The economic war





RUSSIA’S invasion of Ukraine is not going as Vladimir Putin expected. After more than a month of fighting, Moscow’s ‘special operation’ has stalled. Despite almost 200,000 soldiers, supported by large numbers of armoured vehicles and sophisticated weaponry, Russian forces have been held back by poor planning and logistics, a fierce Ukrainian resistance, and an unusually united West, whose weapon supplies and intelligence sharing proved decisive in the unfolding of events on the ground.

The Kremlin, frustrated by the absence of an easy victory, which they had very much taken for granted, resorted to heavy and indiscriminate bombardment of urban centres. The coastal city of Mariupol is a prime example of such tactics, having been pounded into the ground by heavy artillery fire and missile strikes.

But Moscow’s frustration appears to be evolving into some acceptance and pragmatism. Last week, the Kremlin announced its intention to withdraw troops from several areas in Ukraine, saying that such a move had always been their intention. Apparently, the sieges of Kyiv, Kharkiv and other large cities were part of a strategy to divert Ukrainian forces from the Donbass region, in the east, to allow the consolidation of Russian control over the area. A very cunning plan indeed… except that the rest of the world knows it is not true. The Russians are withdrawing because they were unable to complete their objectives of conquering the cities and hand power to a subservient puppet government.

So, it is fair to say that, against all odds, Russia is, in some ways, losing the war with Ukraine. The other war, though, meaning the economic one fought against the west, is going surprisingly well for Moscow. The invasion of Ukraine was met by an unprecedented reaction through the application of economic sanctions meant to punish Russia and force the Kremlin to eventually recall its troops. Many international companies left the country, including famous names, such as MacDonald’s, Visa and Mastercard. Several of Russia’s main banks were excluded from the SWIFT system, and approximately 60 percent of the country’s foreign currency reserves were frozen.

The impact of these sanctions was felt immediately, as the rouble devalued to less than one US cent and Russian companies’ share prices collapsed. However, after the initial shock, the rouble is now back at pre-war levels. The early panic that saw a run to the banks by worried savers was halted, and most of those who withdrew funds have paid them back in. And, while many international observers had expected Russia to default on bond payments denominated in foreign currency, such a scenario never materialised, and all commitments have been honoured.

While the military operation has so far failed in a manner that is almost humiliating, economic policymakers in Moscow have played a poor hand with rare expertise. The central bank moved early and decisively, raising interest rates from 9.5 to 20 percent, incentivising investors to keep high-yielding Russian assets. Another clever measure was to force all of the country’s exporters to convert at least 80 percent of their foreign currency proceeds into roubles. This move was particularly effective as, despite the sanctions, throughout the conflict Russia remained a major exporter of commodities, including large volumes of oil and gas,.

It is fair to say that the Russian government has been better at managing the economy, after it came under pressure from sanctions, than at planning and deploying the invasion of Ukraine. The other lesson we should draw here is that, in order for sanctions to be devastatingly effective, they must be thorough. There is no point in targeting parts of the economy, while for others - the ones that really matter - it is business as usual. Despite all the action and declarations of good intentions, fingers can be pointed at Europe, whose dependency on Russian oil and gas meant that billions of euros kept pouring into Moscow’s coffers over the last five weeks, undermining the overall impact of the sanctions.


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