The Day – Putin could prepare Russia for any sanctions related to Ukraine
US President Joe Biden has said sanctions if Russia invades Ukraine will have a “devastating impact” on its economy. But after the Kremlin has spent the past eight years preparing for more sanctions, economists say the pain may not be as severe as some fear.
The measures being considered, which include limits on the ability of big banks to use dollars and euros, as well as restrictions on public debt and access to American technology, would be the toughest since the first wave of limits imposed. to Russia in 2014 following the annexation of Crimea, according to US and European officials.
At the time, Russia was in a financial crisis. The ruble lost half its value as the central bank saw its reserves plummet by $130 billion and the economy slipped into recession.
This time around, economists say, the measures being discussed by the United States and its allies would hit the currency, stoke inflation and scare away investors, but may not be enough to spark the same kind of turmoil. In addition to the Kremlin’s preparations, a big difference is that prices for oil, Russia’s main export, are now rising, not plunging as they did in 2014.
“Russia is much better prepared for sanctions than it was in 2014, at least on its macro indicators,” said Natalia Lavrova, chief economist at BCS Financial Group in Moscow. “The public sector is ready and the financial cushion is significant,” she said. In all but the most extreme scenarios, the economy would continue to grow, albeit at a slower pace and with higher inflation, she said.
Russian officials say they have no invasion plan, but Moscow has rejected Western demands to call off a buildup of more than 130,000 troops on the border with Ukraine. As President Vladimir Putin this week expressed hope for a diplomatic solution, investors began to cautiously return to Russian assets.
Publicly, the Kremlin says it is concerned about the risk of sanctions and has taken steps to limit their possible impact. Putin has repeatedly promised that the threat of new restrictions will not change his foreign policy. For now, the Kremlin seems confident that limits on Russia’s energy sector or other key exports would be too disruptive to global markets to pose a realistic threat.
Still, Western officials say the risk of sanctions remains. It’s unclear exactly what the response would look like if Russia acted on Ukraine in a less dramatic way than a full invasion is unclear.
At $634 billion, central bank reserves are near a record high, thanks to policies that have saved much of the oil windfall in a rainy day fund. The budget recorded a surplus of 0.4% of GDP last year and public debt at 18% of GDP is among the lowest of major economies. Moscow has reduced its reliance on the dollar for trade and transactions and built its own alternatives to US-dominated payment systems.
Thanks in part to these defences, economists say the likely sanctions would depress the ruble by up to 20% against the dollar, fuel already high inflation and therefore necessitate more interest rate hikes from the Bank. of Russia, as well as perhaps intervention to support financial markets and sanctioned banks.
“Assuming there is no outright ban on exports, an increase in sanctions pressure will have an indirect effect on the economy, since significant financial restrictions have been in place since 2014,” he said. said Sova Capital economist Artem Zaigrin. That could reduce annual growth by a little more than the roughly 0.2 percentage point he estimates was the result of the 2014 sanctions.
In a moderate scenario, with sanctions hitting only Kremlin insiders and certain state entities, the ruble would fall by around 6%, inflation would rise slightly and the economy would grow by 2.4% this year, down from 0. .2 percentage points from the baseline forecast, according to BCS’s Lavrova. Wider limits would hit the ruble harder and reduce growth to 1.4%, she said.
Only in its most extreme scenario, which would include strict limits on debt and banks as well as the exclusion of Russia from the Swift financial communications system, would the economy tip into recession this year, a- she declared.
Failing that, imposing the toughest sanctions on Russia’s 12 largest commercial banks “could provoke a repeat of the 2014 crisis, with more difficult and long-term consequences”, according to Rosbank economist Evgeny Koshelev.
Over time, limits on access to finance and technology would further hamper Russia’s already depressed growth prospects, economists say.
“The medium and long-term impact that will lead Russia to financial and economic autarky and the cost for the economy and for each individual is enormous,” said Elina Ribakova, deputy chief economist at the International Institute of Washington finance. “Potential growth will be much lower without interaction with the world.”
Here are some of the main types of sanctions under consideration and their likely impact.
– Government debt. The softer version would prohibit investors from buying bonds in the secondary market (the US imposed restrictions on the primary market in 2021), while more drastic versions could also force them to dispose of their holdings existing. While these measures would rattle markets, they would not be too taxing on Russia’s finances, since the government has a budget surplus and does not rely on borrowing to pay its bills.
ING Eurasia’s Dmitry Dolgin said a ban on new purchases would cost Russia up to $10 billion in capital inflows a year and lower the ruble by a few percentage points. Additionally, a forced sale of existing bonds would likely force the central bank to intervene in stable markets as the ruble fell more sharply.
In the longer term, Russia’s budget could come under further pressure if it were to sustain a protracted military operation or significantly increase financial support to Ukraine in the event it staged a takeover of Kiev by a pro-Moscow government. .
– Banks/financial sector. Hitting state banks and other big banks with limits on their ability to use correspondent accounts at US institutions “would cut them off from the dollar system”, said Ivan Timofeyev, a sanctions specialist at the Russian Council for International Affairs. “It’s a more serious threat in terms of possible damage than debt.”
Putting individual institutions on the most restrictive SDN list would be even more painful, he said, noting that non-US banks could also follow suit and freeze affected entities entirely.
Russia has developed alternatives to the dollar-based financial system, including its own Swift-style transaction information processing network and direct ties to banks in places like China. But it still depends on the dollar for 55% of its exports and the euro for another 29%, according to the central bank.
– Technology. Russia already faces limitations on access to much of the American technology that could be useful to the military. Wider limits on the consumer sphere could force Russians to switch to Chinese and other phones.
“Banning chips and sensitive technologies would excite some people in power,” said Karen Kazaryan, chief executive of the Internet Research Institute. “Such a move would force Russia to speed up import substitution programs and mean more public money for uncompetitive industries.”
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Bloomberg’s Ilya Arkhipov, Jake Rudnitsky, Andrey Biryukov and Evgenia Pismennaya contributed to this report.