Will crippling Russian economy stop Putin?

A week since Russian forces invaded Ukraine; President Vladimir Putin's economy is feeling the effects of global condemnation. Matthew Boesler reports in Bloomberg Businessweek today, the world has weaponized finance to punish Russia, slapping it with sanctions and limiting its access to capital and currency.

That leaves the country facing what Bloomberg Economics calls “four intersecting crises”, which they predict will unite to tip Russia into a deep recession and cool growth elsewhere.

Crisis 1: A bank run provoked by concern over the safety of deposits

Crisis 2: A credit crunch as lenders retrenches amid losses

Crisis 3: A freefalling ruble amid the freezing of reserves, diminished trade and a rush to safety

Crisis 4: A debt default as assets held abroad are frozen and Russia retaliates

 Just how much pain there will be is hard to say, but this chart shows the implications of each shock:

“Historical comparisons illustrate the difficulty of making a precise estimate of the impact on Russia’s economy,” said Bloomberg economists Scott Johnson, Jamie Rush and Tom Orlik. “What’s clear is that it will be big.”

Capital Economics reckons Russia’s gross domestic product will slide to become the 14th-largest economy from 11th.

The National Institute for Economic and Social Research of UK estimates the conflict could knock US$1 trillion off the value of the world economy and add 3% to global inflation. 

There will also likely be new chapters especially given it's hard to tell how long the conflict will last. Foreign governments may ultimately impose curbs on energy exports and Russia may slow the supplies itself. China could become a backdoor source of money. Moscow also has US$150 billion of external debt due in the next 12 months, which it may choose not to pay.

As for the rest of the world, Bloomberg Economics says Eastern Europe will be especially hurt, while US$120 oil will pose a material hit to growth in the euro-area. Central banks will face even more complicated choices.

For now though, the people of Russia appear more resigned than panicked, as this story from Moscow shows.

Many Russians, who have seen numerous bank runs over the last three decades, are for now approaching the descending hardship with fatalism. 

“As strange as it sounds, in general there’s no panic at stores or ATMs,” said Elmira, who works in education in Ufa in the Urals region. She declined to give her last name.

“There’s clearly no easy solution, but I wasn’t about to run and buy up EUR or US$ or get something just to spend money,” she said.

 

United States to sanction Russian banks

President Joe Biden on Thursday said the United States would sanction major Russian banks and impose export controls on Russia to curtail Russian high-tech imports as part of a coordinated effort with allies to penalize the Kremlin for its military attack against Ukraine. 

However, the latest round of sanctions did not move to kick Russia out of the SWIFT international banking system, despite pleas from Ukraine and some members of Congress.

Biden condemned Russian President Vladimir Putin for ordering the attack against Ukraine and said that his actions would cost Russia dearly’.

“Putin is the aggressor. Putin chose this war, and now he and his country will bear the consequences,” Biden said. 

“Putin will be a pariah on the international stage,” Biden said later. 

Biden said the sanctions would target Russian banks holding a combined US$1 trillion in assets, including Russia’s two largest financial institutions, Sberbank and VTB Bank. He said the US would also impose sanctions on additional Russian elites with links to the Kremlin.

The Treasury Department said in a release that the administration would impose sanctions on VTB and Sberbank, cutting them off from processing payments through the US financial system.

The Biden administration is also imposing sanctions on three other Russian financial institutions: Otkritie, Novikom and Sovcom. 

The sanctions also target 10 Russian individuals, including those close to Putin and elites working in the financial sector, according to the Treasury Department. 

The export controls will restrict Russia’s ability to import sensitive US technology – like semiconductors, lasers, and sensors – and particularly target Russia’s defense, aviation, and maritime sectors, according to a White House fact sheet. Biden said that the restrictions, coupled with actions by European allies, would cut off more than half of Russia’s high-tech imports. 

 “It will be a major hit to Putin’s long-term strategic ambitions,” Biden said.

 “I will not be diplomatic on this. Everyone who now doubts whether Russia should be banned from SWIFT has to understand that the blood of innocent Ukrainian men, women and children will be on their hands too,” Ukraine’s foreign minister, Dmytro Kuleba, tweeted in advance of Biden’s remarks.

Biden cited concerns among some European allies about taking that step but argued the penalties being put in place were severe enough to make a difference. He indicated that kicking Russia out of the system could be a possibility in the future. 

“The sanctions we imposed exceed SWIFT,” Biden said in response to a reporter’s question about excluding the penalty. “The sanctions we imposed exceed anything that’s ever been done. The sanctions we imposed have generated two-thirds of the world joining us. They are profound sanctions. Let’s have a conversation in another month or so to see if they’re working.”

Nor did the sanctions package target the Russian oil or natural gas industries, which are major drivers of the Russian economy. European countries are dependent on Russia for gas.

White House Deputy national Security Adviser Daleep Singh told reporters at a briefing later Thursday that the administration intentionally scoped the sanctions to deliver a severe impact on the Russian economy while minimizing impact on the US and European allies.  

He said the administration would not do anything that causes an unintended disruption in global energy markets, including the flow of gas from Russia to the world.  

The Biden administration also announced plans to impose sanctions on individuals and entities in Belarus, accusing the nation of supporting and facilitating Russia’s invasion of Ukraine.

Biden made the announcement of new sanctions as the Russian assault on Ukraine was very much underway.

On Putin’s orders, the Russian military attacked Ukraine from multiple directions overnight Wednesday. The Pentagon has warned that the assault is only the first part of a multistage invasion.

“It is likely that you will see this unfold in multiple phases. How many? How long? We don't know. But what we're seeing are initial phases of a large-scale invasion,” a senior defense official told reporters on Thursday, before Biden spoke to the nation.

“They’re making a move on Kyiv,” the official said. 

The Biden administration has been working for weeks to develop a comprehensive sanctions package in the event of a Russian invasion, threatening harsh penalties as a means of deterring Moscow from launching a renewed invasion of Ukraine. 

But the threats, coupled with US and European diplomatic overtures, did not convince Putin to deescalate the situation. 

Biden imposed a first tranche of sanctions after Putin recognized two regions in eastern Ukraine as independent earlier this week.

Biden said Thursday it would take time for Putin to feel the economic pain of the penalties and suggested that it could cause the Russian leader to change course on his military campaign.

“He’s going to begin to see the effect of the sanctions,” Biden said. “It will so weaken his country that he’ll have to make a very, very difficult choice as to whether to continue to move toward being a second-rate power or, in fact, respond."

Biden condemned the assault in a statement late Wednesday, but his comments Thursday were his first extended remarks on the events unfolding in Eastern Europe. 

The announcement of new sanctions mirrored penalties unveiled by British Prime Minister Boris Johnson roughly an hour before Biden’s address. 

The White House has been closely coordinating with allies on the response to Russia’s military buildup and subsequent invasion of Ukraine.

 “Our actions, taken in coordination with partners and allies, will degrade Russia’s ability to project power and threaten the peace and stability of Europe,” Treasury Secretary Janet Yellen said in a statement Thursday afternoon.

“We are united in our efforts to hold Russia accountable for its further invasion of Ukraine while mitigating impacts to Americans and our partners.  If necessary, we are prepared to impose further costs on Russia in response to its egregious actions.”