Putin's Russia
The Times carried a revealing article by Oliver Kamm the other day which highlighted the effect sanctions are having on the Russian economy.
Good news if you ask me, because this is one situation in which President Putin is unable to use Russia's military might to his advantage.
Sanctions are forcing Putin to stare down the barrel of recession
By Oliver Kamm - The Times
Economic sanctions don’t work — until they do. That’s the paradox facing the Kremlin at the moment. Western policymakers suddenly find that they have unexpected economic leverage against Vladimir Putin’s regime. They should grasp it.
Last July the United States and the European Union imposed strict financial sanctions on Russia in retaliation for President Putin’s aggression in eastern Ukraine. Most people, presumably including Mr Putin, assumed that these would be more symbolic than effective. After all, Russia has benefited from buoyant revenues for its energy exports for all this century, and even a small country such as Cuba managed to withstand US economic sanctions for decades, until the Obama administration resolved a few weeks ago to abandon that failed policy. Financial markets largely shrugged off the impact of sanctions on Russia.
That was then. It’s clear that those sanctions were skilfully designed and are having a devastating effect on the Russian economy.
Sure, western policymakers have been lucky in this respect, because oil prices have fallen by more than 50 per cent since last summer. That huge decline is reflected also in a collapse in the value of the rouble, which lost nearly half its value against the dollar last year.
The rouble gained ground last month, but so far has appreciated from a low of 71.9 to the dollar to about 62 today. It doesn’t change the fundamental arithmetic. Russia’s economy is suffering from weaker global demand for energy and from the shale gas revolution in the US. It cannot export its way out of trouble. Inflation is running at about 15 per cent owing, in part, to the collapse of the rouble. Real wages are being squeezed severely. Russia is heading for a severe recession this year.
This is the background. In the foreground are the financial sanctions. Without the economic crisis, the Putin regime might have got round them some way. In fact, they are hitting hard. The official currency reserves held by the Central Bank of Russia are on paper quite comfortable, at about $360 billion, but not all of this is liquid. It’s revealing that the central bank isn’t intervening to defend the rouble. It simply doesn’t have the reserves to do this. Rising interest rates aren’t having the desired effect, either. They lack credibility, given Russia’s financial weakness.
The weakness is that Russia can’t get international financing. The sanctions are biting. While those sanctions are in place, Russian corporates and state-owned enterprises have no option but to repay foreign debt when it comes due instead of being able to roll it over.
This is why Russia is heading to economic disaster. If it were simply a matter of collapsing oil prices, the recession might be brief and manageable, yet at just the time when the economy needs stimulus, interest rates are having to rise and companies are unable to invest. The nearest equivalent is the state of the advanced industrial economies in 2009: a squeeze on financial liquidity, because of the collapse of the western banking system, meant that a cyclical economic downturn became a bitter recession.
US and EU policymakers should carry on doing exactly what they are doing. Russia’s looming economic disaster is the direct result of Mr Putin’s policies. He chose to redraw the map of Europe by force and threats. He can get sanctions lifted by abandoning that course.
Russia Today, the English-language propaganda outlet of the Putin regime, is claiming that Europe’s economies will suffer as a result of sanctions on Russia. That’s the response of an alarmed autocracy that didn’t expect to be in this position. Russia is a test case of the effectiveness of economic sanctions. This time they’re working. The West should keep up the pressure.
Oliver Kamm is a Times leader writer and columnist @OliverKamm
Economic sanctions don’t work — until they do. That’s the paradox facing the Kremlin at the moment. Western policymakers suddenly find that they have unexpected economic leverage against Vladimir Putin’s regime. They should grasp it.
Last July the United States and the European Union imposed strict financial sanctions on Russia in retaliation for President Putin’s aggression in eastern Ukraine. Most people, presumably including Mr Putin, assumed that these would be more symbolic than effective. After all, Russia has benefited from buoyant revenues for its energy exports for all this century, and even a small country such as Cuba managed to withstand US economic sanctions for decades, until the Obama administration resolved a few weeks ago to abandon that failed policy. Financial markets largely shrugged off the impact of sanctions on Russia.
That was then. It’s clear that those sanctions were skilfully designed and are having a devastating effect on the Russian economy.
Sure, western policymakers have been lucky in this respect, because oil prices have fallen by more than 50 per cent since last summer. That huge decline is reflected also in a collapse in the value of the rouble, which lost nearly half its value against the dollar last year.
The rouble gained ground last month, but so far has appreciated from a low of 71.9 to the dollar to about 62 today. It doesn’t change the fundamental arithmetic. Russia’s economy is suffering from weaker global demand for energy and from the shale gas revolution in the US. It cannot export its way out of trouble. Inflation is running at about 15 per cent owing, in part, to the collapse of the rouble. Real wages are being squeezed severely. Russia is heading for a severe recession this year.
This is the background. In the foreground are the financial sanctions. Without the economic crisis, the Putin regime might have got round them some way. In fact, they are hitting hard. The official currency reserves held by the Central Bank of Russia are on paper quite comfortable, at about $360 billion, but not all of this is liquid. It’s revealing that the central bank isn’t intervening to defend the rouble. It simply doesn’t have the reserves to do this. Rising interest rates aren’t having the desired effect, either. They lack credibility, given Russia’s financial weakness.
The weakness is that Russia can’t get international financing. The sanctions are biting. While those sanctions are in place, Russian corporates and state-owned enterprises have no option but to repay foreign debt when it comes due instead of being able to roll it over.
This is why Russia is heading to economic disaster. If it were simply a matter of collapsing oil prices, the recession might be brief and manageable, yet at just the time when the economy needs stimulus, interest rates are having to rise and companies are unable to invest. The nearest equivalent is the state of the advanced industrial economies in 2009: a squeeze on financial liquidity, because of the collapse of the western banking system, meant that a cyclical economic downturn became a bitter recession.
US and EU policymakers should carry on doing exactly what they are doing. Russia’s looming economic disaster is the direct result of Mr Putin’s policies. He chose to redraw the map of Europe by force and threats. He can get sanctions lifted by abandoning that course.
Russia Today, the English-language propaganda outlet of the Putin regime, is claiming that Europe’s economies will suffer as a result of sanctions on Russia. That’s the response of an alarmed autocracy that didn’t expect to be in this position. Russia is a test case of the effectiveness of economic sanctions. This time they’re working. The West should keep up the pressure.
Oliver Kamm is a Times leader writer and columnist @OliverKamm
