The Russian Fortress Collapses by Anders Åslund
After years of Vladimir Putin and his cronies mocking the ineffectiveness of previous US and EU sanctions and building resilience against future measures, Russia’s economy has effectively collapsed. In launching his war against Ukraine, Putin clearly underestimated Western capabilities and determination.
WASHINGTON, DC – In the space of a single day, February 28, the “Fortress Russia” collapsed. The ruble plunged about 30%, and the Russian authorities closed all financial markets. Russians rushed to ATMs to withdraw as much cash as they could, desperate to exchange it for anything other than the rouble. Failing that, they stormed the 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 ceased. New censorship laws made the work of independent journalists impossible. More foreign correspondents are gone, and the remaining Russian journalists face 15 years in prison if they share facts that contradict the Kremlin’s narrative. Meanwhile, most Russian state websites have been taken down by the Pirates Where Rod foreigners by the authorities.
Nevertheless, the contours of Russia’s economic disaster are clear. In the days following Russia’s February 24 invasion, a united West responded with far harsher sanctions than it imposed after Putin’s annexation of Crimea and foray into eastern Ukraine in 2014.
The most significant penalties have been financial. The United States has prohibited transactions with four of Russia’s largest public banks; prohibited trading in Russian sovereign bonds; limit the ability to lend to 13 large Russian companies; blocked the main banks of the SWIFT financial messaging system; and the most important, frozen foreign exchange reserves of the Russian central bank. Suddenly, Russia was excluded from international finance. No Westerner will dare to interact with Russian financial institutions for the foreseeable future.
Other sanctions have prohibited the export of about half of the key technological inputs that Russia buys from American suppliers. And hundreds of Western technology companies – led by Apple – have voluntarily declared that they stop doing business or selling to Russia.
Other sanctions have pointed the finger Russian elites and their businesses. Most senior Russian politicians were already under sanctions, but today Foreign Minister Sergei Lavrov and Putin himself were added to list. Moreover, while the main Russian oligarchs have long escaped sanctions thanks to their numerous contacts in the West, they now find themselves alone. Their mega-yachts are seized and Putin’s loyalists in Europe are hunted down like criminals – much to the satisfaction of Western tabloids.
Subscribe to Project Syndicate
Our new magazine, The Year Ahead 2022: Reports, is here. To receive your printed copy, delivered wherever you are in the world, to subscribe to PS for less than $9 per month.
Like a PS subscriber, you’ll also get unlimited access to our On Point suite of premium long-form content, Say More contributor interviews, The Big Picture themed collections, and the full PS archive.
Sanctions generally introduce three types of risk to companies or investors in the sanctioned country. First, there is a risk that measures, which can be changed with the stroke of a pen, continue to evolve in unpredictable ways. Second, there is the risk that no one is insuring transactions or investments in the sanctioned country. And third, there are reputational risks, and potentially even criminal risks, for any entity that continues to work with the sanctioned regime.
Given these risks, Russia has become too toxic to deal with them. Reputable Western companies are not only reluctant to continue buying from or selling to Russia; they are also moving away from major investments there. Almost all major Western oil companies – BP, shell, ExxonMobil, Equine, OMW, and ENI – said they were withdrawing from the country. The only remaining deduction is Total of France.
Before Putin’s war, Western sanctions against Russia were about 30% harsher than those maintained against Iran; yet, in just one day, they jumped to around 90%. The only significant difference was that Russian commodity exports were not yet sanctioned. But on March 8, the United States and the EU introduced major sanctions against Russian energy.
Russia’s sudden isolation and economic collapse took almost everyone by surprise. After long mocking the 2014 sanctions, Putin and his cronies simply didn’t believe in the threat from Western governmentspenalties from hell.” But it is clear that the Kremlin has underestimated the sanctioning power of the West. No one can any longer claim that sanctions are ineffective. The only question is whether they will be applied and maintained.
While the US has consistently advocated tougher sanctions than the EU, the two are now almost completely on the same page. In particular, Germany took a harder line under his new government – a stunning turnaround that deserves future study.
This united response was more than enough to breach Putin’s supposedly sanctions-proof citadel. Since returning to the presidency in 2012, Putin has largely ignored the need for economic growth and development, instead focusing on collecting money. $630 billion international foreign exchange reserves. The Russian federal budget has remained more or less balanced and foreign debt has been kept to a minimum, at around 20% of GDP. Monetary policy was tight and the ruble had a floating exchange rate.
But the fruits of these policies are now rotting. Most of Russia’s foreign exchange reserves are frozen, Russian stock markets are firmand the value of the 31 Russian stocks traded in London has dropped 98% – more than the 94% drop in Russian stocks during the financial crash of 1998. All Russian assets were downgraded to unwanted status, where they will remain indefinitely. Russian capital markets are practically dead.
Economists predict that the ruble keep fallingapproaching a rate of 200 per US dollar by the end of the year (approximately 70 rubles before Putin’s war). And on March 8, the central bank decided to stop trading rubles for foreign currencies, which means that the ruble is no longer convertible. A fair estimate is that the annual inflation rate will reach at least 50% and the Russian GDP probable fall at least 10% this year.
Putin could still control his generals, his security services and his intellectuals. But Russia’s economy depends on workers, many of whom are already seeing their inflation-adjusted incomes plummet because of its unnecessary war. Despite Russia’s extreme censorship regime, there was already a major strike in Nizhnekamsk, Tatarstan, on the depreciation of real wages. More social and labor unrest is likely. The disastrous effects of Putin’s foreign and economic policies will be too extreme and far-reaching to hide.