03/01/2022, 09.30
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The cost of war for Moscow

by Vladimir Rozanskij

The exclusion from the Swift banking system and the freezing of the Russian Central Bank's assets decided by the West are a heavy blow for the Kremlin. There is a risk of collapse of the rouble and a run on ATMs. The US and Europe want to trigger a popular protest and push Putin to negotiate.



Moscow (AsiaNews) - The effectiveness of Western sanctions on Russia is being hotly debated, due to uncertainty and the impression that the Kremlin has been prepared for some time to live in a regime of autarky. The exclusion from the Swift banking system and the freezing of the Bank of Russia's assets by the European Union, the United States and Canada are the most radical measures: the Russians will now no longer be able to use their foreign currency reserves to support the ruble's exchange rate.

 Russian economist Sergei Guriev, interviewed by Meduza, sees this decision "as very serious and unexpected, it was never thought possible. Reserves are among the fundamental foundations of macroeconomic stability, and it is now difficult to predict what will happen on the currency market". The rouble could be suspended from trading, panic could spread, in a huge blow to the Russian economy.

It is also very important to consider which countries have frozen reserves. According to widespread thinking, Russia should not be frightened, as it has accumulated large gold reserves and converted many of them into yuan, the Chinese currency; however, there is no guarantee that Chinese banks will fully support the Bank of Russia, as they too could face severe restrictions as a result.

As Guriev reminds us, "it's not just a theory, it has already happened, for example with the French bank Bnp Paribas, when it violated US sanctions and was forced to pay multi-billion dollar penalties... I can't imagine the Chinese willing to lose such sums to help the Russians".

Moscow will have to find buyers for their gold who are willing to go against the main institutions of the banking system; Washington may prohibit the Chinese from exchanging yuan into dollars. The Russians need dollars and euros anyway, because most of their economy's imports come from Europe anyway: medicines, technology, food, all things that cannot be bought with yuan.

It is true that Russia has been dealing with sanctions since 2014, but access to international reserves was not blocked. The high price of oil seems to favour Putin, but it is not known how it will be sold: even if it were paid in dollars, these could not be converted and used by Russia, but would also end up frozen. The only comparisons of this type of sanctions are Iran and North Korea, countries very different from Russia in economic parameters.

Russia was prepared to be excluded from technology, and to have to resign itself to economic stagnation in general, but it did not and still does not believe it will face a currency crisis. It is possible that the Moscow government will decide to confiscate the dollar reserves of private citizens, prohibiting their withdrawal from current accounts and forcing them to change them into roubles according to the rate decided from above. Imports will fall dramatically, and without hard currency it will become difficult to buy essential goods.

This scenario gives an idea of the purpose of these sanctions: to force Putin to sit down at the negotiating table and withdraw the invading forces from Ukraine, appealing to the discontent of the Russian population which, however much it may be in favour of military action, will not be grateful to the president for freezing accounts and devaluing money.

Even in the unlikely event that Putin bends to the weight of sanctions, the Russian economy is still in for a very difficult time. Even if sanctions are lifted in part or in full, foreign investors will think long and hard before trusting Russia with their business again, with the risk of new regime headaches.

And the West still has a "nuclear" sanctioning weapon in store: blocking the import of Russian gas and oil, which would entail serious sacrifices also for European citizens. But if the EU were to succeed in compensating for this loss with other sources of supply (e.g. the US itself), once again Russia would only be left with selling out to China, without any guarantee of being able to overcome the crisis.

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