The Times Australia
The Times World News

.
The Times Real Estate

.

Russian sanctions are biting harder than it could have imagined, and it'll get worse

  • Written by Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University
Russian sanctions are biting harder than it could have imagined, and it'll get worse

It was only on Sunday that I wrote about the radical escalation[1] in the economic and financial side of the war between Russia and Ukraine.

That was before the financial markets opened on Monday, and before Russia had a chance to respond.

But even by then – early Sunday morning Moscow time – enormous lines had begun to form at Russian automatic teller machines[2] with many running dry, and reports had begun to emerge of Russians swarming luxury retailers to swap their rubles for anything that might retain its value.

These were the beginnings of what is sure to be the most significant financial crisis in Russia since the 1998 Russian financial crisis[3] which brought it to its knees.

So damaged was the Russian economy following that event that the Russian government would eventually ask the International Monetary Fund for food aid[4].

1998 on steroids

The 1998 crisis triggered massive capital flight[5], a sharp devaluation of the ruble, default on public debt, hyperinflation, and a huge increase in interest rates.

It was devastating, and left Russia’s global financial reputation in tatters.

The parallels in the last few days have been striking. When foreign markets opened on Monday, the ruble immediately fell more than 30%[6] to record lows after foreigners began desperately selling out of Russia.

Read more: 'Just short of nuclear': these latest financial sanctions will cripple the Russian economy[7]

Perhaps the most devastating measure is the freezing[8] of at least half of the Bank of Russia’s foreign exchange reserves held by the central banks of cooperating nations. This is the war chest Russia built up with great discipline over many years precisely to guard against sanctions.

Central banks are typically treated as off-limits for sanctions – sacrosanct, if you will. Russia presumably thought so.

Freezing reserves no longer off-limits

Moscow Stock Exchange is now closed. drserg/shutterstock

But just as Russia seems to have underestimated the will of the Ukrainians to fight militarily, it also seems to have underestimated the will of the West to fight financially.

Without the ability to use those foreign reserves to support the ruble, Russia was forced to revert to a range of desperate measures.

The Moscow stock exchange was kept closed[9] on Monday and is yet to reopen. After all, you can’t have a market crash if the market never opens.

Russia more than doubled[10] its key central bank interest rate, lifting it from 9.5% to 20%.

This might seem curious amid an economic crisis.

But when your currency is in freefall because people are dumping it, you need to provide a very big financial incentive for people to hold onto it, including by paying higher interest rates on the remaining rubles in savings accounts.

Economy tanking, yet higher rates

The higher rates immediately flowed through to higher mortgage rates for ordinary Russians – the last thing an economy on the brink needs – as well as to loans funding business investment.

This is the diabolical conundrum Russia faces as it’s hit with a financial crisis with at least one hand tied behind its back by the West.

Russia also banned Russians[11] from buying Russian assets from foreigners, to stop foreigners bailing out of Russia. It required every Russian firm to convert 80%[12] of its foreign earnings into rubles – essentially confiscating foreign dollars to use in lieu of its own frozen foreign reserves.

Read more: How disrupted Russian gas supplies will hit global and Australian prices[13]

And, most recently and most worryingly, it has halted interest payments[14] on three trillion rubles (US$27 billion) in Russian government debt held by foreigners.

Another way to put that is the Russian government is now in default.

That makes one thing certain: there is no going back for Russia now. The damage will be permanent.

Ultimately, each of Russia’s moves is intended to rebuild foreign currency holdings inside Russia. Even with the sanctions, Russia receives billions each day in foreign earnings on the exports still permitted including oil, gas and wheat.

Russia’s goal is to hoard that cash and rebuild its war chest, giving it more room to manoeuvre. Given that US$300 billion[15] of reserves are frozen, this will take time.

How long before collapse?

While the West has made efforts to exempt energy from the sanctions, the interconnectedness of global financial markets and jittery participants fearful of inadvertently falling foul of sanctions have already seen energy deals disrupted.

Contracts for future Russian oil supply are failing to sell, even at sharp discounts.

This raises the key question Western leaders are asking right now: how long can the Russian economy – and thereby its people, and its leadership – survive?

It’s a confounding irony that just as the Russian army encircles Ukrainian cities in a bid to besiege them, Western governments have encircled the Russian economy in a bid to besiege it.

More draconian measures likely

Despite everything Russia has thrown fighting the sanctions so far, the ruble remains 26%[16] below its level last week and 32% below its level a month ago.

It seems likely that to properly stabilise its financial system it will need more draconian measures – such as bans on bank withdrawals and rationing. They will do even more damage to the economy than 20% interest rates and sanctions.

Is this degree of economic damage enough to get Russia to change course in Ukraine? Can the Ukrainians hold on long enough that the economic costs to Russia become unsustainable?

