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Putin’s Invasion of Ukraine Could Destroy Russia’s Economy

Ukraine
Ukrainian Army Tank Firing. Image Credit: Creative Commons.

The domestic economic fallout from Russia’s Ukraine invasion would suggest that economics is not Vladimir Putin’s long suit.

Mr. Putin’s belief that he had sanction-proofed the Russian economy in advance of the Ukraine invasion would now seem to be in tatters.

This is underlined by the fact that his country now finds itself on the cusp of an economic and financial crisis of epic proportions. Mr. Putin’s belief that Europe’s high dependency on Russian energy supply gave Russian substantial economic leverage over the West has been belied by the unusual unity that the Western countries have displayed in imposing crippling sanctions on the Russian economy.

Over the past eight years, having learned from his experience with the 2014 annexation of Crimea, Putin went to great lengths to make his country what he believed to be sanction-proof before he embarked on his next Ukrainian adventure. Among the more important measures taken was to build up a massive arsenal of international reserves. These now total around $630 billion equivalent to approximately a third of the size of the Russian economy.

Mr. Putin also engaged in budget belt-tightening that allowed the country to reduce the size of its public debt to 20 percent of GDP and he took steps to diversify Russia’s trade away from Europe and the United States.

Russia’s massive international reserve arsenal lulled Mr. Putin into a false sense of security. He truly believed that those reserves would allow him to compensate Russia’s banks and companies for any damage that Western sanctions might impose on them. He also believed that those reserves would enable the Russian central bank to support the currency in the event that sanctions weakened the country’s balance of payments.

The one thing that Mr. Putin did not count on was that, despite its very high dependence on Russian oil and natural gas, Europe would stand shoulder to shoulder with the United States in taking far-reaching measures against Russia that would breach its economic defenses. In particular, he did not anticipate that the West would go as far as freezing the Russian central bank’s assets held in Western central banks. Nor did he anticipate that key Russian commercial banks would be shut out of the SWIFT payment system.

Anyone doubting that Russia’s economic defenses have been more than breached needs only take a look at what is happening on the ground.

Since the start of the year, the ruble has lost more than 25 percent of its value and now buys less than one US cent. This has forced the Russian central bank to double its interest rate to 20 percent. Meanwhile, long lines have formed outside banks by depositors wishing to withdraw money. That has forced the Russian central bank to issue desperate reassurances that the banks are sound. At the same time, the stock market has plummeted by more than 50 percent, which has forced the government to shut down the stock market.

Historically, currency collapses and bank runs generally do not end well for economies that experience them. The currency collapse and bank run now occurring in Russia will prove to be no exception. As occurred during the 1998 Russian financial market crisis, it would seem to be only a matter of time before the country is forced to adopt a draconian exchange market and capital controls that will cripple the economy. This prospect is now prompting the Institute for International Finance to believe that Russia is almost certain to default on its debts and to experience an economic collapse.

This is all not to say that Russia’s economic free fall will deter Mr. Putin’s single-minded effort to subdue Ukraine to his will. However, it is to say that when the dust settles, Mr. Putin must expect a domestic backlash at home from an economically impoverished Russian citizenry.

Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.

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Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and multilateral lending agencies.

13 Comments

13 Comments

  1. Eric-ji

    March 1, 2022 at 3:22 pm

    Already done. Just people don’t know it yet.

  2. Alex

    March 1, 2022 at 3:35 pm

    This is exactly what the Western countries assumed. Now Russia does not care about all the sanctions of the West. Forget about them, this will not stop Russia, just as your aggressive actions towards Russia did not stop you.

  3. Commentar

    March 1, 2022 at 7:42 pm

    Russia’s economy will outlast and outlive Biden. This fact is TOTALLY indisputable.

    Biden has made the greatest mistake of his life by refusing to consider russia’s legitimate security demands and wanting to swallow ukraine.

    Russia in the months and years ahead has enough clout to seriously damage US economy by cutting off titanium supply to the west and kneecapping Boeing by preventing all Boeing aircraft transiting through Russian airspace.

    People will think twice before buying Boeing airliners. The market where several thousand planes the company is hoping to sell in the Pacific will literally disappear overnight.

    Russia can retaliate in a multitude of ways that Biden with his cerebrally challenged brain is simply incapable of foreseeing and therefore it’s the US economy that’s going to drop to number two in the world.

    What did Biden say after he became president? “The US won’t be surpassed under my watch.” Famous last words.

  4. Jimmy John Doe

    March 1, 2022 at 8:27 pm

    Russia surely will note the enormous hypocrisy practiced by Biden and his vassals as they have not imposed sanctions on Saudis despite their horribly genocidal war in Yemen for the past seven years and instead imposed the most severe sanctions on Iran.

    Now, Iran is going to have less encouragement or motivation to give ground to Biden and minions in their ongoing nuclear talks seeing that it now has Russia for company. Ha, ha, ha, ha !

    Iran should instead now cooperate with Russia to develop nuclear weaponry and associated rocketry.

    The Saudis will be very very serious with Biden and his cohort at such a turn of events and could even embargo oil supply to the west.

    Biden is going to have a very hot potato in his hands and any oil embargo or even an oil shortage will enrage US motorists who will yodel for Biden’s blood (after shooting each other in mass shootouts).

  5. Commentar

    March 1, 2022 at 8:37 pm

    The only really tangible result from the sanctions imposed on Russia is a coming or inevitable super duper arms race around the world.

    The sanctions are illegal because they are quite extraterritorial and also extrajudicial in their nature and if people wake up and see US and NATO acting like lawless lawmen, they’ll make up their minds to arm themselves to the hilt.

