The Economic Price of Putin’s Invasion

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, February 28.


Michael Nagle/Bloomberg News

Monday was a tense day for global markets as investors passed judgment on the sanctions many governments imposed on Russia over the weekend. The verdict so far: Western economies are resilient enough to absorb the pain. The Russian economy not so much.

In the West, the theme is “manageable pain”. European stock markets fell slightly over the day, less than 1% in London and Frankfurt, and 1.4% in Paris. This was reflected in declines of 0.24% for the S&P 500 and 0.49% for the Dow Jones Industrial Average.

These are routine losses, and major markets still closed well above the lows they hit on Thursday when Vladimir Putin’s tanks first entered Ukraine, even after the sanctions imposed by the Western governments have tightened considerably over the weekend. Investors may conclude that Western economies and financial markets are broad and deep enough to deal with the new state of the world.

The situation is different in Russia. The ruble on Monday lost up to 20% of its value against the dollar, we think. Trade in Russian currency is so thin due to sanctions and other risks that knowing the true exchange rate is impossible. The central bank on Monday suspended equity trading and raised its key interest rate from 9.5% to 20%, in part to bring savers back to banks after reports of bank runs over the weekend. end.

Help is not at hand. New sanctions announced by the US Treasury on Monday ban most transactions with Russia’s central bank and sovereign wealth fund, alongside similar measures imposed by other developed economies. This makes it virtually impossible for Moscow to exchange much of its $631 billion in foreign exchange reserves to support the ruble.

The heaviest cost of these measures will be borne by the Russian people. It’s an argument for Western allies to expand their sanctions lists to include more assets from more oligarchs in Mr. Putin’s inner circle. This would lessen the impact of Kremlin propaganda claiming these measures are “anti-Russian” rather than “anti-Putin”. It would also disrupt the economic cronyism that Mr Putin uses to hold on to power.

But broader sanctions are still needed because they will hamper Mr. Putin’s ability to finance his war in Ukraine, especially if he faces long resistance. This vulnerability could come as a shock to Mr Putin, who thought Europe’s dependence on Russian energy would protect him. Western sanctions would be stronger if they included energy, and $100 oil provides the Kremlin with an economic cushion that should be targeted. But a Russian economy that is too dependent on its energy industry is less resilient to economic shocks.

We keep reading in some quarters that the sanctions are wrong because they will motivate Mr. Putin and China to develop alternatives to the dollar-based financial system. But both countries have been trying to do so since the United States and other governments imposed limited measures in 2014.

The central bank moved reserves from US Treasuries into gold, and out of Europe and the US. Russia has also tried to develop alternatives to the Swift global messaging system that facilitates transactions, and even to Western credit card processing networks. It didn’t work, which is one of the great things about being the reserve currency nation.

None of this means that economic sanctions will win the war in Ukraine. It takes military power. Sanctions take a long time to kick in, and Mr. Putin is willing to let the Russians suffer for a long time to achieve his goals. But the sanctions will make the war harder to finance, and they are already increasing the economic and political costs of waging it.

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Appeared in the March 1, 2022 print edition.


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