Former Russian Banker: A Financial Nuclear Bomb Is Falling on Russia

Things may change, but at the moment it would seem that Valdimir Putin may have grossly understimated the consequences of his rash and illegal invasion of Ukraine.  The Ukrainians are putting up a far more furious defense than Putin expected, NATO and the West have at least for now rallied and united in a way few thought possible, with Germany announcing unprecedented increases in defense spending, western banks, cruise lines, airlines and other companies cancelling business in Europe and Russian aircraft baned from European Union airspace.  At home, large protests against Putin's war have occurred in Russia (see the image above).  But the worst miscalculation may prove to be Putin's failure to understand the financial consequences about to befall Russia's economy.  A piece in The Economist looks at the rallying of the Western world:

Since the fleeting days after the unifying attacks of September 11th 2001, the century has not been kind to expectations that the world’s democracies would work together effectively. America’s costly wars and erratic leadership, Germany’s preference for engagement over confrontation, Britain’s rejection of the European Union, the backsliding of Poland and Hungary: even before President Joe Biden bungled America’s withdrawal from Afghanistan, such interrelated developments weighed on hopes that he would reinvigorate not just NATO but also, perhaps, the promise of liberal democracy itself.

A combination of Vladimir Putin’s viciousness and Ukraine’s courage appears to be changing this dynamic in ways Mr Putin clearly did not anticipate. The invasion is less than a week old, but already by February 27th it had succeeded, in one respect, where years of persuasion by Barack Obama and bullying by Donald Trump failed. Germany committed itself to dramatically boosting its military spending, to above 2% of gdp. Calling the invasion “a turning point in the history of our continent”, Olaf Scholz, the chancellor, declared: “It is clear we will need to invest significantly more in the security of our country to defend our freedom and our democracy.”

On both sides of the Atlantic, foreign-policy analysts expressed astonishment at the swiftness and severity of the international response, including new sanctions aimed at crippling Russia’s economy by freezing the assets of its central bank. With China falling silent on Russia’s action and few countries besides the likes of Syria rallying behind it, America moved to underscore Mr Putin’s isolation. . . . . appearing on “Fox News Sunday”, Condoleezza Rice, who was secretary of state under President George W. Bush, said Mr Putin has “managed to unite NATO in ways that I didn’t think I would ever see again after the end of the cold war”. Citing Germany’s support for sanctions and increased military spending, Ms Rice added that he had “stirred up a hornets’ nest.”

As for the possible fanancial nuclear bomb that may ignite Monday morning, a piece in Politico looks at Putin's other possible miscalculation and raising the question of how long the Russian popuace will be willing to suffer solely to satiate Putin's delusions.  Here are highlights:

The West has tied the hands of Russia's central bank, rendering it powerless to prevent a catastrophic run on the ruble and the banking system when markets open Monday.

Two days after President Vladimir Putin launched his invasion Ukraine, the EU, the U.S., the U.K. and Canada all imposed sweeping restrictions on the Russian central bank that effectively prevent it from deploying its $630 billion in international reserves to mitigate the impact of other Western sanctions.

"This is a kind of financial nuclear bomb that is falling on Russia," said Sergei Aleksashenko, a former deputy finance minister and deputy central bank governor . . . . "The war came and the money ran out — the money ran out sooner than the war ended," said Aleksashenko.

According to the Biden administration, the new policies seek to undermine the central bank's ability to prop up its currency. That would stop Russia from using the playbook it tried Thursday, when it drew heavily on its reserves to avert a collapse of the exchange rate after it hit an all-time low of 89.60 against the dollar.

The new measures announced Saturday have already taken effect, according to Germany's central bank.

"If there were [Russian central bank] deposits at the Bundesbank, they are frozen now," Michael Best, the German central bank’s communications chief, said Sunday. "The decision has been decisively supported by the president of the Bundesbank." Once the foreign exchange markets open on Monday, the Russian currency is set to hit new records lows. With the currency losing value against foreign currencies, any imported goods and services will become extremely costly.

"When markets open, the ruble basically will drop like a rock," said Iikka Korhonen, the chief of the Bank of Finland Institute for Emerging Economies. 

"If the central bank is not able to intervene to prop up the value of the currency, this will create a lot of uncertainty," he said, noting Russians were already queuing at ATMs to withdraw their cash from banks. . . . people’s savings in the Russian currency will effectively halve in value.

[R]etailers have reported a surge in sales of consumer electronics and durable goods as people rush to spend their savings before they are rendered worthless by inflation.

The shock on Monday morning will be so large that “some sort of closing of banks" is likely, Korhonen said, adding that restrictions on withdrawals to protect the banking sector's stability will follow.

The days of toothless sanctions certainly seem to be over. And the massive financial cost of Putin's gamble is coming into focus.

In an open letter, a group of émigré Russian economists urged Putin to stop the war immediately.

“We can predict with complete certainty the most serious negative consequences for the Russian economy — rising prices, falling incomes and investments, depreciation of savings, further cuts in social spending, and the accelerating loss of human capital due to emigration," read the letter.

I have no ill will towards the Russian people. I hope they rise up and take Putin down.  They have been lied to and mistreated by their rulers since the Bolshevik revolution. They deserve so much better.