The Russian economy is reeling from the international sanctions levied in response to Russia’s invasion of Ukraine.
After initial rounds of sanctions late last week, the United States, the European Union, and other countries imposed several new measures designed to squeeze the Russian economy and push Russian strongman Vladimir Putin to back off his war in Ukraine. The Russian stock market was closed on Monday as the value of the country’s currency, the ruble, collapsed amid the crushing sanctions.
The ruble tumbled by about 30% from Friday to Monday, hitting an all-time low, although it has since pared back a bit of those losses. At one point, the ruble was trading as low as 120 against the dollar, according to Reuters. As the ruble collapsed, Russian citizens have been seen across the country waiting in lines at ATMs to withdraw foreign currencies.
Over the weekend, Western countries announced that certain Russian financial institutions would be cut off from the SWIFT system, a move that President Joe Biden had previously declined to pursue last week.
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The Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, is the main secure messaging system that facilitates cross-border financial transactions and money transfers. SWIFT is overseen by the Bank of Belgium and is used by 11,000 banks and institutions worldwide.
U.S. officials said that the SWIFT move was done in order to send the ruble into a “free fall” and generate crippling inflation in an effort to force Putin’s hand.
The U.S., Britain, and the EU also restricted the Russian central bank from accessing a big chunk of its more than $600 billion in foreign currency reserves, which it would otherwise use to halt the ruble’s decline and slow inflation. By doing so, the Western powers have dinged Moscow’s efforts to insulate its economy from the other sanctions.
“Our strategy, to put it simply, is to make sure that the Russian economy goes backward as long as President Putin decides to go forward with his invasion of Ukraine,” a White House official said during a Monday phone call.
Liam Peach, an emerging market economist at Capital Economics, said in a note that about 40% of Russia’s reserves are now off-limits to Moscow.
“The ratcheting up of Western sanctions over the weekend has left Russian banks on the edge of crisis,” he wrote.
While the Russian central bank initially paused the opening of markets on Monday, it later decided to suspend trading entirely for the day under the weight of the economic penalties. The Russian central bank plans to provide an update on future trading at 9 a.m. local time on Tuesday, which is 1 a.m. EST.
S&P Global Ratings lowered Russia’s credit rating to junk status as a result of the economic crisis.
The country’s central bank decided to more than double interest rates, hiking them to 20%, the highest in nearly two decades.
“External conditions for the Russian economy have drastically changed,” the central bank said in a statement. “Due to the current situation, the Bank of Russia has decided not to open a stock market section, a derivatives market section, or a derivatives market section on the Moscow Exchange today.”
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On Monday, Switzerland, which prides itself on its international neutrality, took the step of freezing the assets of Putin and hundreds of other individuals sanctioned by the EU last week. The move was a major blow to Russian oligarchs, many of whom have parked their money in Swiss banks. Switzerland said it was abandoning its neutrality because of “the unprecedented military attack by Russia on a sovereign European state.”
Switzerland also joined with other European countries in barring Russian aircraft from entering its airspace.
Chris Miller, an assistant professor at Tufts University’s Fletcher School and visiting fellow at the American Enterprise Institute, said that while the new sanctions against Russia from the West are tough, they are not maximally tough as, for example, U.S. sanctions against Iran have been.
“Sanctions will cause tremendous financial distress in Russia and will throw it into a deep recession. Russia has said it had ‘sanction-proofed’ its economy, but the slump in Russia’s currency today shows that this isn’t true,” Miller told the Washington Examiner.
Miller noted that the reality of the situation is that there are not many tools left at Moscow’s disposal to soften the blow of the powerful sanctions.
Given that Russia supplies some 40% of Europe’s natural gas, the U.S. and its allies have left some exemptions on payments for purchases of certain energy products. Even before the war began in Ukraine, Europe and the world at large were facing an energy crunch. Energy products and other commodities have risen since the start of the war.
Oil prices jumped by more than 3.5% on Monday, while corn and wheat were up by 4.8% and 5.5%, respectively. Gold prices have also remained high, as it is being seen as a safe-haven asset.
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International retaliation for Russia’s invasion of Ukraine has been swift. In just a matter of days, the situation has galvanized the resolve of NATO and EU countries in condemning and punishing Putin’s regime. After Russia’s initial incursion last week, some countries such as Germany were reticent about going all-in on sanctions.
Over the weekend, though, the EU presented a united front, and German Chancellor Olaf Scholz even announced before a special session of Parliament a one-time increase of more than $100 billion for defense spending. He also pledged to boost Germany’s defense spending by above 2% of the country’s gross domestic product.
