Sanctions test Putin’s ‘fortress’ economy

Vladimir Putin has tried to turn Russia’s economy into a fortress. But now, Russian currency markets are reeling.

People queuing outside a branch of Russian state-owned bank Sberbank in Prague to withdraw their savings and close their accounts, before Sberbank closed all its branches in the Czech Republic. Picture: Michal Cizek / AFP

Vladimir Putin has tried to turn Russia’s economy into a fortress in recent years, but far-reaching sanctions by the West will put those defences under severe pressure.

Russian currency markets were reeling after the US, Europe and Britain unveiled an unprecedented set of sanctions on Moscow at the weekend in response to its invasion of Ukraine.

Analysts believe that the most damaging of the measures are those that target Russia’s central bank and the $US630bn ($867bn) war-chest of international ­reserves that it has amassed.

The Kremlin will have hoped to have used these vast reserves to prop up its currency and help its financial system to withstand the ­impact of the other sanctions brought in by America, Europe and Britain. But the Western ­allies have announced that they will stop the central bank from selling these assets.

The British government said on Monday (Tuesday AEDT) that the move was aimed at preventing Russia from “deploying its foreign reserves in ways that undermine the impact of sanctions imposed by us and our allies, and to undercut its ability to engage in foreign exchange transactions to support the Russian rouble”.

Deutsche Bank manager Jim Reid said: “This is in effect a financial war now.”

Blocking Russia banks from using the SWIFT financial messaging system will further isolate Russia from the global financial system.

Rouble tumbles

The measures have caused chaos in Russia. The rouble tumbled 15 per cent against the US dollar on Monday.

The Russian central bank also kept Moscow’s stock exchange closed to limit the fallout from the sanctions on the country’s equity market, and it remained shut on Tuesday. Meanwhile, images that started to circulate on Sunday of long queues of Russians at ATMs trying to withdraw cash suggested that the country faced a bank run.

Officials are racing to limit the damage to the Russian economy. The central bank lifted its main interest rate from 9.5 per cent to 20 per cent on Monday in an ­attempt to support the rouble and rein in inflation.

Export-focused Russian companies have also been told by the authorities to prepare to sell 80 per cent of their foreign currency revenues, while the central bank banned brokers from selling Russian securities for foreign clients.

‘Fortress Russia’

Russia has been living with sanctions since 2014, after its ­annexation of Crimea from Ukraine. As a result, Moscow has adopted what has been called a “Fortress Russia” approach to its financial system. This has ­included “de-dollarising” its economy to limit the impact of earlier sanctions and stockpiling the central bank’s international reserves.

Oil and gas revenues are central to the Russian state, amounting to about 36 per cent of Russia’s budget last year, and rising oil and gas prices in recent months have provided a big boost.

Russia’s hydrocarbon industry also gives Moscow significant leverage over other European countries: Europe relies on Russia for about 40 per cent of its natural gas and 25 per cent of its oil.

In January, the International Monetary Fund forecast that the Russian economy would grow 2.8 per cent this year. But after the latest round of sanctions, a 5 per cent fall in GDP is now forecast.

If inflation surges, household finances will be hit hard. Ophelia Coutts, a Russia analyst at risk ­intelligence company Verisk ­Maplecroft, said: “This will likely exacerbate civil unrest incidents as anti-war protests will be fuelled by the resulting deterioration in living standards.”

Berenberg Bank chief economist Holger Schmieding said that although “Iran and North Korea have shown that brutal ­dictatorships can persevere for a long time despite very heavy sanctions”, the situation with Russia was different. “Many Russians have close links to the free world and strong family ties to Ukraine,” he said. “Sanctions can make it more difficult and costly for Putin to suppress dissent at home.”

The Times