Sixth day of invasion of Ukraine: sanctions hit Russia 1:28

London (CNN Business) — The West responded to Russia’s invasion of Ukraine with a series of punitive sanctions. The latest is designed to cause a banking crisis, overwhelm Moscow’s financial defenses and plunge the Russian economy into a deep recession.

Never before has an economy of Russia’s global importance been subject to sanctions of such a high level, say analysts, who say there is now a high risk that Russia will face a financial crisis which could bring its largest banks to the brink of collapse. .

Western officials have described their campaign as an economic war aimed at punishing President Vladimir Putin and turning the country he leads into an international pariah, even if it takes years for sanctions to destroy the defenses of “the protected economy” of Russia. .

“We are going to cause the collapse of the Russian economy,” French Finance Minister Bruno Le Maire told a local news channel on Tuesday.

Russia’s status as a global energy supplier will make this mission even more difficult. Europe gets nearly 40% of its natural gas and 25% of its oil from Russia, and any disruption to these exports would cause already high world prices to rise further.

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How the West fights

Putin’s invasion of Ukraine received an unprecedented response from the United States, United Kingdom, European Union, Canada, Japan, Australia and other countries. Even Switzerland, famous for its neutrality and banking secrecy, agreed to impose sanctions on Russia.

The West has cut off direct access to the US dollar from the two largest Russian banks, Sberbank and VTB. It has also taken steps to remove some Russian banks from SWIFT, a global network that connects financial institutions and facilitates fast and secure payments.

The coalition is trying to stop Russia’s central bank from selling dollars and other foreign currencies to defend the ruble and its economy. In total, nearly $1 trillion in Russian assets have now been frozen by sanctions, according to Le Maire.

“Western democracies have surprised many by pursuing a strategy of putting intense economic pressure on Russia by effectively isolating it from global financial markets,” Capital Economics market economist Oliver Allen said in a research note. .

“If Russia continues on its current course, it is quite easy to see how the latest sanctions could be just the first steps in a serious and lasting severance of Russia’s financial and economic ties with the rest of the world,” he added.

Western countries have ruled out sending troops to fight in Ukraine, leaving sanctions as the primary means of challenging Russia. The measures could wipe out up to 6% of Russia’s gross domestic product, according to Oxford Economics.

“Our strategy, in a nutshell, is to ensure that the Russian economy shrinks while President Putin decides to continue his invasion of Ukraine,” a senior US administration official told reporters.

Russia’s “protected” economy

Possible scenarios for the Russian economy after the invasion of Ukraine 3:34

Since 2014, when the United States and its Western allies imposed sanctions on Moscow following its annexation of Crimea and the downing of Malaysian Airlines Flight 17, Putin has been trying to protect Russia’s $1.5 trillion economy. dollars, the 11th in the world. of the world.

Moscow has tried to wean its oil-dependent economy from the dollar, by limiting government spending and hoarding foreign currency.

Putin’s economic planners have also sought to boost domestic production of certain goods by blocking equivalent products from abroad. Meanwhile, Russia’s central bank has amassed a $630 billion war chest in reserves that includes foreign currency and gold, a huge sum compared to most other countries.

These defenses are being put to the test.

The sanctions crippled about 50% of Russia’s foreign exchange reserves, according to Capital Economics.

“The external conditions of the Russian economy have changed dramatically,” Russia’s central bank said on Monday, announcing it would roughly double interest rates to 20%. “This is necessary to support price stability and financial stability and protect citizens’ savings against depreciation,” the bank added.

Russia also imposes capital controls. The central bank ordered businesses to sell foreign currency on Monday to support the ruble, which fell to a record low against the U.S. dollar. And Putin is planning an executive order that would temporarily block foreign companies and investors from selling Russian assets, which have become toxic to many since the invasion.

“Russia’s war chest of over $600 billion in foreign reserves is only strong if Putin can use it,” a senior Biden administration official told reporters.

What will happen next

All eyes are on the Russian financial system.

There were reports over the weekend that Russians were queuing to withdraw cash from ATMs, raising the possibility of a bank rush in the country. Russian banks, already the main target of sanctions, could come under even more pressure if borrowers are unable to repay their loans as the inevitable recession hits businesses and households.

Liam Peach, emerging markets economist at Capital Economics, said Russian banks could be forced to respond by selling assets, likely at lower cost. Credit could become scarce, further compounding the economic pain of the sanctions.

“The increase in Western sanctions over the weekend has left Russian banks on the brink of crisis,” Peach said.

One of the first victims was the European branch of Sberbank, the biggest Russian lender sanctioned by Western allies. The European Central Bank said on Monday that Sberbank Europe, including its branches in Austria and Croatia, was, or likely would be, bankrupt due to “large deposit outflows” caused by the crisis.

Another problem is that Russian banks only have enough foreign liquidity to cover around 15% of foreign currency deposits on their books. The central bank would normally provide banks with foreign currency, but with half of its war chest out of bounds, it might not be able to do so, while defending the ruble.

The central bank could be under pressure for months or even years.

Thanks to oil and gas, the value of Russian exports far exceeds imports, and payments to the country are a major source of foreign currency. But investors and companies could try to squeeze large amounts of foreign cash out of the country as the ruble falls, forcing the central bank to spend up to $100 billion of its available reserves this year, according to Capital Economics.

At the same time, the West could take even tougher measures. The United States and its allies could pull more Russian banks out of SWIFT and further restrict their access to dollars and euros, according to the Institute of International Finance. They could also cut off Russian energy exports, even if it would send prices skyrocketing.

A further escalation of the economic conflict could have significant consequences.

“Remember that in the history of mankind, economic wars have often turned into real wars,” former Russian President Dmitry Medvedev said Thursday in response to Le Maire’s remarks.