudden isolation and economic collapse has surprised just about everyone. Having long flouted the 2014 sanctions, Putin and his acolytes did not believe Western governments’ threat of additional “hellish sanctions.” But it is clear that the Kremlin underestimated the sanctioning power of the West.and. No one can say now that the sanctions are not effective. The only question is whether they will be implemented and sustained over time.
While the US has persistently advocated tougher sanctions than the EU, the two are now almost entirely in agreement. Specifically, Germany has taken a harder line.
This united response has been more than enough to crack Putin’s supposedly sanctions-proof citadel. Since he returned to the presidency in 2012, he has ignored the need for economic development, focusing instead on amassing some $630 billion of international foreign exchange reserves.
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Putin may still have his generals, his security services and his intellectuals under control. But the Russian economy depends on workers, who are already seeing their incomes fall.
The Russian federal budget has remained more or less balanced, and external debt has remained at record levels, at about 20 percent of GDP. But the fruits of these policies today decompose. The bulk of Russia’s foreign exchange reserves are frozen, Russian stock markets are closed and the value of the 31 Russian shares traded in London has plunged 98 percent. All Russian assets have been downgraded to junk status, where they will stay indefinitely.
Economists predict that the ruble will continue to collapse, reaching a rate of 200 per dollar by the end of the year (compared to around 70 rubles before Putin’s war). And on March 8, the central bank decided to stop exchanging rubles for foreign currencies: the ruble is no longer convertible.
Putin may still have his generals, his security services and his intellectuals under control. But the Russian economy depends on workers, who in many cases are already seeing their incomes fall. It is likely to generate greater social and labor unrest. The disastrous effects of Putin’s foreign and economic policy will be too extreme for him to hide.
ANDERS ÅSLUND
© PROJECT SYNDICATEWASHINGTON D.C.