Sifting through the Ruble: Russia’s Sanction Reaction

The Western military reaction to Russia’s invasion of Ukraine has been understandably reserved. Given the likelihood that a more unequivocal approach would generate a rapid and potentially boundless escalation of hostilities, even Ukraine’s most devout supporters must consider caution in calling for increased Western military intervention in the ongoing conflict. The economic reaction of key Western powers and notable allies such as Japan however has been something else entirely. More akin to an all-out assault on the Russian economy both at home and abroad. Russia is now the world’s most sanctioned nation (Wadhams, 2022) facing a level of economic punishment without precedent in terms of both the scale and breadth of the penalties incurred. While the Russian government and economy at large have certainly felt the impact of the wide range of sanctions in place against it, a combination of well-considered policy responses and the extraordinary leverage granted by its position as a key global energy supplier has meant that the severity of the damage wrought has not been nearly as extreme as the sanctioning nations in question may have hoped. This article will aim to examine Russia’s policy reaction to the economic sanctions it faces, alongside the corresponding impact on its economic adversaries with particular reference to the EU.

Figure 1: The economic fallout from Russia's invasion of Ukraine continues apace

The World’s Most Sanctioned Nation

As of July 8th 2022, the Russian economy stands under a total of 10,539 individual economic sanctions. A brief perusal of the list of sanctioning bodies reveals a decidedly Western flavour to proceedings. Switzerland has proven the single leading nation to date with a total of 1,292 individual penalties imposed, alongside those implemented by the EU, UK, USA, Canada, Australia and Japan (“Russia Sanctions Dashboard”, 2022). Amongst the more notable penalties currently in operation is the banning of so far 7 major Russian banking institutions from SWIFT, the world’s largest and most widely used financial payment system (Hotten, 2022). Restrictions on Russian oil and gas imports have been well documented (“What are the”, 2022), while vital manufacturing and high technology commodities such as semiconductors are now the subject of multilateral Russian export bans (Whalen, 2022), (European Council, 2022).

Russian aviation and automotive sectors look particularly vulnerable. In the absence of essential manufacturing components previously supplied by now banned imports automobile sales have fallen dramatically, down 83.5 per cent for the month of May 2022 alone while car prices have risen by a reported 50 per cent since the beginning of the year (“Russian auto sales, 2022). Deeper concerns abide about the ongoing ease of repairs, and the safety levels of newly produced vehicles which look set to make to do without fundamental safety features such as “anti-lock braking systems and airbags, as well as emission restrictions and satellite navigation systems”, as Russia scrambles to find substitute parts it lacks the current propensity to produce (Roth and Sauer, 2022).

Figure 2: Russia's military actions in Ukraine have made it the most economically targeted nation on the planet

Russia has also been banned outright from operating flights over “US, UK, EU and Canadian airspace” (“What are the”, 2022) while “American and European manufacturers have been blocked from selling aircraft, parts or providing technical support” (Eccles, 2022). The Russian aviation sector had been heavily reliant on foreign leased aircraft with well over 400 of a reported 500 western leased planes currently stranded on Russian soil. Were any of them to land outside of Russia they would be immediately seized and repossessed, as a reported 78 have already been (“Moscow says all”, 2022). Though several carriers such as Air Serbia and the newly instated Southwind Airlines of Turkey have stepped in to assist (Eccles, 2022) Russia’s newfound lack of autonomy with regard to its aviation sector lends further to the sense of isolation that has enveloped the nation in the aftermath of its invasion of Ukraine.

Public penalisations have operated in tandem with the targeted sanctioning of private Russian citizens with alleged ties to the Putin regime. A combination of the US, UK, EU and assorted allies have already sanctioned “more than 1,000 Russian individuals and businesses” to date (“What are the”, 2022). Russia has also undergone a massive scale asset freeze on its international foreign currency holdings thought to be equivalent to around 60 per cent of the Russian central bank’s international reserves (“Under unprecedented sanctions”, 2022) with an estimated value of around $600bn (Partington, 2022). The goal is simple, to devalue Russia’s domestic currency – the Ruble. Doing so would pile a host of unwelcome pressures on the Russian economy, damaging Russia’s purchasing power abroad “by making imports vastly more expensive and fueling inflationary pressures in the Russian economy more generally” (Vermeiren, 2022).

Figure 3: Russia's aviation sector has been devastated by the severing of contract agreements for leased aircraft

Russia’s Riposte

In spite of what may be regarded as an initial success with the ruble losing approximately half of its value in the immediate aftermath of the sanctions imposed (Daniel, 2022), it has since rebounded to dramatic effect and currently sits at its highest value in just over 7 years (Turak, 2022). The adjustment of Russian interest rates from 9.5 to 20 per cent has served to encourage investors to hold on to “interest-bearing Russian assets” helping to stabilise domestic markets and further discourage capital flight (a mass exodus of currency and assorted financial assets) (“Under unprecedented sanctions”, 2022). A newly installed requirement for Russian exporters to convert 80 per cent of any foreign currency revenue received to rubles has helped to bolster the Russian government’s foreign currency reserves with this legislative change anticipated to raise an estimated $400 billion in foreign exchange revenue by the end of 2022 (“ Russia requires exporters”, 2022).

