‘Massive’, ‘enormous’, ‘maximum pain’, ‘severe’, ‘immediate’: the West is at a loss for words to describe the sanctions package that is brewing if Russia decides to attack using part of the 100,000 men massed near Ukraine.
With NATO and the United States having ruled out sending their own soldiers to Ukraine, economic sanctions and restrictions on officials – including, possibly, Vladimir Putin – are all they have.
A new set of sanctions could include a ban on Russian banks from exchanging dollars, a ban on US high-tech exports, including iPhones, to Russia, disconnecting Russia from the Swift bank transfer system and even the travel ban for President Putin.
But Mr. Putin is unlikely to be scared; he’s been preparing for it, after all, for years.
The Crimea Effect
Russia first faced Western sanctions in 2014 after annexing Ukraine’s Crimean peninsula and stoking a separatist conflict in eastern Ukraine by supplying rebels with arms and, occasionally, troops.
The ruble fell, economic growth faltered, but prudent macroeconomic and monetary policy helped the Kremlin stay afloat and even set aside billions of its oil revenues for a bad weather fund.
Russia launched its own payment system, Mir, in 2015 after several private banks linked to close friends of President Putin were no longer able to process Visa and MasterCard due to Western sanctions.
Mir cards have since become the default payment method for anyone receiving an old-age pension or benefits in Russia, and unlike MasterCard or Visa, Mir is accepted in Crimea.
A recent opinion poll showed that half of the Russian population has a Mir card.
Faced with a long-standing threat of being kicked out of the Swift international bank transfer system, Russia has also developed a local system to duplicate it.
The new system currently only covers Russian institutions and a handful of foreign banks, but is generally operational, Russian Foreign Minister Sergey Lavrov boasted in parliament on Thursday, commenting on Russia’s longstanding efforts to economic self-sufficiency.
Dedollarization
The Kremlin has also been working to “de-dollarize” the Russian economy, urging state-owned companies to trade with foreign partners in local currencies and gradually reduce the dollar’s share in its fund for bad weather. In June, Russia’s finance minister said that all dollar investments in the National Social Welfare Fund would be replaced with euros and gold.
Besides replicating the global financial infrastructure, the Kremlin has economized.
Earlier this month, Russia’s National Social Welfare Fund reached 13.6 trillion rubles (£127bn), or 12% of its annual GDP, twice as much in rubles as Russia’s two main funds. combined before the annexation of Crimea.
Russia also holds the fourth largest foreign currency reserves in the world, at around $630 billion.
The Kremlin has even drawn criticism at home for refusing to dip into its rainy day reserves to help individuals and businesses affected by the Covid-19 pandemic.
Being too stingy, however, may have been an intentional policy.
“There are only two things that are required of finance leaders in Russia: to save as much as possible and to prepare the tools to adapt the economy to the shock of the new sanctions,” said Tatyana Stanovaya, head of political analysis R .Politik. solidify.
“They have been preparing for a long time for Russia to live under sanctions. In the [Kremlin’s] Logically, whatever they do, the worst kinds of punishment are inevitable.
“Nuclear options” such as closing Russian Swift banks and banning Russian banks from trading in dollars will certainly trigger a sell-off in the Russian stock market and spur ruble devaluation, but none of these options will leave the market. Russia. economy “in tatters”, as predicted by former US President Barack Obama.
But political leaders on both sides of the Atlantic – and particularly in Europe – are showing themselves unwilling to cut all trade ties with Russia, which would seriously harm the global economy.
Oil, gas and China
The US designation of Russian billionaire tycoon Oleg Deripaska and his companies, including Rusal, the world’s largest aluminum producer, in 2018 showed that some people may be too big to be punished.
Several months after targeting Mr. Deripaska, the US Treasury Department essentially bowed to market pressure and agreed to remove Rusal from the sanctions list while Mr. Deripaska agreed to divest his majority stake in Rusal and other companies.
“Russia is deeply integrated into the global economy, so the question is: will Europe or the United States be ready to stop buying Russian oil and gas? said Maria Shagina, visiting scholar at the Finnish Institute of International Affairs.
“Even if the West targeted Russian oil and gas, where would they find so much gas? And if they were to turn off Swift for Russia, how are they going to pay for that gas? »
As tensions with the West escalated, President Putin held a televised video call with Xi Jinping.
China may not have joined other countries in slapping Russia over Crimea, but neither has its companies rushed to invest in the annexed peninsula, nor has Beijing acknowledged the claim of Russia on this one.
“A war with Ukraine would be extremely unpopular domestically, and severing relations with the West would put Russia at the mercy of China,” said Kadri Liik, senior policy researcher at the European Council on Foreign Relations. “I find it hard to think that the Kremlin is ready for this. They want a rapprochement with China, but on their terms.
A badge of honor
Russian officials who have faced visa bans and asset freezes abroad have worn them over the years as a badge of honor, and Kremlin officials have dismissed Western restrictions as blackmail which will never make Russia change course.
The share of Russians who say they worry about Western sanctions has halved since 2014, according to a poll conducted Thursday by the Levada Center.
Asked about a US threat of sanctions against President Putin personally, Dmitry Peskov, his spokesman, described such a decision as “not painful but politically damaging” for those who would impose them.
Many members of the Russian establishment, including prominent businessmen and financial officials, may be genuinely worried about the prospect of war, but they have little to say about the incursions. of President Putin’s foreign policy.
“For the part of the Russian establishment that makes the decisions – Putin and his allies in the security services – the sanctions have no effect on the politics of Russia and could even be seen as a positive factor, cultivating a mentality of besieged fortress,” Ms Stanovaya said.
“For them, sanctions are the inevitable and necessary cost to keep Russia safe as they see it.”
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