The Impact Of The Consequences Of Putin's Blunder (Escalation In Ukraine) On Russian Economy And Financial System

There is no need of introduction, I guess. The rising tensions, attacks and aggression in Ukraine by the Russian troops is making the headlines in national as well as international news.

While Zelensky The President of Ukraine asked for the support of various EU nations, NATO and rest of the world.

But everyone including EU and USA has refrained from directly engaging with Russia in a military combat.

And most of them have used the economic sanctions, to cripple the Russian economy and its oligarchs.

Will it help in stopping the Russia is a different question. As It is not a brainstormed decision for the upliftment of the country at large. It a decision by one single human to satisfy the ego of one single human - Vladimir Putin.

But too much of any kind of restrictions are definitely disturbing. Doesn't matter how much you try to ignore them.

I am here to discuss the impact at Russian economy and financial system, of all the counter steps taken against Russia by the rest of the world.

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The Impact of Economic Sanctions

Individually, these sanctions wouldn't have meant much. But the bilateral coordination and the incoming restrictions getting worse and worse from multiple countries is drastic for the Russian economy.

Though the sanctions are intended to curtail the oligarchs - the prime money whales in close relation to Putin. By limiting their ability to use their money and support the Russian aggression against Ukraine.

But there is no denying the fact that every common citizen of Russia is going to face the wrath of these sanctions. And they will severely disrupt the life and living of Russians.

Let's dive into what the various individual economic restrictions are meant for.

Cutting Off The Major Russian Banks By The US

The first major step taken by the US was to cut off major state run banks of Russia. Sanctions were imposed on the 5 major Russian banks, out of which two of them i.e Sberbank and VTB are state backed largest lenders.

The sanctions restrict those specific Russian banks to transact in US dollars. 80% of the total forex trade of $46 billion done by these banks was in US dollars.

It has disrupted the ability of these banks to be involved in World Trade or liquidate their foreign assets present in US.

It will make the procurement of essential products and services difficult, by these banks, as USD is the gold standard for international payments. The transactions for energy are exempted though.

The sanctions were also specifically imposed on the Russian elites - the inner circle of Putin and the key members of Russian parliament.

Sanctions on Russia's Central Bank

Multiple countries like France, Germany, Italy, UK, US and European Union has further escalated and made the situation economically more worse for Russia by restricting the central bank from accessing it's $630 billion of forex reserves.

This move prohibits Russia to use these enormous reserves of in stabilizing its plummeting currency - Rouble. As they won't be able to exchange that forex to Rouble and shoot up its demand and falling price.

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People standing in ATM lines to get their cash out in Russia

Sanctions Against Russian Elites & Entities

Multiple Western, European and Asian countries have froze the assets of key Russian elites and entities including cabinet ministers & their families, paramilitary groups, money whales, Russian investment funds, state run enterprises, private entities. Also, some nations are deciding to curb Russians from getting a golden passport i.e getting the citizenship of another country by the means of investment.

Cutoff from SWIFT

SWIFT is a global network of 11000 banks that lets the national banks to transact with the other international banks.

Russia relies on SWIFT to settle the majority of its international export transactions of oil and gas.

US, UK and EU has imposed SWIFT ban on major Russian banks. As a result limiting their ability to transact anywhere outside Russia in more than 200 countries. This is severe.

Export & Import Control

Both US & Japan has imposed export limits to disrupt Russia's tech supply. Primarily meant to slow down the Russian technological advancement in military, aviation and marine industries. It includes telecommunications and navigation equipments, lasers, semi conductors etc. And any goods made in any other country using american machinery, blueprint or software can't be sold to Russia.

More than 75% of Russian Aeroplanes are leased. A lot of aircraft leasing companies will have to cancel their contacts with Russia. As EU sanctions bans supply of all kind of aircraft related tech to Russia

Also countries like Germany have halted their Oil and Gas imports from Russia along with suspending the approval of Nord Stream 2 gas pipeline.

Restrictions on Using Global Air Space

Numerous countries have banned Russian airplanes from accessing their air space. The whole of EU basically and US and Cananda. Any Russian national or entity is no longer allowed to own or operate an airplane in this territory. And as a counter action Russia has banned 36 countries form its air space.

As a result, a lot of European passenger and cargo flights will have to reroute and air transport to longer distances would become more costly.

Impact on Russia

Already visible.

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The value of the native Russian currency already went down by 30% and then slowly stabilizing at 16-17% of overall value depreciation. But things can definitely turn worse further in the longer term or if stronger sanctions are imposed.

Russian banks have doubled their interest rate in an attempt to stabilize Rouble making the loans costlier. And they are taking various other capital control measures, like restricting the transfer of foreign currency by residents to non residents. But there is always only so much you can do without hurting anything. The hurt is inevitable.

All these steps are going to take toll on every Russian. By giving rise to inflation, loss of jobs and a negative GDP growth.

Though it is too soon to comment on anything. But Russia will have to curb most of his spending and fill its treasury to fight with these sanctions. And as a result the Russians will get deprived of the infrastructural development, any state's coffers are meant for.

The tech supply restrictions are only going to have an impact after years. Or probably not.

Will Russian Economy Crash Altogether?

Well its difficulty to say as most of it depends on how things will progress further.

With current sanctions, I don't think the Russian economy can collapse.

It is not like that Russia has been completely cut off from the global economy. Sanctions are imposed on some particular banks. Making it difficult to pool huge amounts and transact.

There are still Russian banks that can transact globally.

As it's not just about the sanctions but also about the participants.

China is a huge economy having at least 10-15% of total Russian reserves. And it has made it clear that it won't participate in the sanctions against Russia.

It leaves out a lot of potential to deal with the western sanctions as Russia can always knock the Chinese doors and use it as a channel to participate in the global economy.

And not only just China, there are other economies as well like India that doesn't want to spoil its relations with any of these countries.

So yes, there are potential outlets and workarounds that can help the Russian economy to keep standing on its feet.

Other than this, the world needs Russia more than the Russia needs the world. They are the major exporters of oil and natural gas. And also multiple types of grains. The prices of gas has already shot up by $8 in Europe. And the Whitehouse is already being pressurized not to sanction the import of Uranium from Russia.

The growth would definitely be impacted, and people will have to face the hard times. But yes, Russia can and will survive the current sanctions. Despite the collective efforts of the west to cripple its economy.

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