December 6, 2022

The Indie Toaster

Complete News World

Sanctions will put Russia's "fortified" economy to the test

Sanctions will put Russia’s “fortified” economy to the test

Since 2014, when the United States and its Western allies imposed sanctions on Moscow in the aftermath annexation of Crimea By shooting down Malaysia Airlines Flight 17, the Russian president was trying to build an economy that could withstand tougher sanctions.
West this week She kept some of her firepower in reserve After the Russian forces invaded Ukraine. However, the measures announced by the United States, the European Union and the United Kingdom will put Russia’s “fortress economy” to the test.

Fear of what sanctions might do sent Russian stocks crashing 33% on Thursday. They have since regained some of those losses, but the ruble continues to trade near record lows against the dollar and euro.

Russia’s $1.5 trillion economy is the eleventh largest in the world, after South Korea. Since 2014, its GDP has barely grown and its people are getting poorer. The ruble also depreciated, reducing the value of the Russian economy by $800 billion.

During the same period, Moscow attempted to wean its oil-dependent economy off the dollar, limiting government spending and hoarding foreign currency.

Putin’s economic planners sought to boost domestic production of certain goods by banning similar products from abroad. Meanwhile, Moscow has amassed a war fund of $630 billion in international reserves – a huge amount compared to most other countries.

“Fortress economics” requires building up large foreign exchange reserves that can be spent if sanctions are painful, said David Lubin, an economist at Citi and an associate fellow at Chatham House.

“Russia has taken this pattern seriously,” he wrote recently.

See also  The Memorial Institute reports that a 96-year-old Holocaust survivor was killed in a Russian raid

Some of these reserves have already been published. On Thursday, the Russian Central Bank said it was intervening in the currency markets to support the ruble. On Friday, it said it was increasing the supply of bills to ATMs to meet the growing demand for cash. Russia’s state news agency TASS reported that many banks have seen increased withdrawals since the invasion of Ukraine, particularly in foreign currencies.

While building a war fund, Putin’s tough strategy also limited economic growth, investment, and productivity, and prioritized state companies over private ones. The incomes of ordinary Russians have plummeted to levels last seen in the early 2010s, and new foreign direct investment is minimal. Russia has also failed to diversify away from oil and gas, leaving it highly vulnerable to fluctuations in global commodity prices.

Capture the “castle”

Less than 24 hours after Russian forces attacked Ukraine from the north, south and east, US President Joe Biden revealed sweeping sanctions aimed at harming the Russian economy and turning Putin into an international “pariah”.

The US sanctions target Russia’s two largest financial institutions, Sberbank and VTB, and prevent them from processing payments through the US financial system. Russian state-owned companies will not be allowed to raise capital through US markets. Sanctions cover nearly 80% of Russia’s banking assets.

The US is also trying to cripple Russian military and industrial companies by preventing them from buying critical technology such as advanced computer chips.

The European Union, the United Kingdom, Japan, Australia and other countries have announced their own sanctions against Russian companies and individuals, a coordinated action unprecedented in its scope and potential economic impact. EU officials went further on Friday and imposed sanctions on Putin himself.

See also  Heat wave in Spain: the country is witnessing a temperature of 40 degrees Celsius

“I don’t think we’ve seen anything like this, and it’s much more severe than the 2014 sanctions,” said Ika Korhonen, head of the Bank of Finland Institute for Emerging Economies and an expert on Russia’s banking and financial systems. .

However, Russia was preparing its economy for this moment. And since world oil prices of $100 a barrel produce huge amounts of revenue for the state, Moscow can guarantee the payment of salaries and pensions.

“They can manage for a while,” Korhonen said. “But the longer that goes on, the slower the growth will be.”

More penalties?

The United States and the European Union have so far avoided targeting Russia’s massive oil and natural gas exports, and the alliance has been unable to reach a consensus on whether to isolate Moscow from SWIFT, a highly-secure messaging network that connects thousands of financial institutions around the world.

Some experts have argued that such measures should be considered now to deter Putin from further aggression. Ukraine has appealed for Russia to be removed from the SWIFT system, a call backed by Lithuania, Estonia, Latvia and the United Kingdom but resisted by some other European countries – most notably Germany.

Both measures could come with a major economic setback for the West. Natural gas prices are very high in Europe, and cutting supplies to Russia could push them up. Likewise, a decline in Russian crude exports will lead to higher oil and gasoline prices.

But as Russian forces advance into the capital, Kiev, that price is what some say the West should be willing to pay.

See also  An animal charity says more than 100 shelter dogs who have survived starvation in war-torn Ukraine have moved away at Poland's border

“We don’t have five years for the Russian economy to slowly deteriorate. We need to do that now,” said Tyler Kostra, associate professor of politics and international relations at the University of Nottingham in England.

– Nathan Hodge and Vasco Cutofio contributed reporting.