02-26-2022, 01:55 PM
Sanctions will put Russia’s ‘fortress’ economy to the test
Since 2014, when the United States and its Western allies imposed sanctions on Moscow following the annexation of Crimea and the downing of Malaysian Airlines Flight 17, Russia’s president has been trying to build an economy capable of withstanding much tougher penalties.
The West this week kept some of its sanctions firepower in reserve after Russian troops invaded Ukraine. Even so, the measures that were announced by the United States, the European Union and the United Kingdom will put Russia’s “fortress economy” to the test.
Fear of what sanctions might do sent Russian stocks crashing 33% on Thursday. They have since recovered some of those losses, but the ruble continues to trade near record lows against the dollar and the euro.
Russia’s $1.5 trillion economy is the world’s 11th biggest, just behind South Korea. Since 2014, its gross domestic product has barely grown and its people have gotten poorer. The value of the ruble has also tumbled, shrinking the value of the Russian economy by $800 billion.
Over the same period, Moscow has tried to wean its oil-dependent economy off the dollar, limited government spending and stockpiled foreign currencies.
Putin’s economic planners have sought to boost domestic production of certain goods by blocking equivalent products from abroad. Moscow has meanwhile amassed a war chest of $630 billion in international reserves — a huge sum compared to most other countries.
David Lubin, a Citi economist and associate fellow at Chatham House, said “fortress economics” requires the creation of big foreign currency reserves that can be spent if sanctions bite.
“Russia has followed this pattern assiduously,” he wrote recently.
Some of those reserves are already being deployed. The Russian central bank said Thursday it was intervening in the currency markets to prop up the ruble. And on Friday, it said it was increasing the supply of bills to ATMs to meet increased demand for cash. Russian state news agency TASS reported that several banks had seen increased withdrawals since the invasion of Ukraine, notably of foreign currency.
While building up a war chest, Putin’s austere strategy has also limited economic growth, investment and productivity, and prioritized state companies over private business. The incomes of ordinary Russians have regressed to levels last seen in the early 2010s, and new foreign direct investment is minimal. Russia has also failed to diversify away from oil and gas, leaving it heavily exposed to swings in global commodity prices.
https://www.cnn.com/2022/02/26/business/...index.html
