It was March 2022. The Russian ruble plummeted, the London value of giants Gazprom and Sberbank fell by 97%. Long lines began to form at Moscow ATMs. Oligarchs had their yachts, football teams, mansions and even their credit cards confiscated. Russia fell into a major recession.
This was the immediate result of the West’s most extraordinary attempt to financially contain Russia after it decided to invade Ukraine and the war began.
Among the most important measures was the seizure of the Russian state’s official foreign currency assets and, in particular, the unprecedented freezing of the central bank’s reserves of $300 billion.
Western governments deliberately avoided using phrases like «economic warfare,» but it certainly looked like there was a financial battle going on with the Kremlin. It was better than the alternative of direct confrontation between nuclear states.
Nearly two years have passed and there has been a great change in this economic context.
In a long and confusing interview this week, Russian President Vladimir Putin gleefully exclaimed that Russia is the fastest-growing economy in Europe.
Last week, the International Monetary Fund (IMF) highlighted the strength of the Russian economy when it upgraded its growth forecast for this year from 1.1% to 2.6%.
According to IMF figures, the Russian economy grew faster than the entire G7 last year and will do so again in 2024.
In March 2022, the London value of giants Gazprom and Sberbank fell by 97%.
These aren’t just numbers.
The stalemate in Ukraine last year and the growing expectation of a frozen conflict on the ground throughout this year have been underpinned by the remobilization of the Russian economy towards its military effort, especially in the construction of defensive fronts in eastern and southern Ukraine.
Will Russia be able to sustain growth?
Western leaders argue that this model is totally unsustainable in the medium term. But the question is: how long can it be sustained?
Russia has transformed its economy into a mobilized war economy. The Russian state is spending a record amount in the post-Soviet era.
Military and security spending, which accounts for up to 40% of the budget, has returned to the levels of the late USSR era. Other areas of state support to the population have been reduced to compensate for funding for the production of tanks, missile systems and defenses in occupied Ukraine.
On top of that, and despite Western restrictions on Russian oil and gas, hydrocarbon revenue streams have continued to trickle into state coffers.
Tanker Ships are now headed to India and China and most payments are made in Chinese yuan rather than U.S. dollars.
Despite the restrictions, the flow of hydrocarbon revenues continues to flow into state coffers.
Russia’s oil production remains at 9.5 million barrels per day, an amount that is just below pre-war levels.
The country has circumvented sanctions by buying and deploying a «shadow fleet» of hundreds of tankers.
Last week, its Finance Ministry reported that taxes on hydrocarbons in January exceeded levels seen in January 2022, just before the invasion.
The current flow of foreign currency into Russian oil, gas and diamonds has also helped ease the strain on the value of the ruble.
Western leaders insist this cannot last, but acknowledge its impact.
A world leader recently said privately: «2024 will be much more positive for Putin than we thought. He’s managed to reorganize his own industry more efficiently than we thought.»
Russia Exposed
But this form of economic growth has greatly increased Moscow’s dependence on oil revenues, China, and non-productive war spending.
As demand for oil and gas peaks and competing production from the Arabian Gulf comes online next year, Russia will be exposed.
Statistical increases in gross domestic product (GDP) stemming from the production of tanks and shells that then explode in the Donbas in eastern Ukraine are also far from productive.
Russia’s military and security spending accounts for up to 40% of its budget.
Meanwhile, Russia has experienced a brain drain of some of its most talented citizens.
The Western strategy has not been to lay siege to the Russian economy, but to engage in a cat-and-mouse game to restrict its access to technology, increase costs, limit revenues, and make the conflict unsustainable in the long term.
«We’d rather have Russia use its money to buy oil tankers than tanks,» a U.S. official told me.
In the oil market, the goal of the policy is not to try to prevent India, for example, from buying Russian oil, but to limit the profits from that trade that go back to the Kremlin’s war machine.
But this resilience and stagnation may last at least the rest of this year. And this helps the Kremlin’s clear strategy of waiting for a possible change of US president and a reduction in Western funding for Ukraine’s defense.
Frozen assets
That’s why attention is now returning to the central role of those hundreds of billions in frozen Russian financial assets.
Ukrainian President Volodymyr Zelensky told me last month, «If the world has $300 billion, why not use it?» All those frozen funds should be used to finance Ukraine’s reconstruction efforts, he said.
El Canciller del Reino Unido, Jeremy Hunt, y el Secretario de Asuntos Exteriores, David Cameron, respaldan la medida.
Ukrainian President Zelensky has called for billions of dollars of frozen Russian assets to be used to help his country.
Cameron told me, «We have frozen these assets. The question is: are we going to use them?»
Cameron noted that «using some of this money now is, if you will, an advance payment of (Russian) reparations» for its illegal invasion of Ukraine, and could be used «to help Ukraine and save Western taxpayers money at the same time.»
The G7 has asked its central bank leaders to produce a technical and legal analysis. It is understood that this is something that makes them uncomfortable.
A major financier told me that there are risks of what he called «weaponizing the dollar.» Traditionally, central banks enjoy sovereign immunity from such actions.
A plan being developed would use funds or investment proceeds to raise tens of billions of dollars for Ukraine.
But it’s a delicate balancing act. If Russian assets are confiscated in this way, what message does it send to other nations, perhaps in the Gulf, Central Asia, or Africa, about the safety of their reserves in Western central banks?
These relationships are some of the central arteries of global finance, in which hundreds of billions of dollars used to pay for energy around the world are recycled.
Putin certainly sought to communicate that China was now emerging as an alternative, if not for the West, then for emerging economies.
The Russians have also indicated that they will take legal action against any seizures and, in turn, take similar assets from Western companies frozen in Russian banks.
So the shadow battle over Russia’s economy is essential to understanding where this conflict and the world economy is headed.
Russia’s war economy cannot sustain itself in the long term, but it has given the country some extra time. The West is about to up the ante, after Russia showed this unexpected resilience.
The precise form of this financial escalation will have consequences far beyond Russia and Ukraine.