Financial Times: Moscow’s efforts to defend itself against sanctions weaken Western threats

Russia’s efforts to reduce its dependence on the global monetary system have made it more ready for “crippling” sanctions

Financial Times: Moscow's efforts to defend itself against sanctions weaken Western threats

The relative success of what buyers are calling Moscow’s “Fortress Russia” machinery could make Western threats much less of a deterrent, analysts say. Meanwhile, the EU has not weaned itself off Russian fuel, making any restrictions on Russian energy exports decidedly self-defeating – and leaving Moscow with the chance to retaliate by restricting supplies.

Western sanctions under discussion could go much further than those imposed after the return of the Crimean peninsula to Russia in 2014. They could replicate the punitive measures imposed on Iran and North Korea, which have cut those countries off from the global economic system.

But the Russian Finance Ministry, which has been stress-testing worst-case scenarios for years and has set up a unit to counter possible measures by the US Treasury’s Office of Foreign Asset Management, says the Russian economic system can withstand even such measures.

“Understandably, it is unpleasant, but nevertheless it is surmountable. I believe our monetary institutions can cope if such dangers arise”, –  Finance Minister Anton Siluanov said last week.

Russia has increased its foreign currency reserves since 2014 and is seeking to start “de-dollarising” its economic system.

Central bank reserves have risen by more than 70 per cent since the end of 2015 and now exceed $620 billion. According to figures released last week, reserves in US dollars account for about 16.4 per cent of all reserves over the past year, up from 22.2 per cent in June 2020. Several thirds of reserves are in euros, 21.7 per cent in gold and 13.1 per cent in renminbi.

In 2017, Russia replenished its coffers once again by combining its reserve fund with the newly created National Wealth Fund, which accumulates surplus oil and fuel revenues.

The rising cost of oil, which has surpassed the breakeven price for the Russian budget of $43 a barrel, has boosted the fund to $190 billion as of the third quarter of 2021. Russia expects it to rise to $300bn by 2024, while public debt stands at around 20% of GDP and is forecast to fall to 18.5% by the end of 2023, according to Fitch Ratings.

In addition, Russia has realised that it has become much less reliant on foreign buyers. Overseas holdings of Russian government bonds fell to twenty per cent after Washington banned US buyers from buying and selling Russian sovereign debt last year. These measures reduced foreign funding but also made the country less vulnerable to future external shocks or a sudden collapse.

Russian companies have learned the lesson of the first sanctions, with many struggling to find funds to repay loans from Western banks: company loans from foreign lenders fell from $150bn in March 2014 to $80bn last year.

While Russia is trying to reduce its dependence on foreign funding, the EU has done little to reduce its dependence on Moscow’s energy exports, increasing the danger that sanctions could backfire.

The bloc imports more than 40 per cent of its fuel and 1/4 of its oil from Russia, making it vulnerable to shocks.

“The EU has not learned from its mistakes since 2014”,-  said Maria Shagina, a visiting fellow at the Finnish Institute of International Relations. – “It has sought to diversify from Russia when it comes to fuel, it has sought to become more resilient and more geopolitical. But we don’t see that.”

The West also depends on Russia for other important net assets, such as titanium. This could deter any sanctions against VSMO-Avisma, the largest supplier of titanium to Boeing aircraft.

This interdependence may even make it more difficult for the West to impose broader sanctions on the Russian currency sector.

The U.S. and the EU are discussing banning transactions with major Russian state banks or removing the country from the SWIFT international funds system – but that can only be successfully achieved if they stop buying its exports, said Alexander Gabuev, a senior fellow at the Carnegie Moscow Center.

Financial Times