How Putin prepared the Russian economy for sanctions

Vladimir V. Putin’s posture toward the West during the recent Ukraine crisis seems unusually challenging, even for him. But there may be more behind his confidence than military prowess or empty valor.

Over the past few years, Russian President Putin has restructured the country’s economy with the specific aim of withstanding Western financial pressure.

Russia has drastically reduced its use of dollars and thus Washington’s leverage. It has hoarded massive currency reserves, and slashed its budget, to keep its economy and government services afloat even in isolation. It has reoriented trade and sought to replace Western imports.

Russian economic officials are “quite proud and have good reason to do the work they’ve done to make the Russian economy immune to sanctions.” Alexander Gabueva senior fellow at the Carnegie Moscow Center.

This transformation, among the most dramatic examples of what has been called “resistance to sanctions” worldwide, comes less than eight years after Western sanctions over the annexation. Moscow’s annexation of Crimea in 2014 plunged Russia into economic and political upheaval.

Russia’s reinforced economic defenses could help explain why Mr. Putin now seems ready to launch another military offensive on Ukraine despite the long-term costs of his move he is in Crimea.

However, his changes only provide a buffer against sanctions, not an impregnable shield. The The harshest measures are being considered in Washington will almost certainly be disruptive, inflicting potentially devastating damage — albeit at the expense of Western economies in the process.

Moscow’s most important economic underpinning is the central bank’s foreign currency reserves.

All countries hold foreign currency reserves to cover trade and debts. Most hold US dollars, because of its stability and wide acceptance. Countries that depend on energy exports tend to store more in response to price fluctuations.

Since 2015, Russia, by redirecting revenue from oil and gas, has expanded its currency reserves to a staggering $631 billion, or a third of the entire Russian economy. That is fourth largest such reserves in the world, one of the largest of any oil field.

“This is what gives Putin the freedom of strategic maneuvering,” said Adam Tooze, economic historian at Columbia University, Written.

Moscow could use those reserves to keep the ruble appreciate if another wave of sanctions hits. It can also use them to cover government and corporate balance sheets.

And Mr. Putin, by cutting costs, has kept his overall liabilities below two-thirds of his monetary reserves.

“This strong fiscal balance means that Putin’s Russia will never experience the full-blown financial and political crisis that rocked the country in 1998,” Tooze wrote.

Crucially, the once dominant dollar now accounts for only 16% of Russia’s monetary reserves, which Moscow has replaced with the euro, Chinese yuan and gold.

This is one of many steps toward so-called “de-dollarization,” reducing Washington’s ability to use its control over dollar-based transactions to strangle Russia’s economy. .

For example, Russia has also restructured corporate debt in the country into rubles instead of dollars.

At the same time, Russia has shifted some of its trade to Asia. And, after 2014, when Russia imposed trade restrictions on European cheeses as a retaliation measure for the sanctions, Moscow replaced lost imports with homegrown alternatives. garden leaves.

Although the world mocks Russia’s Brie and Parmesan, which are made from palm oil rather than milk, many Russians Consumers now say they are satisfied with the change. The cheese event, while seemingly peripheral, demonstrated Moscow’s resilience to consumer shortages.

Mr. Putin has also learned to keep Russia’s key political and business elites (who keep him in power the way voters keep democratic leaders in power) loyal even under sanctions. punish.

For example, those in politics or the oligarchs who lost their London flats or foreign investments after 2014, may have been granted a construction or energy contract in their home country as compensation. .

“This really strengthens the cohesion of the regime,” Gabuev said of the sanctions targeting the elite, “because all the key players now have no choice but to return to normality.” usually with the West.”

Russia’s overwhelming economic dependence on oil and gas exports is sometimes seen as a weakness that the West can exploit.

If that is true, however, some analysts say, Russia’s economic fortifications could reverse the effect, making it Russia’s leverage.

“Europe has yet to resolve its dependence on Russian gas,” said Emma Ashford, who studies European security issues at the Atlantic Council think tank.

Russia’s tight national budget means the Kremlin can cover the costs as long as the oil sells for at least $44 a barrel, according to international estimates. The current market price is more than twice this, allowing Moscow to keep the government services and military budget running even amid a severe decline.

And Russia’s currency reserves could replace the loss of energy exports to Europe in “several years,” Ashford estimates. Meanwhile, Europe’s energy stockpile may only last for a few months.

The United States, as the world’s top energy consumer, is also highly vulnerable to shocks in the oil and gas market.

Russia is also a the world’s leading exporter copper, aluminum and other commodities on which global industries rely – not to mention wheat. Moscow may believe that the world needs it even more than it needs the world.

“I think that’s part of the reason for the Kremlin’s calculation here,” Ms. Ashford said.

But Mr. Putin may not have foreseen the harshest measures currently being discussed.

Edward Fishman, a top sanctions policy official in the Obama administration, said: “The current sanctions, namely the total containment sanctions against Russia’s largest banks , many times stronger than those envisaged in 2014.”

Under such restrictions, even with Russia’s monetary reserves, “it becomes difficult to actually spend those reserves to support the ruble and maintain Russians’ standard of living,” said George Peakes, analyst at Bespoke Investment Group, an investment firm, wrote this week.

President Biden’s threat Completely blocking Russian banks from dollar-based transactions, if implemented, would limit the banks’ ability to do business abroad.

“Importers will not pay their suppliers. Exporters will not receive new revenue. Comparing the impact on Russian civilians to the impact of a wartime bombing campaign, Mr. Pearkes writes, is not being able to meet the demand at normal levels.

“There is nothing Russia can do to protect itself from that,” Mr. Fishman said.

Separately, Washington’s threat to hi-tech export bloc Gabuev, a Moscow-based analyst, said he appeared to have taken Putin by surprise.

The move would limit Russia’s ability to produce advanced military or industrial weapons. It could also ban Russians from buying smartphones or similar consumer electronics, depending on how it’s implemented.

Mr. Putin is expected to raise the issue during his talks on Friday with China’s leader, Xi Jinping. But China’s high-tech industries are still not considered enough to replace American components.

Western policymakers face a question: Will Putin continue to push through, despite Western threats that show a weakness in his economic armor, as he views the Is the price worth paying or is it because you believe the Western threats are empty?

Mr Fishman, a former sanctions official, said: “I don’t think our threats of sanctions are so believable because of our track record.

And such harsh measures, for a large and globally integrated economy like Russia, would be virtually unprecedented. Larger shocks could also damage Western countries, whose governments have already coped with economic stress.

But there are signs that the Kremlin is preparing for the worst. Last week, the Central Bank of Russia stop use excess oil revenues to buy dollars outright.

Mr. Fishman raised another possibility, related to the possibility: Mr. Putin may not have grasped the extent of his vulnerability, increasing the risk of plunging Europe into both a war and a significant economic conflict. is to prevent it.

“Maybe they’re overconfident,” he said, adding that Putin’s inner circle could only tell him what he wanted to hear. “I don’t think the Kremlin is prepared for what could happen to it.” How Putin prepared the Russian economy for sanctions

Fry Electronics Team

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