Russia, with the 8th largest oil reserve in the world at 4.8%, had the 11th largest economy in the world at the start of the invasion of Ukraine. It is a large economy by most standards and Putin likely felt secure that it would not be extremely sanctioned as Russia planned its attack on Ukraine. Never before has an economy of this size ever been cut off so quickly from most large economies in the world.
Daleep Singh - Deputy National Security Adviser for International Economics at the White House - calls the sanctions an “economic blitzkrieg.” Singh designed the sanctions on Russia when it annexed Crimea in 2014 and on Putin himself recently. Singh presented his economic blitz of Russia to the White House. Per Singh, the Russian economy is quickly headed to a Soviet era weak economy, where scarcity of goods was common.
The USA, and its allies froze $300 billion of Russian Central Bank assets, causing the Central Bank to double its interest rate from 10% to 20% in order to reduce the risk of flight of capital from the Russian Rouble in favor of foreign currencies. Still, the Russian Rouble lost one-third of its value in less than a week. This created a panic situation for Russian citizens that drove them to try to purchase foreign currencies in order to protect their savings and to line up at ATMs to withdraw cash. Assets of certain Russian oligarchs as well as those of Putin were frozen.
Within three days the Russian banks were kicked out of the SWIFT financial network where international banks trade with each other. This impacts over 300 Russian banks. According to the Brookings Institution, more than 30 countries have leveled a total of 2,500 sanctions on Russian targets. Even Switzerland broke centuries of neutrality to join the sanctions. There are more sanctions to come, per Singh, that can target additional Russian banks and industries like oil.
Surprising to Signh has been the corporate activism exhibited by over 400 corporations that have stopped doing business with Russia, putting a serious hurt on the Russian economy. The Russian Central Bank views this exodus as a large structural economic transformation. The impact of corporate activism has been significant.
Boeing and Airbus are no longer supplying airplane parts, crippling the Russian travel industry. Some oil companies have divested from Russian ventures. Cogent Communications - the provider of internet services to 170 countries - has terminated its services to entities linked to the Russian government; their number one motivation was to help prevent any cyber attacks by Russia. Visa and MasterCard have stopped providing credit card services to Russia; this cuts off purchasing power by consumers which in turn adds to the economic chaos.
Recently, Putin acknowledged that inflation and unemployment will rise for the Russian people. It is possible that Russia will default on some debt, something that has not happened since the Bolshevik Revolution a century ago. The Russian Central Bank has closed the Russian stock market since the war started. Can you imagine the average American not being able to get to their stock investments while their economy was in free-fall? That’s what’s happening for Russian citizens now.
Putin considers the sanctions akin to a declaration of war and has stated that it reserves the right to react in kind. So far he has announced that he put his nuclear arsenal on heightened alert. It is unclear whether he will act militarily against those countries that are sanctioning Russia. It’s a balancing game of how far to go with sanctions according to Richard Nephew who used to work for the U.S. State Department.
The sanctions would backfire in several ways and Russia could potentially find workarounds to some of the sanctions.
Instead of SWIFT Russia could use its own “System for Transfer of Financial Messages (aka SPFS)” but it’s only available during weekday working hours whereas SWIFT is 24x7 and banks have contractual obligations with SWIFT members, whereas SPFS does not. Russia could use China’s CIPS, but it can only handle transactions in Yuan; less than 2% of global transactions are in Yuan while about 40% are in US Dollars, the dominant currency of SWIFT.
Russia could switch to China’s UnionPay credit card system in order to replace the Visa and MasterCard systems. Russia is rumored to be seeking financial aid from China, but China doesn’t want to raise the ire of its trading partners in the West in favor of a shrinking economy that was only the 11th largest in the world.
Secretary of State Antony Blinken told National Public Radio that ending Russia's economic isolation would require Putin to stop his war and agree not to attack Ukraine again.
Questions
How will the Russian people react as Russia heads to a Soviet era weak economy and seeing their hard earned economic progress wiped off?
Will Putin act militarily to economic sanctions he sees as akin to a declaration of war?
If Russia weathers the economic blitz, will China and others fill the void left behind western companies as they move out of Russia?
Are we entering a world where corporate activism is as powerful as government sanctions?
Sources
Russian banks rush to switch to Chinese card system
Explainer: Russia could work around SWIFT ban but with high costs
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