Russia and the West Are Locked in a Deadly Economic Escalation

Its central bank as well as its foreign-exchange reserves and national sovereign wealth fund have been targeted, essentially freezing perhaps up to half of Russia’s liquid reserves, severely reducing the government’s ability to shore up the level of ruble. Consequently, accelerating bank runs are developing and a financial crisis looks increasingly unavoidable. As of March 2, the volatile value of the ruble had fallen by as much as 50 percent to about $120, ensuring an imminent dramatic increase in inflation that will most adversely affect lower-income groups.

Russia’s government has closed the Moscow stock market and instituted severe capital controls to preserve foreign-exchange in response. But these moves will shortly see the country’s financial institutions and businesses begin to default on their foreign debts, further cutting its commercial ties with the rest of the world.

To date, the G7 governments have refrained from directly targeting Russia’s crucial oil and gas exports as this would drive up global oil prices and cause immediate gas shortages in Europe. However, given the increasing civilian casualties from Russia’s terror tactics on the ground in Ukraine, it is doubtful that this reluctance to hit President Vladimir Putin’s regime where it hurts the most will be politically sustainable, even if it will hurt the G7 countries.

The Russian economy is, on top of and due to Western sanctions, facing what is increasingly an international private-sector embargo.

Western publics will demand that their governments stop funding Putin’s war and institute a moratorium on Russian energy imports. In the likely event that such import bans are implemented in the near future, Russia’s economy will face further dramatic deterioration, as the government will be deprived not only of the majority of its foreign-exchange reserves but also of its main source of export earnings. Its ability to support the ruble would be further reduced and a likely collapse in the currency’s value would ensue.

Even without an outright ban on Russian exports of energy to G7 countries, the Western private sector is already responding to the newly imposed sanctions and the commercial uncertainty the invasion has created. Fear of being affected by these sanctions has seen the world’s largest container-shipping companies stop serving Russian harbors, international banks stop providing trade financing and credit for trade with Russia, and oil refiners around the world shunning Russian crude oil, demanding significant discounts in prices to continue to purchase it. The Russian economy is thus, on top of and due to Western sanctions, facing what is increasingly an international private-sector embargo.

An unprecedented assault has been launched on Russia’s economy in response to its invasion of Ukraine, almost certainly causing a deep recession in the country.

Western governments have, in addition to sanctions against Russian government entities, imposed personal sanctions and asset seizures on a long list of Russian oligarchs and their families. This is due to the many informal links between this elite group of wealthy Russians and the regime. To a degree, the intent is also to incentivize some of them to break with Putin.

All in all, an unprecedented assault has been launched on Russia’s economy in response to its invasion of Ukraine, almost certainly causing a deep recession in the country. While this will degrade Russia’s economic ability to wage the war, it is unclear what the effects will be on domestic political support for Putin. The majority of the Russian population is likely to be hit hard by the adverse economic consequences of sanctions before it becomes aware of the full extent of the country’s invasion of Ukraine. How citizens will interpret their personal economic problems in such an information vacuum as the one in Russia remains unknown. Meanwhile, Putin’s propaganda apparatus will continue to mislead most Russians about the true causes of the economic crisis.