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Russia’s Efforts to Sanction-Evidence Its Economy Has Revealed a Weakness

After the West defeated Russia with sanctions because annexed Crimea from Ukraine in 2014Chairperson

Vladimir Putin

embarked on what analysts have called Russia’s Fortress strategy, boosting the country’s foreign exchange reserves, buying gold and shifting some exports to China.

Now, a series of tougher measures in the event of a new invasion of Ukraine could test this approach, and experts say they could cause widespread economic pain, despite Putin’s efforts.

The United States on Tuesday said it was prepare to impose sanctions and export controls on important sectors of the Russian economy. Senior administration officials said the United States could ban the export to Russia of various products using microelectronics based on American equipment, software or technology, similar to the US pressure campaign. for Chinese telecom giant Huawei Technologies Co. US officials have previously said that measures under consideration also include cutting off Russian banks’ access to the dollar and possible sanctions on energy exports. of Russia.

“It’s unpleasant, of course, but it can be solved by financial institutions” in Russia, Finance Minister Anton Siluanov said this month on the prospect of more sanctions, noting that Russia prepared ready. “I think they will cope in such a risky case.”

To some extent, Russia has removed itself from the dollar and reduced the proportion of debt held by foreign investors. The government has implemented a prudent fiscal policy and kept its government debt below 20% of GDP, compared with 133% in the US, according to IMF data.

Russia has also amassed a significant financial buffer, with international reserves, including gold and foreign currency reserves, reaching an all-time high of $630 billion in December, one of the largest in the world. world, according to central bank data.

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A convoy of Russian armored vehicles moved along a highway in Crimea earlier this month. President Putin annexed the region in 2014.


Photo:

/Related press

In an early retaliation to Western sanctions, Moscow in 2014 banned most Western food imports such as fruits, vegetables, meat and dairy products, including cheese. French coolers have become a staple product of the middle class. The import substitution drive then extended to other sectors, including healthcare and technology, stimulating domestic production.

Meanwhile, economic cooperation with China has increased. In 2019, Russia opened a major gas pipeline to China, and trade between the two countries has grown to more than $100 billion a year.

“Putin has been preparing for this moment since 2014,” Timothy Ash, senior emerging markets strategist at BlueBay Asset Management, wrote in a note Tuesday.

One area where Moscow cannot resist sanctions is technology. Global chip industry is largely dominated by companies from the US and its allies in Europe, Taiwan and South Korea. Russia has only a handful of semiconductor factories, mostly outdated and dependent on parts and patents from Western companies.

Export controls of microelectronics under consideration by the United States will be exercised through a powerful policy tool known as the Foreign Direct Product Rule, which The Trump administration once crippled China’s Huawei. European officials have said they will also impose export bans, including on high-tech goods, although discussions continue over how broad they are.

Such export restrictions will limit Russia’s ability to buy machine tools, smartphones and other consumer electronics, analysts say. They will exactly an economic damage and hurt the modernization efforts of the Russian economy.

The US says about 100,000 Russian troops have been deployed near the Ukrainian border. Satellite images show an increasing presence of military equipment at several locations. Photo: Maxar Technologies

Even as it has been more successful in other areas, resisting sanctions has come at a cost.

Rigid fiscal policy has limited growth and investment while the government prioritized support for state-owned enterprises. As a result, Russia’s GDP has grown more slowly than the world average since 2014. Russians are also poorer than they were before the annexation of Crimea: at the end of 2020, real incomes fell by 9. 3% from 2013 levels.

Past sanctions have also taken a toll. The International Monetary Fund estimates it fell 0.2 percent from Russia’s one-year growth from 2014 to 2018.

Ultimately, analysts say, Russia’s efforts won’t be enough to ease the new massive sanctions.

While down from 80%, the dollar’s share of exports of goods and services now stands at 56%, ING Bank estimates. The private sector is even more exposed and the dollar still dominates the foreign exchange market in the country.

“Russia is ready this time,” said Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs. “But this does not mean that the effects of sanctions will not affect the entire system.”

Brian O’Toole, a former Treasury official and sanctions expert at the Atlantic Council Institute, said the latest round of sanctions, if passed, “would cause confusion.” Big economic, with big economic consequences… There will be immediate economic impact.”

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The exchange rate of the Russian ruble against the euro and the US dollar outside the office changed in central Moscow on Monday.


Photo:

Anton Novoderezhkin / Zuma Press

Russian assets have tumbled this week as investors weigh on the threat of sanctions. The ruble and the local stock market fell to multi-month lows while Russia’s credit default swaps, a gauge of financial risk, rose to their highest levels since the start of the pandemic. Strategists at JPMorgan on Tuesday recommended that investors close their long ruble positions due to “severely high” geopolitical uncertainty.

Economic pain could lower Mr. Putin’s approval rate, which fell to 65% in December from nearly 90% in 2015, according to Russia’s independent polling center Levada.

Among the toughest options — and one Western negotiator says are not currently on the table — the Biden administration has in the past considered disconnecting Moscow from the SWIFT international banking system, used by more than 11,000 financial institutions in more than 200 countries, and prevent Russian financial institutions from using the US dollar.

In the event of a SWIFT disconnection, Russia could switch to the Central Bank’s Alternative Financial Message Transfer System. But while almost every Russian bank participates in the network, it accounts for only 20% of financial transactions in 2020, the central bank said last year. It’s also uncommon abroad: only one Chinese lender is involved.

Meanwhile, if the Biden administration cuts off Russian banks’ access to the dollar, that would disrupt the country’s links to the rest of the world and lead to a sharp drop in GDP, Janis Kluge , an expert on Eastern Europe at the German Institute said. International and security issues. Most global trade, including oil and gas sales, is paid for in dollars. Side effects would include capital flight, a collapse of the ruble and high inflation, he said.

On the banking sector, Dmitry Dolgin, an economist at Moscow-based ING Bank, estimates that nine out of the 12 financial institutions listed in the sanctions bill proposed by the Chairman of the Upper House Foreign Affairs Committee Bob Menendez Institute, (D., NJ) sponsored. over 40% of the local interbank market and up to 80% of corporate lending and financing. If those banks were sanctioned, “it would be a very painful measure,” he said.

Restrictions on Russian energy companies will directly affect the heart of the country’s economy, where the oil and gas sector contributes up to a fifth of GDP. With a number of companies, including major oil giant PJSC Rosneft, already sanctioned, the US could further restrict their financing or go after its subsidiaries, analysts said. they are abroad. Mining and metals companies could also face financial cuts.

Write letter for Georgi Kantchev at georgi.kantchev@wsj.com

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https://www.wsj.com/articles/russias-attempts-to-sanction-proof-its-economy-have-exposed-a-weak-spot-11643193911 Russia’s Efforts to Sanction-Evidence Its Economy Has Revealed a Weakness

Ethan Gach

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