Russia has initiated a full-scale invasion to Ukraine and the financial costs can easily reach billions of dollars. In a bid to stop Russia from continuing its invasion, countries such as the US, UK, Canada, and the European Union have all imposed sanctions. This effectively isolates the country from any monetary support it tries to amass but do these sanctions actually work given that Russia has over years decouple itself from the west?

It’s been a quite a while since Putin’s Russia stopped investing in top-of-the-range global securities, namely US Treasury Bonds. Clearly worried about freeing itself from the West’s tutelage, Russia now has only US$3.7 billion of US debt compared to the US$177 billion it had in 2010. Also, Russia’s central bank possesses wealth in the way of US$630 billion in reserve, covering the cost of an entire year’s worth of imports for the country as well as 75 per cent of its foreign debt. In fact, Russia has made the most of the last eight years and reduced its economic and financial dependence, and at the same time its vulnerability to sanctions.

To do this, Russians have consented to a drop in their living standards by drastically revising their consumption, importing 30 per cent less since 2014 to pay off a substantial proportion of their foreign debt owned by private enterprises, and their government managing to slash its foreign debt by a third. Russians as a whole have therefore had to accept a tightening of the belt since 2014 in order to reinforce themselves against the economic weapons used by the West.

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Being excluded from SWIFT (Society for Worldwide Interbank Financial Telecommunication) will nevertheless prevent Russia from using these reserves since almost no foreign importer or exporter will be able to pay or receive payment anymore from this wealth that has been so industriously accumulated by the Russian government. A freezing of the Russian central bank’s assets held by foreign establishments will also have major consequences on the country’s domestic macroeconomic balance. The bank of Russia has effectively deposited some US$95 billion in its European equivalents like the Bundesbank, the Banque de France, and the IMF among others. It is rare — though not unheard of — to freeze central bank accounts.

Let us not forget in this regard the recent freezing of Afghan public assets by the US, and of that of Venezuela’s central bank by the Bank of England that was supported by the UK courts which judged the government in place to be “illegitimate”. The combination of these financial measures will thus render use of the rouble on financial markets almost impossible, causing the currency to crash, pure and simple. 

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With the central bank’s reserves making up an essential weapon at the disposal of a country trying to protect its macroeconomic interests and power, the paralysis caused by the blockade on SWIFT and reserves held abroad leaves Russia with just two options, one being worse than the other, which involves wrestling capital under control with a drastic interest rate hike. Of course, Russia could also call on China to help since it does hold 15 per cent of its reserves.

Alternatively, Russia could sell some of its 2,300 ton gold stock to China, that is by the way the 5th biggest in the world. But it is not at all certain that China would agree to take such a risk, especially with America involved, in the knowledge that its interest would obviously be to see Russia’s power fall to such a weakened position that it could then entrench itself in Siberia for the long term in order to exploit the region’s immense natural reserves. 

The West’s measures against Russia are therefore openly aiming to destabilise the country’s economy by cutting it from the international financial network for good. As massive as its reserves may be, Russia can in fact do nothing about it if the transfer channels are blocked and if it loses control of them. All the ingredients are now there to trigger a sizeable global inflationary spiral, because the ramifications of these sanctions and weighty decisions will naturally have a gigantic effect on the world economy, on supply chains, energy prices, maritime freight… The repeated defaults that hit Russia over the preceding decades are nothing compared to what awaits the global economy now.

For more information about Michel Santi, visit his website: michelsanti.fr/en

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