Beaten by economic sanctions, Putin’s Russia struggles to remain solvent

Battered by the toughest economic sanctions ever imposed on an industrialized country, the Russian currency hit a record high of 118 rubles to the US dollar on Thursday March 3, underscoring the Kremlin’s struggles to remain solvent as its invasion of the Ukraine is stagnating.

The value of the ruble has fallen by 30% since the start of the Russian military offensive on February 24. The currency is the victim of a global economic war against the Kremlin which has severed Moscow’s ability to prop up its failing currency, pay its debts to lenders and shore up an economy on the verge of collapse.

With its reserves of foreign cash frozen as it is increasingly isolated from global capital markets and boycotted by the biggest foreign corporations, Vladimir Putin’s Russia is today a financial pariah, even its vast oil production. crude oil and natural gas is increasingly shunned by buyers.

A Russian airstrike hits the TV tower in Kiev, Ukraine, Tuesday, March 1, 2022. Debris fell on the site of Babyn Yar, where tens of thousands of Jews were massacred during the Holocaust. Officials said the attack killed seven people and injured 24 others. Photo by the Ukrainian Defense Ministry.

On Thursday, the International Energy Agency, a consortium of European Union countries, Japan and South Korea, announced a 10-point plan to wean their countries off Russian oil and gas, reducing d a third of their imports over the next year. In 2021, the EU alone imported 155 billion cubic meters of natural gas from Russia; this represents almost 40% of the EU’s total gas consumption.

“No one has any illusions anymore. Russia’s use of its natural gas resources as an economic and political weapon shows that Europe must act quickly to be ready to face considerable uncertainty over the supply of natural gas. Russian gas next winter,” IEA Executive Director Fatih Birol said in a prepared statement.

Liquid natural gas shipments from Qatar and the United States are expected to help fill the gap. On Thursday, the Dutch gas benchmark price for the first month hit a record high of around $220 per megawatt-hour.

But perhaps the biggest blow came only two days into the war, when the leaders of the European Union, Canada and the United States dumped what French Finance Minister Bruno The Mayor, called “the financial nuclear weapon” on the biggest Russian banks – tearing them away from the Belgian bank. Society for Worldwide Interbank Financial Telecommunication, the main courier service used by banks to transfer money across borders.

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The Swedish tanker Fure Ven, moored alongside Talleyrand Marine Terminal, uses liquefied natural gas as fuel in Jacksonville, Fla., Sept. 8, 2020. U.S. Coast Guard Photo.

“Every day gets harder for Russians who don’t have access to dollars or euros,” said Christopher Swift, a former regulator at the US Treasury Department’s Office of Foreign Assets Control, where he enforced sanctions targeting foreigners. Rogue states, terrorist syndicates and weapons. proliferators. “Their rubles become worthless. The banks are closed. It’s starting to look as bad as the Weimar Republic, but you can’t even get your money out.

“People are watching the economy collapse around them. Putin offered to ensure economic and political stability, and in return the Russian people had to accept his leadership as an autocrat. This social contract is rapidly breaking down.

On Wednesday, ratings services Moody’s and Fitch downgraded Russia’s sovereign credit rating to junk status. Their warnings to global investors about the slump in the Russian economy followed the decision by the London Stock Exchange’s FTSE Russell and US financial giant MSCI to remove all Russian stocks from their index funds.

On the London Stock Exchange on Thursday, three of Russia’s biggest companies – energy giants Gazprom and Lukoil and state-owned loan company Sberbank – were pared down to penny stocks. The Moscow Stock Exchange remains closed by order of the Putin administration.

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Ukraine’s Defense Ministry says its forces shot down three Russian jets and two helicopters on Wednesday, March 2, 2022. Photo by Ukraine’s Defense Ministry.

According to a statement prepared by Fitch, the post-invasion fallout will weaken Russia’s public finances, limit its ability to respond to the worsening economic crisis and “significantly reduce” its gross domestic product while increasing “risk and national and geopolitical uncertainty”.