    Biden ain’t going to win this one, he will lose, shout it’s unfair and US will become extremely hysterical and warlike and will initiate ww3 ! ! ! Gone with the wind, nuclear wind, that is.

    When you sow the wind, you shall reap the whirlwind.

  6. FRAZIER STALL

    March 1, 2022 at 8:57 pm

    Once sanctions become an everyday reality, people will have enough time to stop and ask ‘Is the US now the dark vadar of our times, the new genghis, or the new hetlar’.

    People will refrain from buying genghis’ propositions, his goods and services which, by the way, are marketed at cut-throat prices and wary of his bloodthirsty ways.

    People will stop buying Apple products, for example. These products right now are all available to buyers with great courtesy and a big nod of approval from NSA.

    Edward Snowden has in the past revealed NSA had monitored phone calls around the globe including those of cellphone calls from Merkel and others.

    Apple cellphones have long been turned inside out by the famous NSA, There’s even a special program or app designed for these items (can’t recall name) but all Apple iOS calls are automatically recorded and analysed not by humans but by supercomputer systems based at it’s several cryptologic centers in Europe and america.

    That’s how drone strikes are operated and coordinated today and how fed agencies intercept goods, people, parcels and financial transactions and the like.

    This is the age of the new vader, the new overseer and sanctions god. Good day.

  7. Slack

    March 1, 2022 at 9:30 pm

    Sanctions will ricochet or boomerang back at US. Bet it was never thought of by Mr Biden.

    Not just apple, but intelligence agencies have long had a big grasp of products produced by Microsoft and google.

    Google’s ties with them are famous and have been known for years. It’s how they id’d system users and phone callers. Now with apple smartphones and google smartphones, they certainly have a field day.

    Recently, reseachers just discovered NSA has programs targeting non-google, non-apple or MS systems.

    These target Unix, Linux and even sun systems. Rather than logging your keystrokes at the computer, they cache an exact copy of what’s appearing at your computer monitor, thus even mouse movements and pre-loaded graphics and diagrams cannot escape them

    These actions and the sanctions on russia will ricochet badly on Biden and company, and the economies of the west will eventually pay a big price for their actions.

  8. Jacky

    March 1, 2022 at 10:09 pm

    The hitlerian policies of sanctions, financial cutoffs, global blackmail, sustained strangulation and other gangster economics will destroy the world economy.

    Not only will world’s economy be destroyed but the world will be transported back or return to pre-1914 situation.

    The world will be divided into two camps, one led by west and one led by non-west. These two will eventually collide like two meteors or comets ramming headlessly into each other.

  9. Commentar

    March 1, 2022 at 10:58 pm

    During the 1930s, Germany saw a shrill campaign against ‘jews and bolsheviks’ especially after Adolfo ascended the seat of German chancellor.

    Adolfo hitler became chancellor in 1933, later also becoming the fuhrer. But at the beginning or the early years of his chancellorship, Jews were only hit by unofficial sanctions, harassed on the streets or had their businesses disrupted.

    Later, their belongings were seized or compounded, their homes ransacked and shipped to camps while ‘bolsheviks’bwere shot and killed as traitors and saboteurs.

    Today, there’s a similar pattern or series of events being seen around the world with media trumpeting how ‘evil’ Russia has become and Russian tourists, sports people and businesses coming under attack and harassment.

    History fondly likes to repeat itself, only just the actors changing into different costumes.

    What happened to the thing about turning swords into ploughshares. The UN needs to close shop or movemout of NYC altogether.

  10. Commentar

    March 2, 2022 at 1:08 am

    Putin’s invasion has laid bare the duplicity of the US, in particular Biden’s double dealings for Europe. And even the world.

    Biden has just declared he won’t authorise any military involvement in ukraine, yet he has sent soldiers, warplanes and other war stuff to Europe. For strictly sightseeing and visiting bars, nightclubs, brothels and gay joints?

    Biden is like Obama, who once repeatedly said no military boots in syria, but the whole world knows what Obama did.

    The sanctions will eventually bounce back at Biden and in 2024, he will get swiftly kicked out of the white house.

  11. Slack

    March 2, 2022 at 6:18 am

    It’s a big shame a near 80-year old man is free to initiate actions that could destroy the world economy, in fact his actions could end up destroying the world itself.

    Perhaps this is the way of life for a demented democracy or deeply flawed democracy in which one very old, old man, especially a man who’s mental capacity has been diminished by early stage dementia can make decisions that will deeply affect 7 billion others on the planet.

    A law must be put up to forbid anyone over 70-years-old from holding executive office.

    An old, old man bent on confrontation with a foe that possesses massive nuclear weapons and then threatening to strangle his country is a big no-no.

    Other people aren’t yet ready to die unlike the old, old man who’s time is almost up. But he doesn’t care. This could very well be his last thrill on earth, so be it, as far as he’s concerned.What the heck.

  12. Alex

    March 2, 2022 at 9:52 am

    Destroy – can not. But it can harm the Russian economy. But the West will also suffer from this. Russia prepared for any consequences, Russia is not the first time facing backstabs and lies from the West.

  13. from Russia with love

    March 2, 2022 at 3:52 pm

    so far, it looks very much like the short-sighted actions of Western countries will become the catalyst for another global crisis that will destroy the economies of Western countries. Russia was preparing for sanctions and a crisis. what did the west do? puffed out his cheeks and was rude. as a result, fuel prices doubled in a week and gas prices confidently exceeded $2,000. and this is just the beginning! 😉

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