Yesterday, the Center for European Policy Analysis (CEPA) cheered that sanctions against Russia are finally working:
In recent weeks, we have seen a serious increase in pressure through new measures against Russia’s key sanctions-evasion and energy finance house, Gazprombank and six international subsidiaries, a host of sanctions-busters hit by secondary sanctions, a focus (finally) on Russia’s shadow crude oil fleet and measures aimed at Moscow’s main FX exchange (MOEX.)
And hey presto, the ruble has fallen around 7% this week and 15% over the past month. At over 113 against the dollar, Russia’s currency is at its weakest level since the market shock suffered just after the full-scale invasion in 2022.
And now, Russia seems finally to be in the midst of a currency crisis […].
Clearly, Western sanctions have’t stopped Putin from continuing his attack against Ukraine. But CEPA seems to think that the West has finally found unity to sufficiently coerce Putin into compliance with international law.
Let’s examine some key factors to determine whether this hope is grounded in reality.
Will this force Putin to the negotiating table?
CEPA seems to assume a weak ruble will hurt Russia’s economy so much, Putin will have no other choice but to stop the war.
A weak ruble will indeed make imports more expensive and drive up inflation. However, Russia is a net exporter. Its exports were valued at $486 billion, while its imports only at $195 billion. Russia exports 2.5 times more goods than it imports (These numbers are from 2022. Net imports will likely have decreased since the start of the war.)
Compare this with the US. Its exports are valued at $5.86 trillion and its imports at $9.36 trillion. A weak dollar would destroy America’s buying power and hurt its economy.
But since Russia exports exceed its imports by a factor of 2.5, a weak ruble most likely will have a positive net effect on Russia’s economy. It’s also beneficial to the government’s budget. As the German Marshall Fund of the United States explains:
From the Russian government’s perspective, the depreciation of the ruble over the past week from 75 down toward 80 to the dollar is actually a positive move. The reason is that Moscow earns most of its revenues via taxes that are de-facto dollar denominated – above all, by taxing oil production and exports. But government expenses are in rubles. Because of this, when the ruble falls against the dollar, moving from 75:1, say, to 80:1, the government collects more rubles in taxes.
That is important because government expenses – pensions, salaries, military kit, and the like – are paid in rubles. By decreasing the value of the ruble against the dollar, the government earns more rubles and can thereby more easily meet its spending requirements.
At times when the government is running a large deficit, devaluation can help balance the budget. The Kremlin was going to struggle to hit its 3 percent deficit target this year given its oil price forecast of $50 per barrel – nearly twice the current price. Unless the oil price picks up in the coming months, that target looks highly unlikely. But by letting the value of the ruble fall, the government can counteract some of the negative budgetary effects of the price slump.
What about imports getting more expensive?
Let’s have a closer look:
Russia’s top imports (again, data from 2022):
Medicaments ($9.11B)
Broadcasting Equipment ($7.15B)
Cars ($6.38B)
Computers ($3.94B)
Motor vehicles; parts and accessories($3.64B),
Russia is importing mostly from (Germany and South Korea may not hold these top positions anymore based on updated 2024 data):
China ($75.4B)
Germany ($15.5B)
Turkey ($9.24B)
Kazakhstan ($8.78B),
South Korea ($6.33B).
The crucial detail is that Russia imports most goods from China. In fact, imports hit a recent high last September. At the same time, Russia exports $101 billion worth of goods to China (mostly fossil fuels). Both countries can settle their transactions with rubles and yuan. The value of the ruble against the US dollar should be by and large irrelevant.
And Russia’s soaring inflation?
Maybe everyday Russians will be so fed up they’ll finally topple the regime? After all, inflation supposedly helped tip the US election toward Trump.
Russia’s food inflation is indeed at 9%. But that’s not significantly above the 6.26% average over the past 8 years, and way below the 20% inflation rate at the start of the war. In other words, the Russian people are used to this kind of pain. It’s unlikely high food prices will sway public opinion.
What to make of the ruble’s decline?
The ruble’s recent plunge is likely driven by new financial sanctions. They have intensified existing bottlenecks in Russia’s financial plumbing, namely the requirement to settle international trade in US dollar.
Over the long term, however, Russia will resolve this bottleneck. BRICS nations are already exploring the development of an alternative currency to reduce reliance on the US dollar.
In fact, the US itself paved the way for this. Biden decided to weaponize the dollar when he froze $300 billion owned by the Russian central bank.
This set a dangerous precedent, destroying the trust in the US dollar as a neutral currency. In essence, Biden told the world: The White House might confiscate all your money if you do something we don’t like. Holding dollar reserves is like putting a noose around your neck, hoping the US State Department won’t yank the rope.
It’s unlikely BRICS nations will want to stay in such a position in the long run. They have a stunning amount of economic muscle. BRICS have already overtaken the G7 in terms of purchasing power GDP.
In other words, BRICS have more money to spend than the United States, Canada, Japan, the United Kingdom, France, Germany, Italy, and the rest of the European Union combined.
The West’s schadenfreude over the ruble’s decline doesn’t seem to acknowledge this new reality of a multipolar world.
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Great article.
Yup. China is already dumping US Treasuries and buying sanction-proof gold.
You can either have the US dollar as a global reserve currency, or you can weaponize it, but you can't do both.