How the West can increase its chokehold on Russia’s economy
- The rouble’s depreciation has highlighted just how much pressure the war in Ukraine – and the sanctions imposed in response – has placed on Russia’s economy
- While the sanctions are clearly working, Putin’s continued ability to fund his war shows more must be done
Russia’s leaders have less to celebrate today. The rouble exchange rate offers the most visible indication of Russia’s economic performance, at least for Russian households.
So, the currency’s recent dip below the politically important threshold of 100 to the dollar made the Kremlin nervous. And it put the central bank – which, over the past year, has loosened or removed many of its capital controls – under fire.
Putin’s economic aide, Maxim Oreshkin, wrote an op-ed blaming policymakers for being too “soft”. The central bank immediately called an extraordinary board meeting, where it decided to raise interest rates by 3.5 percentage points, and signalled that more hikes are likely to come.
Additional currency controls also appear to be on the table. Meanwhile, Finance Minister Anton Siluanov reportedly advocates forcing Russian exporters to repatriate their dollar revenues and sell them to the central bank.
Nonetheless, the depreciation has highlighted just how much pressure the war – and the sanctions imposed in response to it – has placed on Russia’s economy.
In April last year, I wrote that Putin should not celebrate the rouble’s rally, which reflected two developments that would ultimately prove bad for Russia’s economy.
The delayed introduction of these policies allowed Putin to rake in huge revenues. Though the West had frozen about US$300 billion of the Russian central bank’s reserves, Russia’s record current-account surplus last year, at US$227 billion, almost made up for it.
But this bonanza is well and truly over: in the first half of this year, Russia’s oil and gas revenues fell by almost half, causing the budget deficit to grow to 2 per cent of annual gross domestic product.
And the war in Ukraine remains the Kremlin’s top priority: in the first half of this year alone, Russia’s military spending was reportedly 12 per cent higher than the amount budgeted for the entire year.
Beyond funding the war, Russia’s government hoped that continued spending would give the economy a Keynesian boost. But these hopes have not materialised, precisely because trade sanctions have undermined Russia’s productive capacity.
Nor should anyone be surprised by the central bank’s decision to pump the brakes, despite the likely impact of higher interest rates on output growth. Bloomberg now puts the probability of recession in Russia in the next six months at 21 per cent, compared to 6 per cent before the rate hike.
The other important takeaway from the rouble’s recent fall is that Putin is managing to circumvent trade sanctions. The rouble is cheaper because Russia needs US dollars to pay its import bill, which grew by one-third, year on year, in the second quarter.
This increase partly reflects the rising costs of bypassing sanctions, which are compounding the pressure on Russia’s budget and currency. By tightening the enforcement of export controls, the West can raise these costs further, putting Russia’s budget – and thus its criminal war effort – in a chokehold.