Russia appears to have gone into an overnight economic and financial crisis due to sanctions implemented in the past week by the United States and its allies in Europe and across the world.
“We’re [in] uncharted waters in terms of the impact. I think that one of the things we’ve learned here: Global coordination plus rapidly escalating sanctions means that the impacts in the short term are greater than the sum of their parts,” Rachel Ziemba, a senior adjunct fellow at the Center for a New American Security, told Grid.
Just a few days ago, there was some speculation that the economic response to Russia’s invasion of Ukraine was not all it could be and had been hampered by, among other things, Italy’s response for a carveout for luxury goods. But moves made over the weekend, including especially sanctioning the Central Bank of the Russian Federation, made it clear to economic actors both in Russia and abroad that sanctions may be tougher than expected — and more could be coming.
Analysts pointed to the sanctions placed against the Bank of Russia as particularly potent. “The U.S. and others putting on the table the prospect of targeting the Central Bank of Russia’s ability to access its reserves is motivating the sell-off in the ruble today. It’s the primary factor, more than SWIFT,” Dan Katz, a former senior Treasury official and co-founder and portfolio manager at Amberwave Partners, told Grid.
SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, is essentially a messaging system used by banks to make transactions for each other. Over the weekend, the United States and a number of other countries announced they would remove some Russian banks from the system after calls for harsher actions than their initial moves following the invasion.
“It’s not the SWIFT cutoff itself, it’s the overall arc of the sanctions response and how that impacts private expectations of the future path of sanctions and therefore the risk that private actors face in continuing to do certain types of business with Russian entities,” Katz said.
“The view I had around SWIFT is that, rather than focusing on SWIFT, it’s more important to think about designations and restrictions on the underlying banks,” Ziemba said.
Russia thought it could withstand a lot, but maybe not this
Russia has for years been building up reserves of foreign currency and assets like gold in order to insulate itself from sanctions and macroeconomic shocks and to protect the value of the ruble.
But the moves announced over the weekend were intended to make these reserves impossible to access, as they were held overseas. With large reserves of other currencies, a country can protect the value of its own currency by buying and selling it on the international markets — and with gold, the country can raise money by selling it. But thanks to the sanctions announced over the weekend, the Russian central bank appears unable to do so.
“The sell-off in Russian securities and Russian currency we’ve been seeing is primarily in response to expectations of future actions and the associated uncertainty around how they will be implemented and enforced,” Katz said. “The way to think about this is that the economic pressure imposed by sanctions is generated as a result of private actors responding to two things. The first is current law. But the more important driver of behavior is expectations regarding the future path of law and the associated counterparty risk that private actors have to take into account in doing business with Russia.”
The policy was designed to “make sure that Russian companies and Russian banks would not be sanctionable in the kinds of ways in which we’ve seen that they are,” Helen Thompson, a professor of political economy at Cambridge University, told Grid. “The awareness in … Moscow is very high on this, but the ability completely to detach, it’s not there.”
With the ruble in free fall, the Central Bank had to announce the type of actions typical of a country in a situation when investors are running for the doors.
“The Central Bank of Russia did what central banks tend to do with any kind of massive capital outflow: They hiked interest rates and imposed capital controls,” Ziemba said.
The bank said in an announcement Monday that it had “carried out FX interventions totaling one billion US dollars on Thursday and in a smaller amount on Friday,” but was unable to do so on Monday, “considering the restrictions on using the gold and foreign currency reserves in dollars and euros,” an admission that it had been stymied by sanctions.
The U.S. has a lot of economic power, and it’s ready to use it
“American financial power is not only acute, but that it’s grown considerably over the last 10 years,” Thompson said.
While there has been some speculation that China, which has notably refused to join the Western diplomatic and economic campaign against Russia, could help circumvent the fetters Russia finds itself constrained by, there’s only so much Chinese banks and financial institutions can do as they too are part of the U.S.-dollar-world and are thus conscripted into helping enforce restrictions and sanctions.
“They don’t have any interest to explicitly block or try to circumvent U.S. sanctions in the sense that they’re unwilling to engage in transactions directly with listed entities that tap into U.S.-based dollar markets,” Thompson added.
Many Western businesses appeared to have made those calculations over the weekend — the British energy company BP said it would give up its stake in the Russian oil company Rosneft, and Shell said it would abandon its joint ventures with the Russian gas giant Gazprom.
“Market actors don’t wait to get out on the last day,” Ziemba said. “The rational thing from a business perspective is to exit when you can.”