It was March 2022. The Russian ruble collapsed and the value of Russian giants Gazprom and Sberbank in London plummeted by 97%.
Long queues began to form at ATMs in Moscow. In Western countries, oligarchs have had their yachts, football teams, mansions and even credit cards confiscated. Russia entered a major recession.
This was the immediate result of the West’s most aggressive attempt to financially contain Russia after the invasion of Ukraine, through economic embargoes.
Among the most important measures were the confiscation of the Russian state’s official foreign currency assets and the unprecedented freezing of the central bank’s reserves of US$300 billion.
Western governments avoided using phrases like “economic war,” but there was certainly a kind of financial battle against the Kremlin. This type of confrontation was a better alternative than direct conflict between nuclear states.
Almost two years have passed and a major change has occurred in this economic context.
In a long and rambling interview this week, Russian President Vladimir Putin boasted that Russia is the fastest-growing economy in Europe.
Last week, the International Monetary Fund (IMF) highlighted the strength of the Russian economy by increasing its growth forecast for the country this year from 1.1% to 2.6%.
According to IMF data, the Russian economy grew faster than the entire G7 last year and will continue to do so in 2024.
It’s not just about numbers.
The stalemate in Ukraine and the growing expectation of a long conflict were sustained by the remobilization of the Russian economy towards the military effort, especially in the construction of defensive fronts in eastern and southern Ukraine. nia.
Will Russia be able to sustain this growth?
Western leaders say this model is completely unsustainable in the medium term. But the question is: how long can it be sustained?
Russia turned into a mobilized war economy. The Russian state is spending record amounts in the post-Soviet Union era.
Military and security expenses, which represent up to 40% of the budget, returned to the same levels as at the end of the USSR. Other areas of the state budget earmarked for services to the population were reduced to compensate for funding for the production of tanks, missile systems and defenses in occupied Ukraine.
Furthermore, despite Western embargoes on Russian oil and gas, hydrocarbon revenue streams continued to flow into Russian state coffers.
Russian oil tankers now head to India and China, and most payments are made in Chinese yuan rather than US dollars.
Russia’s oil production remains at 9.5 million barrels per day, slightly below the pre-war level.
The country circumvented the sanctions by purchasing and mobilizing a “parallel fleet” of hundreds of oil tankers.
Last week, the Russian Ministry of Economy announced that revenue from hydrocarbon taxes in January exceeded levels seen in January 2022, just before the invasion of Ukraine.
The continued flow of foreign currency into Russian oil, gas and diamonds has also helped ease tension on the value of the ruble.
Western leaders insist this situation is not sustainable, but recognize Russia’s current success.
A world leader recently said in a private conversation: “2024 will be much more positive for Putin than we thought. He managed to reorganize his own industry more efficiently than we thought.”
Russia exposed
But this model of economic growth greatly increased Moscow’s dependence on revenues from oil, China and war spending.
When demand for oil and gas peaks and competing production from the Persian Gulf increases next year, Russia’s economy will be exposed to trouble.
The increases seen in the Gross Domestic Product (GDP) resulting from the production of war equipment are also far from being productive.
And Russia suffered a brain drain from the war.
The Western strategy has not been to directly attack the Russian economy, but to create a kind of “cat and mouse” game, trying to restrict its access to technology, increase its costs, limit their revenues and make the conflict unsustainable in the long term.
“We would rather Russia use its money to buy tankers than tanks,” a US official told me. In the oil market, the political objective is not to try to prevent India, for example, from buying Russian oil, but to limit the profits from this trade, so that they do not feed the Kremlin’s war machine. .
Frozen assets
Attention now turns to the central role of frozen Russian financial assets.
Ukrainian President Volodymyr Zelensky told me last month: “If the world has $300 billion (in frozen Russian assets), why not use it?” All these frozen funds should be used ​​to finance Ukraine’s reconstruction efforts, he said.
UK Economy Minister Jeremy Hunt and Foreign Affairs Minister David Cameron support this idea.
Cameron told me: “We froze these assets. The question is: are we going to use them?”
Cameron said that “using some of this money now would be an advance on (Russian) reparations” for the illegal invasion of Ukraine, and could be used “to help Ukraine and at the same time save the money of Western taxpayers.”
The G7 asked the presidents of their central banks to prepare a technical and legal analysis on the matter.
A source in the financial market told me that there are risks of turning the dollar into a kind of weapon.
One plan under discussion envisages the use of investment funds to raise billions of dollars for Ukraine.
But everything is very delicate. If Russian assets are confiscated in this way, what message would be sent to other nations, perhaps in the Gulf, Central Asia or Africa, about the safety of their reserves in Western central banks? These relationships are central to the global financial system.
Putin certainly tries to highlight that China is emerging as an alternative, if not to the West, at least to emerging economies.
The Russians have also indicated that they will take legal action against any asset seizures and will seize assets of Western companies frozen in Russian banks.
The battle over Russia’s economy is essential to understanding the direction of this conflict and the global economy.
Russia’s war economy may not be sustainable in the long term, but it has bought the country some additional time. The West is about to increase the pressure after Russia showed this unexpected resistance.
The precise form of this financial escalation will have consequences that go far beyond Russia and Ukraine.
2024-02-24 19:47:56