Nearly a third of Russia’s frozen foreign exchange reserves are in euros, while dollars make up 16% of holdings. Fitch estimated that dollars accounted for a quarter of all foreign-dominated Russian accounts. Normally, around 84% of Russian exports are traded in euros or dollars, which means its companies are now struggling to find the hard currency needed to pay for what they import or export.

To combat hyperinflation, Russia’s central bank raised its interest rate to a record 20% from 9.5% and announced capital controls to keep hard currencies inside the country.

“The external conditions of the Russian economy have changed dramatically. The increase in the policy rate will ensure that deposit rates rise to the levels needed to compensate for the increased risks of depreciation and inflation,” read a statement issued by Russia’s central bank on Monday. “This is necessary to support financial and price stability and protect citizens’ savings against depreciation.”

A parade of leading companies from around the world left Russia, stopped buying or selling goods and services to the nation, or suspended trade there. Even though Russia can find hard currency, it is becoming increasingly difficult for the country’s agencies and companies to buy information technology hardware and software, fly and maintain airliners. , unloading shipping containers, procuring automobiles, using credit cards, or accessing the insurance and reinsurance market. to mitigate risk.

In Moscow on Thursday, the Kremlin-controlled Tass news agency published a statement by the head of the foreign intelligence service, Sergei Naryshkin, lambasting the expansion of government and private sector sanctions against Russia.

“The masks were thrown away,” Naryshkin said. “The West is not just trying to put a new ‘iron curtain’ around Russia. [We] can talk about the attempts to destroy our state or to “cancel” it as we are now used to saying in the “tolerant” liberal-fascist environment.

“Since the United States and its allies have neither the ability nor the courage to attempt to do so in an open and honest military and political confrontation, underhanded methods are being used to establish an economic, informational and humanitarian blockade,” said the spy chief. continued. “The most disgusting thing is that this is done under the false slogans of the need to protect Ukraine’s sovereignty and European security.”

As a member of Putin’s inner circle, Naryshkin has been personally targeted by US Treasury sanctions since 2014.

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Ukrainian Foreign Minister Dmytro Kuleba released photos Thursday, March 3, 2022, which appeared to show the widespread devastation of residential neighborhoods by Russian strikes in Borodyanka, a town northwest of Kyiv. Photo by Ukrainian Ministry of Foreign Affairs.

Former US Treasury watchdog Swift, now a partner and litigator at the Washington, DC-based law firm Foley & Lardner LLC, finds himself “on a war footing” thanks to Putin cronies like Naryshkin. He’s often on the phone, not just with customers scrambling to get on the right side of the global sanctions regime, but also with Ukrainians ripping their servers out of the wall and fleeing before Russian tanks arrive.

“On Monday, the Russians woke up to find they were now on the same page as Syria, with sanctions synchronized between Europe, the United States and Asia,” Swift said. Coffee or Die Magazine. “They now face three possible outcomes in Ukraine. Russia wins the war but is a pariah state, economically, politically and militarily contained by the rest of the world. Russia loses the war in Ukraine and withdraws into itself, still isolated from the rest of the world. Or third, Russia loses and Putin tries to hold on to power until he is overthrown in a palace coup.

But Swift warned Americans against patience. Economic sanctions will not immediately prevent Russian artillery from bombing Ukrainian cities. The financial measures are just one more tool to be used to coerce the Kremlin to the negotiating table – or to pressure Putin’s security services to take him off the table.

“One of my fears is what happens when wars go on for a really long time,” Swift said. coffee or die. “If Ukraine falls and it becomes an insurgency, the only way Russia can try to retain power is through mass brutality. But this repression is radicalizing people, and you are starting to see the strange second and third order effects, as we have seen in Syria, Chechnya and Iraq.


Disclosure: The author of this article owns less than $1,000 in a Russian internet company, Yandex, representing approximately 1.5% of a global disruptive technology fund purchased before the invasion. Yandex has lost half of its market value over the past week.

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