It may take twelve hours to traverse the roads between Moscow and Kyiv, but suddenly the war in Ukraine has become a local story to Russians — economically. After the West belatedly took off the financial gloves and began conducting an economic war against Vladimir Putin over his attack on Ukraine, Russia finds itself teetering on the edge of a banking and investor collapse.
The ruble had already started falling as soon as Putin ordered hostilities to begin. Now it has almost entirely collapsed, touching off a run on the banks in Russia:
Less than a week after Russian President Vladimir Putin ordered his military to invade Ukraine, the ruble has plunged nearly 30% and the Bank of Russia has moved to defend the ruble and prevent a bank run.
“The bank more than doubled its key interest rate to 20%, the highest in almost two decades, and imposed some controls on the flow of capital,” Bloomberg’s Netty Idayi Ismail and Jana Randow report.
“At current levels the ruble’s slump is the biggest since 1998, the year the nation’s economy went into a tailspin and the government defaulted on its local debt.”
The bank run has already begun, Reuters reported this morning. And the ruble isn’t the only collapse in Russia’s financial firmament. Their stock market has also crashed, and today Russia declined to allow it to open:
The ruble collapsed against the dollar and the euro on the Moscow Stock Exchange on Monday as the West punished Moscow with harsh new sanctions over the Kremlin’s invasion of Ukraine. …
Russia’s central bank announced that it would not open share trading at the Moscow stock exchange on Monday “due to the situation that has arisen”. It said that it would make an announcement about trading for the next day by Tuesday morning.
The Kremlin acknowledged the impact on Monday, with spokesman Dmitry Peskov saying that “the Western sanctions are hard, but our country has the necessary potential to compensate the damage.”
Er … no, they actually don’t. If they had the potential to compensate for the financial damage of sanctions, they would have had those in place by now. Western countries may have dithered on getting serious with these sanctions, but they’ve been on the horizon for weeks. If Putin had the ability to “compensate” for the sanctions, he would have had those compensatory tactics and strategies in place long before now. Putin gambled that the West would fear his reprisals more than they feared his new phase of military aggression.
Those miscalculations appear to be ongoing. These sanctions still aren’t going as far as they could. The US and the EU could kick Russia completely out of SWIFT and force an end to their only substantial source of income — oil and natural gas sales. For now, the West has carefully scaled the SWIFT sanctions to allow Russia to keep its energy income, which arguably could send a signal of weakness to Putin. However, any further escalations from Russia could cut those funds off too and start a collapse in Russia not seen since Putin’s beloved Soviet Union crumbled under the weight of its financial delusions.
Russians aren’t buying Peskov’s happy talk either. They’ve seen this movie before. Twice:
Many Russians queued at ATMs over the weekend, seeking to withdraw ruble savings and exchange them for foreign currency before rates plunged further.
In the second largest city of Saint Petersburg, some 20 customers waiting outside a branch of Raiffeisen Bank Russia said they wanted to withdraw their cash.
“We went through all these cataclysms in 1998, so we have no trust in the authorities or in banks,” said Anton Zakharov, 45.
The only way to stanch the bleeding is to make money more expensive. Russia’s central bank doubled its interest rate, in a move that might stop inflation as shortages avalanche but has its own problems in the longer run:
As the day began, Russia’s currency lost as much as a quarter of its value within hours. Scrambling to stem the decline, the Russian Central Bank more than doubled its key interest rate, banned foreigners from selling Russian securities and ordered exporters to convert into rubles most of their foreign-currency revenues. It closed the Moscow stock exchange for the day because of the “developing situation.” …
Even as Russian and Ukrainian delegations met for talks at the Belarus border, Moscow’s military offensive showed no sign of letting up, and the hectic moves offered the first signs that the sanctions imposed on Russia by the West over the weekend were shaking the foundations of Russia’s economy. The decisions by the United States, Britain and the European Union restricting the Russian Central Bank’s access to much of its $643 billion in foreign currency reserves have undone much of the Kremlin’s careful efforts to soften the impact of potential sanctions.
And with dozens of countries closing their airspace to Russian planes, major foreign investors pulling out and the West placing debilitating restrictions on Russia’s biggest banks, it was becoming clear that Mr. Putin’s invasion of Ukraine was ushering in a period of international isolation for Russia unseen since the Cold War.
“So, has Russia become Venezuela or is it still Iran?” the morning-show host on the liberal-leaning Echo of Moscow radio station asked an economist on Monday.
“We’ll go through the Iran phase,” Yevgeny S. Gontmakher of Moscow’s Higher School of Economics responded, referring to sanctions placed on Iran because of its plans for uranium enrichment, “but what happens after that is hard to say.”
The problem with the new 20% interest rate and a bar on foreign currencies is that both will combine to put a huge drag on economic-growth activities. That’s a bad combination when you have effectively disconnected your economy from outside investment too. Putin’s oligarch support might have initially dreamed about the potential windfall profits from a new Russian empire, but now they have to wonder whether Putin will get forced into a new Soviet expropriation strategy in order to keep funding his military adventurism. He won’t get the necessary capital from the West any longer, and China’s probably not looking at Putin with as much enthusiasm after this debacle either.
We’ll talk more about Putin’s cease-fire talks with Ukraine in another post, but it’s becoming clear that Putin won’t have many choices left except to retreat. He’s in a worse position than his Soviet predecessors, having no ideological framework for this kind of collapse — no proletarian anthems, no workers-of-the-world propaganda will explain his unprovoked attack on fellow Slavs and the economic disaster Putin unleashed. All he has is tsarist powers and domestic fear, and neither are unlimited resources.
Play stupid Cold War games, win stupid Cold War prizes. First Russia will go through the Iran phase, then the Venezuela phase, and shortly thereafter Putin may go through the Nicolae Ceauşescu phase — specifically, its abrupt end.
