The economic warfare inflicted on Russia by the West over its attack on Ukraine is without modern precedent, in its speed, its devastating impact, and the size and unity of the coalition waging it.
That coalition, including Canada, is expected to drive Russia into a deeper recession than its pandemic one.
Western sanctions have caused the Russian ruble to collapse in value. That has erased much of the purchasing power of 144 million Russians.
Cut off from international finance, Russia is impaired in paying for imports and receiving payment for exports. The resulting product shortages across the economy have caused skyrocketing inflation.
And the attempt to curb that inflation by the Bank of Russia, the country’s central bank, has caused borrowing costs to spike.
The bank has more than doubled its key lending rate, to a record 20 per cent. That is stifling both consumer spending and business investment. (The Bank of Canada’s key lending rate is 0.5 per cent.)
The Russian government’s cash crunch is so severe that Fitch Ratings warned March 8 that a Russian default on its sovereign debt is “imminent.”
In short, the Western alliance has quickly come close to bringing the Russian economy to its knees.
That could be a new power in the world, able to resolve geopolitical crises with economic rather than military means.
But would this coalition of North American and European powers come together again to curb abuses of another rogue state?
The answer is that it could.
The leadership in Beijing, ambivalent in support of its ostensible ally Russia, is quietly seething that Russian President Vladimir Putin has unleashed a force that could someday challenge China.
So, how does this new power work?
In place of half-hearted, ineffectual sanctions against a targeted country, the coalition’s goal is to starve Russia of money. That is, to “suffocate the Russian regime,” as Mélanie Joly, Canada’s foreign affairs minister, has described the aim of Canada’s sanctions against Russia.
To that end, within hours of the Feb. 24 Russian invasion of Ukraine, Canada, the U.S., the European Union (EU) and the U.K. called for a freeze on Russia’s $640 billion (U.S.) in foreign currency and gold reserves, much of it held abroad.
Without access to those assets, the Bank of Russia was unable to prop up the ruble by purchasing rubles with those foreign-denominated assets.
At the same time, the coalition disconnected many of Russia’s banks and other financial institutions from the Belgium-based SWIFT global financial system.
The Society for Worldwide Interbank Financial Telecommunications is the main system for enabling financial transfers among more than 11,000 financial institutions worldwide.
And in its no-holds-barred campaign, the coalition has also imposed bans on strategic Russian imports and exports, except for oil and gas.
It is commonly believed, and Putin is counting on it, that cutting off Europe from imported Russian natural gas and oil is inconceivable.
It isn’t, though. And it might be that the coalition is keeping that hammer blow in reserve.
European economies are scrambling, in collaboration with their coalition partners, to find alternative sources of energy. The longer the Ukraine crisis lasts, the more success countries will achieve in reducing their dependence on Russian fossil fuels.
In the meantime, Germany will likely reconsider its planned shutdown of its three remaining nuclear power plants by year’s end.
Putin, meanwhile, has few options for restoring his country’s diminished liquidity.
Russian consumers have been severed from foreign transactions now that Mastercard Inc., Visa Inc. and other foreign payment providers have suspended their Russian operations.
Russia’s state-owned consumer payments agency, Mir, has been cut off from those foreign payment services. So, Russians can still make domestic transactions but can no longer make or receive foreign payments, including remittances from abroad.
And Mir’s ATMs now spit out devalued rubles and not hard currency.
Putin’s planned workaround for SWIFT is to rely more on CIPS, China’s nascent international banking network. But the Cross-Border Interbank Payment System has few members, is dominated by yuan transactions, and relies on SWIFT for international transactions.
Putin might tap the cryptocurrency market, which bypasses the world banking system that is critical in enforcing sanctions.
But the crypto market is too small to provide the liquidity Russia requires.
“Crypto alone will never enable Russia to circumvent financial restrictions at the scale it needs to mitigate the full impact of restrictions,” David Carlyle, director of policy at Elliptic, a consultancy that helps clients fight crypto-related crime, told the U.K. Guardian last week.
Besides, the U.S. is working to disable Russia’s crypto market.
It plans to use the Ukraine crisis as an opportunity to shut down the Russian ransomware attackers, who demand payment from their victims in Bitcoin and other cryptos.
The Ukraine crisis will end either with a ceasefire and a negotiated settlement, or with a pro-Russia government in Kyiv installed by Putin.
Whatever the outcome, Russia will emerge from its latest adventurism beholden to Western financial systems and the world leaders who control them.
And the Western liberal democracies, said to be under siege during the strongman era of Putin and Trump, are regaining the upper hand.
Correction — March 14, 2022: This column was edited to correct the population of Russia. It has 144 million citizens, not 155 million as previously stated.
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