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The West's bid to collapse Russia's economy (analysis)

2022-03-01T21:54:43.393Z


The West has responded with a round of punitive sanctions. The latest one is designed to collapse Russia's economy.


Sixth day of invasion of Ukraine: sanctions hit Russia 1:28

London (CNN Business) --

The West has responded to Russia's invasion of Ukraine with a round of punitive sanctions.

The latest of these is designed to provoke a banking crisis, overwhelm Moscow's financial defenses and plunge the Russian economy into a deep recession.

Never before has an economy with Russia's global importance been subject to sanctions of this level, according to analysts, who say there is now a high risk that Russia faces a financial crisis that could bring its biggest banks to the brink of collapse. .

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Western officials have described their campaign as an economic war aimed at punishing President Vladimir Putin and turning the country he leads into an international pariah, even if it takes years for sanctions to destroy the defenses of Russia's "protected economy." .

"We will cause the collapse of the Russian economy," French Finance Minister Bruno Le Maire told a local news channel on Tuesday.

Russia's status as a global supplier of energy will make that mission even more difficult.

Europe gets nearly 40% of its natural gas and 25% of its oil from Russia, and any disruption to those exports would cause already high world prices to rise further.

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How the West fights

Putin's invasion of Ukraine has received an unprecedented response from the United States, the United Kingdom, the European Union, Canada, Japan, Australia and other countries.

Even Switzerland, famous for its neutrality and banking secrecy, has agreed to impose sanctions on Russia.

The West has cut off direct access to the US dollar for Russia's two biggest banks, Sberbank and VTB.

It has also taken steps to remove some Russian banks from SWIFT, a global network that connects financial institutions and facilitates fast and secure payments.

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The coalition is trying to prevent Russia's central bank from selling dollars and other foreign currencies to defend the ruble and its economy.

In all, nearly $1 trillion in Russian assets have now been frozen by sanctions, according to Le Maire.

"Western democracies have surprised many by pursuing a strategy of exerting intense economic pressure on Russia by effectively isolating it from global financial markets," Oliver Allen, markets economist at Capital Economics, said in a research note.

"If Russia continues on its current path, it is quite easy to see how the latest sanctions could be just the first steps in a severe and lasting severing of Russia's financial and economic ties with the rest of the world," he added.

Western countries have ruled out sending troops to fight in Ukraine, leaving sanctions as the primary means of challenging Russia.

The measures could wipe out up to 6% of Russia's Gross Domestic Product, according to Oxford Economics.

"Our strategy, in a nutshell, is to make sure that the Russian economy regresses while President Putin decides to go ahead with his invasion of Ukraine," a senior US administration official told reporters.

Russia's "protected" economy

The possible scenarios for the Russian economy after the invasion of Ukraine 3:34

Since 2014, when the United States and its Western allies imposed sanctions on Moscow following its annexation of Crimea and the downing of Malaysian Airlines Flight 17, Putin has been trying to protect Russia's $1.5 trillion economy, the 11th largest in the world. of the world.

Moscow has tried to wean its oil-dependent economy off the dollar, limiting public spending and hoarding foreign currencies.

Putin's economic planners have also sought to boost domestic production of certain goods by blocking equivalent products from abroad.

Meanwhile, Russia's central bank has amassed a $630 billion war chest in reserves that includes foreign currencies and gold, a huge sum compared to most other countries.

Those defenses are being severely tested.

The sanctions have crippled roughly 50% of Russia's foreign reserves, according to Capital Economics.

"The external conditions of the Russian economy have changed dramatically," the Russian central bank said on Monday, announcing that it would roughly double interest rates to 20%.

"This is necessary to support price and financial stability and protect citizens' savings from depreciation," the bank added.

Russia is also imposing capital controls.

The central bank ordered companies to sell foreign currency on Monday to prop up the ruble, which slumped to a record low against the US dollar.

And Putin is planning a decree that would temporarily bar foreign companies and investors from selling Russian assets, which have become toxic to many since the invasion.

"Russia's $600 billion-plus war chest of foreign reserves is only powerful if Putin can use it," a senior Biden administration official told reporters.

What will happen next

All eyes are on the Russian financial system.

There were reports over the weekend of Russians lining up to withdraw cash from ATMs, raising the possibility of a bank run in the country.

Russian banks, already the main target of sanctions, could come under even more pressure if borrowers are unable to repay loans as the inevitable recession hits businesses and households.

Liam Peach, emerging markets economist at Capital Economics, said Russian banks could be forced to respond by selling assets, likely cheaply.

Credit could be in short supply, further worsening the economic pain of sanctions.

"The increase in Western sanctions over the weekend has left Russian banks on the brink of crisis," Peach said.

One of the first casualties was the European subsidiary of Sberbank, Russia's largest lender that has been sanctioned by Western allies.

The European Central Bank said on Monday that Sberbank Europe, including its branches in Austria and Croatia, was bankrupt, or likely would be, due to "significant deposit outflows" caused by the crisis.

Another problem is that Russian banks only have enough foreign cash on hand to cover about 15% of the foreign currency deposits on their books.

The central bank would normally provide banks with foreign currency, but with half its war chest off limits, it may not be able to do so, while also defending the ruble.

The central bank could be under pressure for months or even years.

Thanks to oil and gas, the value of Russia's exports far exceeds imports, and payments to the country are a major source of foreign exchange.

But investors and companies could try to move large amounts of foreign cash out of the country as the ruble falls, forcing the central bank to spend up to $100 billion of its available reserves this year, according to Capital Economics.

At the same time, the West could take even tougher measures.

The United States and its allies could remove more Russian banks from SWIFT and further restrict their access to dollars and euros, according to the Institute of International Finance.

They could also cut off Russian energy exports, though that would send prices skyrocketing.

A further escalation of the economic conflict could have important consequences.

"Don't forget that in the history of mankind, economic wars often turned into real wars," former Russian President Dmitry Medvedev said Thursday in response to Le Maire's comments.

Economy Russian invasion of Ukraine

Source: cnnespanol

All news articles on 2022-03-01

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