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Russia’s efforts to reduce its reliance on the global financial system have better prepared it to withstand sanctions the United States and Europe have warned of in the wake of new attacks on Ukraine.
Analysts say the relative success of what investors call Moscow’s “Russian fortress” strategy could weaken the deterrent of Western threats. At the same time, the EU is not free from dependence on Russian gas, making any restrictions on Russian energy exports potentially self-inflicting—and giving Moscow the possibility of retaliation by restricting supply.
The sanctions being discussed in the West could go well beyond those passed after Russia annexed Ukraine’s Crimean peninsula in 2014. They could mimic the punitive measures taken against Iran and North Korea, all but isolating those countries from the global economy.
But Russia’s Treasury Department has been stress-testing worst-case scenarios for years and created a unit to respond to possible measures by the U.S. Treasury’s Office of Foreign Assets Control, which it says the Russian economy can even withstand.
“Obviously it’s unpleasant, but it works. I think our financial institutions can handle it [if] These risks arise,” Finance Minister Anton Siluanov said last week.
The likelihood of a Russian aggression against Ukraine and subsequent financial retaliation from the United States and Europe has increased after Kremlin talks to de-escalate tensions in Geneva and Brussels last week were deemed “unsuccessful.”
Russian President Vladimir Putin has deployed more than 100,000 troops on Ukraine’s border and has threatened military action unless the West meets a series of security demands.
“When Putin asked what if we were punished by sanctions for military action, his officials could salute and say, ‘Yes, Vladimir Vladimirovich, we know exactly what to do’. It gives them a sense of confidence that sanctions are nothing to worry about,” said Alexander Gabuev, a senior fellow at the Carnegie Moscow Center.
Since 2014, Russia has increased its foreign exchange reserves and attempted to start “de-dollarization” of its economy.
central bank reserves It has surged more than 70% since the end of 2015 and is now over $620 billion. U.S. dollar reserves accounted for about 16.4% of total reserves last year, up from 22.2% in June 2020, according to data released last week. About one-third of the reserves are in euros, 21.7% in gold and 13.1% in yuan.
In 2017, Russia boosted its coffers again by merging the reserve fund with a newly created state wealth fund that accumulates oil and gas revenues.
The surge in oil prices has surpassed Russia’s budget breakeven price of $43 a barrel by the third quarter of 2021, raising the fund to $190 billion. Russia is expected to grow to $300 billion by 2024. Meanwhile, government debt, equivalent to around 20% of GDP, is expected to fall to 18.5% by the end of 2023, according to credit agency Fitch Ratings.
Russia has also learned to reduce its reliance on foreign investors. Foreign ownership of Russian government bonds has dropped to 20 percent after Washington last year banned U.S. investors from trading in newly issued Treasury securities. These measures reduce foreign investment, but also make the country less vulnerable to future external shocks or sudden sell-offs. The Treasury Department sold most of the subsequent offerings to state-owned banks after the ban.
Russian companies have learned their lesson from the first sanctions, when many struggled to raise capital to repay loans to Western banks: corporate lending by foreign banks has fallen from $150 billion in March 2014 to $80 billion last year.
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The 2014 sanctions and these measures have come at a price: Since 2013, the Russian economy has grown at an average annual rate of 0.8%, while the global economy has grown at an average annual rate of 3%. Conservative fiscal policies limit social spending and infrastructure investment. During the same period, real income plummeted.
Putin has refused to spend the nation’s wealth fund on pandemic relief, backing more limited stimulus than most Western countries and a faster easing of Covid-19 restrictions that epidemiologists say has led to one of the world’s highest death tolls per capita .
Maria Shagina, a visiting scholar at the Finnish Institute of International Affairs, said the stability of Russian fortresses “is a post-Soviet kind of stability where you sacrifice economic growth for stability”.
While Russia has worked to reduce its reliance on foreign financing, the EU has done little to reduce its reliance on Moscow’s energy exports — at the risk that sanctions could backfire.
The group imports more than 40 percent of its natural gas and a quarter of its oil from Russia — putting it under shock.
“The EU has not learned from its mistakes since 2014,” Shagina said. “Its goal is to be different from Russia in gas, its goal is to be more resilient and more geopolitical. But we don’t see that.”
The West also relies on Russia for other vital natural resources such as titanium. That could thwart any sanctions on VSMPO-Avisma, the largest supplier of titanium for Boeing planes.
This interdependence could even make it harder for the West to pass broader sanctions on Russia’s financial sector. Gabuev said the United States and the European Union are discussing banning transactions with Russia’s main state-owned bank or isolating the country from the SWIFT global payments system — but that can only be done effectively if they stop buying their exports.
“You have to open a channel to pay Russia for oil and gas. [Sanctions] Putin will not change his mind because any damage is acceptable and the Kremlin thinks it has the answer,” Gabuev said.
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