The Russian economy is likely to suffer significantly from the series of sanctions imposed after Moscow’s invasion of Ukraine, despite efforts to reduce western countries’ financial dependence in recent years.
And the impact could spread far beyond Russia’s borders.
Sanctions already corrosive?
The ruble plunged to an all-time low, the Moscow stock exchange remained closed to avert an expected sell-off and interest rates were slashed on a turbulent Monday for the Russian economy.
One of the most recent sanctions, the partial freeze of the Russian central bank’s foreign exchange reserves, will make it difficult to keep the beleaguered currency afloat.
“The size of your reserves makes you credible to defend an exchange rate,” said Niclas Poitiers, a researcher at the Brussels-based economic think tank Bruegel.
“People lost faith in the financial system,” he added, explaining the collapse of the Russian currency and people’s rush to withdraw money from banks on Monday.
The Kremlin responded by banning foreign money transfers abroad and forcing exporters to convert 80 percent of their income into rubles.
The economic sanctions also include freezing the assets of banks and people, excluding certain Russian banks from the SWIFT interbank messaging system and export controls.
Olivier Dorgans, an attorney at Ashurst who specializes in sanctions, said measures such as freezing the assets of Kremlin-affiliated businessmen would have a short-term effect.
But restrictions on the export of electronic components would have much longer lasting effects, he added.
The consequences can be enormous. The IMF, which predicted before the war in Ukraine that the Russian economy would grow by 2.8 percent this year, warned Thursday of a “significant economic risk” to the region.
Analysts at Capital Economics said sanctions could reduce one or two percent of Russia’s annual economic output — even before the freeze on Russia’s central bank assets and lockouts from SWIFT.
Capital Economics also warned that inflation could rise by as much as three percentage points, diminishing the purchasing power of ordinary Russians. Inflation in Russia reached 8.7 percent in January.
The decision by the Russian central bank to raise interest rates to 20 percent on Monday threatens to slow the country’s economic growth even further.
Could sanctions be even tougher?
Western countries still have plenty of cards to play. A blanket ban on SWIFT’s Russian banks is possible, but unlikely.
“If we push it too far, it will be bad for us,” EU officials told AFP. “But it’s also bad for the future, because then we damage SWIFT as an infrastructure in general.
“The Russians and the Chinese are already building their own SWIFT,” they added, highlighting the risk of pushing Moscow further towards an alliance with Beijing.
Several banks could escape the lockout to maintain energy supplies to Europe, with several economies – including the continent’s largest, Germany – relying heavily on Russian oil and gas, much of the country’s income.
But “no sanction is worth anything unless we sanction energy,” said economist and EU lawmaker Luis Garicano.
A deep freeze on oligarchs’ foreign assets would be another weapon at the West’s disposal, according to Gabriel Zucman, an economics professor at the University of California, Berkeley.
Zucman said half of the fortunes of Russia’s richest elite — the top 0.01 percent — was held abroad.
Economist Thomas Piketty has called for a 10 or 20 percent tax on such large fortunes.
The world economy in danger?
The West’s strategy thus far has been to focus their effects on the Russian economy and minimize the impact on the rest of the world.
But the conflict has rocketed commodity prices, putting pressure on international supply chains already severely disrupted by high demand during the post-pandemic economic recovery.
Industries have suffered from rising electricity costs, while airlines have faced more expensive fuel bills.
In January, the IMF revised its global growth forecast for 2022 down to 4.4 percent, mainly on the back of rising inflation, which has reached 3.9 percent in developed countries.
Central banks’ response to runaway inflation was a hot topic before the conflict erupted in Ukraine as they prepared to tighten monetary policy.
Now there is a risk that the recovery after the Russian invasion of Ukraine will be stifled.
“Central bank challenges have become more complex as inflationary pressures have mounted, even as growth prospects have softened,” Claudio Borio, head of the monetary and economic division of the Bank for International Settlements, said Monday.