Read more: US-EU sanctions will pummel the Russian economy – two experts explain why they are likely to stick and sting[17]

If necessary, will the West be willing to double down, and really put some skin in the game by limiting their purchases of Russian oil and gas?

That could well be the nail in Russia’s coffin – but also highly damaging to the European and global economy. Only time will tell.

References

  1. ^ radical escalation (theconversation.com)
  2. ^ automatic teller machines (www.cnbc.com)
  3. ^ 1998 Russian financial crisis (economics.rabobank.com)
  4. ^ food aid (www.econcrises.org)
  5. ^ capital flight (www.imf.org)
  6. ^ 30% (www.cbsnews.com)
  7. ^ 'Just short of nuclear': these latest financial sanctions will cripple the Russian economy (theconversation.com)
  8. ^ freezing (ec.europa.eu)
  9. ^ closed (www.bloomberg.com)
  10. ^ more than doubled (www.marketwatch.com)
  11. ^ banned Russians (www.reuters.com)
  12. ^ 80% (www.reuters.com)
  13. ^ How disrupted Russian gas supplies will hit global and Australian prices (theconversation.com)
  14. ^ halted interest payments (www.reuters.com)
  15. ^ US$300 billion (www.aspistrategist.org.au)
  16. ^ 26% (www.reuters.com)
  17. ^ US-EU sanctions will pummel the Russian economy – two experts explain why they are likely to stick and sting (theconversation.com)

Read more https://theconversation.com/russian-sanctions-are-biting-harder-than-it-could-have-imagined-and-itll-get-worse-178322

The Times Features

Understanding the Dangers of Ignoring a Gas Leak

Gas leaks are silent threats lurking within both homes and workplaces. A gas leak occurs when natural gas or any other gaseous substance escapes from a pipeline or containment. T...

Can You Sell Your House Privately in Queensland? Here’s How

Selling a house privately in Queensland is entirely possible and can be a cost-effective alternative to using a real estate agent. While agents provide valuable expertise, their co...

Itinerary to Maximize Your Two-Week Adventure in Vietnam and Cambodia

Two weeks may not seem like much, but it’s just the right time for travelers to explore the best of Vietnam and Cambodia. From the bustling streets of Hanoi to the magnificent te...

How to Protect Your Garden Trees from Wind Damage in Australia

In Australia's expansive landscape, garden trees hold noteworthy significance. They not only enhance the aesthetic appeal of our homes but also play an integral role in the local...

Brisbane Homeowners Warned: Non-Compliant Flexible Hoses Pose High Flood Risk

As a homeowner in Brisbane, when you think of the potential for flood damage to your home, you probably think of weather events. But you should know that there may be a tickin...

Argan Oil-Infused Moroccanoil Shampoo: Nourish and Revitalize Your Hair

Are you ready to transform your hair from dull and lifeless to vibrant and full of life? Look no further than the luxurious embrace of Argan Oil-Infused Moroccanoil Shampoo! In a...

Times Magazine

"Eternal Nurture" by Cara Barilla: A Timeless Collection of Wisdom and Healing

Renowned Sydney-born author and educator Cara Barilla has released her latest book, Eternal Nurture, a profound collection of inspirational quotes designed to support mindfulness, emotional healing, and personal growth. With a deep commitment to ...

How AI-Driven SEO Enhancements Can Improve Headless CMS Content Visibility

Whereas SEO (search engine optimization) is critical in the digital landscape for making connections to content, much of it is still done manually keyword research, metatags, final tweaks at publication requiring a human element that takes extensiv...

Crypto Expert John Fenga Reveals How Blockchain is Revolutionising Charity

One of the most persistent challenges in the charity sector is trust. Donors often wonder whether their contributions are being used effectively or if overhead costs consume a significant portion. Traditional fundraising methods can be opaque, with...

Navigating Parenting Arrangements in Australia: A Legal Guide for Parents

Understanding Parenting Arrangements in Australia. Child custody disputes are often one of the most emotionally charged aspects of separation or divorce. Parents naturally want what is best for their children, but the legal process of determining ...

Blocky Adventures: A Minecraft Movie Celebration for Your Wrist

The Minecraft movie is almost here—and it’s time to get excited! With the film set to hit theaters on April 4, 2025, fans have a brand-new reason to celebrate. To honor the upcoming blockbuster, watchfaces.co has released a special Minecraft-inspir...

The Ultimate Guide to Apple Watch Faces & Trending Wallpapers

In today’s digital world, personalization is everything. Your smartwatch isn’t just a timepiece—it’s an extension of your style. Thanks to innovative third-party developers, customizing your Apple Watch has reached new heights with stunning designs...

LayBy Shopping