Multipolar World

The collapse of the Russian economy

Jorge Costa Oliveira

Following the invasion (on February 24) of Ukraine by Russia, the EU and the Western world imposed severe sanctions, including financial ones. Transactions with seven of Russia’s largest banks were banned; trading Russian bonds on western financial centers was prohibited; the ability to lend to some large Russian companies was restricted; the major Russian banks were blocked from the SWIFT system; and the Russian central bank’s foreign exchange reserves were frozen. With this first set of sanctions, Russia was denied access to the international financial world. Banned also was the export of about half of the major technology components that Russia buys from Western suppliers. In addition to Russia’s top politicians, other sanctions targeted Russian elites and their companies. The assets of top Russian oligarchs, who until recently escaped sanctions, have been frozen, with their mega-yachts being seized. Given the extraterritorial nature of many of these sanctions, no Western entity will dare to interact with Russian financial institutions in the near future. The reputational risks (and pressure from Western public opinion) have led hundreds of respectable Western companies to declare that they will stop doing business in or with Russia.

On February 28th the Russian economy collapsed. Russians rushed to banks and ATM machines to exchange as much money as they could for hard currency; and burst into stores to buy whatever they could find before prices skyrocketed. The ruble has fallen 70% and economists predict the ruble will continue to fall, approaching an exchange rate of 200 rubles per US dollar by the end of the year (it was about 70 rubles before Putin’s war). On March 8, the Russian central bank decided to stop exchanging rubles for foreign currency, making the ruble de facto inconvertible. Most of Russia’s foreign exchange reserves ($630 billion dollars) are frozen. Russian stock exchanges are closed and the value of 31 Russian stocks that are traded in London has fallen 98% (on February 15, Sberbank shares on London’s secondary market were at $14, on March 13 they were at 5 cents). Russia’s capital markets are essentially dead. All Russian financial assets have been reclassified to junk status. It is possible that the Russian Federation will soon default on its sovereign debt obligations. It is not unlikely that the inflation rate will reach at least 50%, and that Russian GDP will fall by at least 10% this year. 

Putin has not realized that, in the financial realm, the world is not yet multipolar.

The economic catastrophe that Russia has plunged into is clear and likely to get worse. The European and Western world sanctions are still at the beginning and already the Russian economy, banking and finance are collapsing. This collapse, the product of the imposition of an imperialist delusion, will cause social misery among the general Russian population, create social and political instability, and radicalize a doubling down from the Russian leadership. Yet, Putin has only himself to blame for this.

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