21.2 C
City of Banjul
Tuesday, May 24, 2022

How much damage will sanctions do to Russia?

- Advertisement -

Over the past week, Western countries have ramped up sanctions against Russia in response to its invasion of Ukraine. The measures are the toughest since those imposed on Iran in 2010 and North Korea in 2013.

Russia is the largest economy and the largest country globally, by population, against which such strong sanctions have ever been implemented. Western leaders know that they will not immediately stop the war, but hope that they would inflict enough damage on the Russian economy to help de-escalate the conflict.

How tough are the sanctions:

- Advertisement -

They are much tougher than those previously imposed on Russia in the aftermath of the annexation of Crimea and the start of the war in Eastern Ukraine in 2014, but I would not call them “nuclear”. That is, they could damage the Russian economy but not obliterate it, given some major loopholes purposefully left by the sanction architects.

What follows is my insight into how the current package of sanctions will and will not hurt the Russian economy and why.

Sanctions on the Central Bank

- Advertisement -

Undoubtedly, the most powerful blow to the Russian financial system is the imposition of sanctions on the Central Bank of Russia (CBR), which plays a crucial role in the domestic foreign exchange market.

The CBR has enormous foreign exchange reserves amounting to $640bn and it traditionally regulates the level of the rouble exchange rate.

The freezing of the CBR’s assets and accounts in the G7 countries means that it is left with gold reserves worth $127bn held in Russia and renminbi reserves worth $70bn. Both are useless from the point of view of maintaining stability in the domestic foreign exchange market.

From February 24 to March 2 the CBR loaned 4.4 trillion roubles (3.4 percent of GDP) to banks as part of its efforts to maintain stability in the financial system.

The sanctions against the CBR affected the domestic foreign exchange market immediately after they were announced on Sunday. By the end of that day, the selling rate of dollars in exchange offices of banks had risen by at least 45 percent compared with Friday. In the next days, the gap between selling and buying rates in the banks’ offices was between 20 and 50 percent.

Starting from Sunday night, the CBR and the government issued several new regulations imposing currency control. Exporters now have to sell 80 percent of foreign exchange earnings for roubles.

Foreigners cannot sell Russian stocks and bonds and transfer coupons and dividends to their accounts, while residents and non-residents from 43 countries (that imposed sanctions on Russia) cannot transfer funds to their accounts with banks outside Russia.

A side-effect of the sanctions on the CBR is the freezing of assets belonging to the Ministry of Finance, current accounts and funds of the National Welfare Fund. But it does not seem that this will have any effect on the current economic situation.

On the one hand, at the current level of oil prices, Russia’s budget is in surplus, and the Ministry of Finance does not need to use reserves. On the other hand, when the Ministry of Finance sells its foreign currency reserves, the buyer is the CBR; the Ministry of Finance does not need to go to the market for this.

Consequently, even if the accounts of the CBR are frozen, the Ministry of Finance will be able to receive roubles from it, if at some point it wants to sell some of its currency reserves.

However, the devaluation of the rouble will certainly affect consumer inflation, which may grow by an additional 4-5 percent for a 40-50 percent increase in the value of the dollar. By the end of February, consumer price inflation in Russia exceeded 9 percent, with food inflation exceeding 12.5 percent.

Devaluation of the rouble, potential problems with imports, and general political uncertainty may undermine a business’s desire to take risks and result in lower growth in agriculture, lower supply, and even higher food inflation.

- Advertisement -
Join The Conversation

Latest Stories

GFF SIGNS SPONSORSHIP DEAL WITH BALUWO

The Gambia Football Federation (GFF) on Friday signed a sponsorship deal with Baluwo, a Gambian founded international company. The sponsorship covered the 16-team domestic...