In a move that mirrors many of the individual sanctions placed on Russian nationals abroad the Russian government have also placed a ban on the sales of any foreign owned securities (tradable financial assets) within Russia. A major bind for any non-Russian citizens holding financial interests such as corporate shares or Russian government bonds who may understandably wish to part with these assets given the widespread uncertainty around the future of the Russian economy as a whole. Such a move has served to further stabilise the value of the ruble by “shoring up both the stock and bond markets and keeping money inside the country” (Hirsch, 2022). Russia has not been afraid to play hardball in its attempts to maintain the surety of its currency notably cutting off gas supplies to Poland and Bulgaria in April of this year in response to both nations’ refusal to pay for previously agreed provisions in rubles (Strzelecki, Tsolova & Polityuk, 2022).

Figure 4: As the war in Ukraine continues, costs rise around the world

The Law of Co-Dependence

Amidst falling Western demand for Russian energy exports Russia has benefitted massively from the strength of its ongoing trade relationships elsewhere, most notably with China and India. It is hard to underestimate the Russian economy’s level of energy dependence with revenues generated from the sale of oil and natural gas having “made up 45% of Russia’s federal budget” for the year 2021 (IEA, 2022). Given this almost total reliance on the sale of fossil fuels it will have served as a welcome relief to the struggling Russian economy that China almost doubled its year on year intake of Russian oil, gas and coal in the period from March-May 2022. India also increased its imports by “more than five times” over the same period with sales to both nations accounting for a total of $24 billion, “an extra $13 billion in revenue from both countries compared to the same months in 2021.” (Murtaugh, Chakraborty & Bloomberg, 2022). Though demand for crude oil exports in particular from both nations has dipped somewhat in the time since raising longer term concerns about the sustainability of demand for Russian energy exports outside the established European market (Rosen, 2022), of much more pressing concern is the EU’s imminent search for new suppliers as it attempts to reduce its reliance on Russian oil and gas.

In spite of much internal division on the subject a recently approved 6th round of EU sanctions has laid out the ambitious goal to “effectively cut around 90 per cent of oil imports from Russia to the EU by the end of the year” (“EU agrees ban”, 2022). The implementation of such a policy may not however prove as straightforward as envisaged. Amidst genuine concerns of a coming energy crisis, there remains the strong possibility that “Russian oil exports to Europe will increase in the next six to eight months before the trade becomes illegal” (Cahill, 2022), with importers potentially seeking to stockpile inventories to guard against future supply shortages. Reducing western energy imports from Russia has also had the unfortunate effect of increasing competition for a more limited global supply with particular reference to oil and gas. The subsequent hike in prices has played hugely to Russia’s advantage with Russian oil revenues up 50% since the beginning of the year (Smith, 2022) and gas revenues having remained stable in spite of a significant reduction in the amount of gas Russia has actually supplied (Mazneva, 2022).

Figure 5: a shutoff of Russian gas could have an extremely damaging effect on European heavy industry

Russia plainly intends to capitalise on its advantage in this area with Russian state gas supplier Gazprom having refused to guarantee the continued flow of gas to Europe this winter in light of what it terms “‘extraordinary’ circumstances” (Payne, 2022). Russia’s superior leverage in the energy sweepstakes is further highlighted by the EU’s plans to introduce gas rationing this winter. The latest proposal from EU leaders has requested member states to reduce gas consumption by 15 per cent in advance of spring 2023 citing the willingness “to impose mandatory curbs” if necessary to do so (Geman, 2022). A total shutdown of Russian gas would almost certainly send a number of EU countries into recession with Hungary, the Slovak Republic and the Czech Republic particularly exposed and facing the prospect of a fall in GDP of as much as 6 per cent. Italy also appears highly vulnerable “due to its high reliance on gas in electricity production” while Germany and Austria would also likely be significant impacted (Flanagan et al., 2022) alongside a predicted EU wide reduction “in economic output of almost 3% over the next 12 months” (Elliot, 2022).

The uncertainty surrounding the EU’s future economic prospects is reflected in the dismal performance of the euro which recently fell below the dollar in equivalent value for the first time in almost 20 years. With inflation across Eurozone member countries already at a heady 8.6 per cent for the most recently recorded month of June 2022, the prospect of further currency depreciation is deeply troubling (King, 2022). The EU has since responded by raising interest rates for the first time in 11 years by 0.5 per cent, a larger gain than had been widely predicted (Inman, 2022), but one unlikely to quell such a tectonic shift in economic conditions.

Figure 6: Europe faces suddenly the prospect of a true Russian winter

A Long Winter

The ongoing conflict in Ukraine has provided marginal gains in certain sectors for some nations, and universal losses for all. Attempting to deduce winners and losers from such a scenario is pure folly as any benefits attached are offset by immense damages elsewhere. In the immediate term Russia has managed to deal with the blockade of Western sanctions placed against it exceptionally well and certainly far better than most would have predicted. Cracks in its economic defences remain plainly visible however and are surely set to widen over time. High interest rates may have offset the outflow of domestic currency for now but longer term they will choke investment and inevitably drive the Russian economy into recession. Adjusting to shortages in key industries will prove an extremely painful process and could potentially set Russia back decades in its development if not managed correctly. From an EU perspective serious questions have to be asked about the viability of the proposed suspension of Russian energy imports. With division already rife amongst member states with regard to how best to proceed and wartime measures in the form of gas rationing already in place, the Bloc’s resolve is likely to be sorely tested in the weeks, months and potentially years ahead. With the conflict in Ukraine itself showing no sign of abating, a long winter lies ahead for all.

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Visual References