Russia Sanctions: Just How Effective Will They Be? | National Review

Russia Sanctions: Just How Effective Will They Be? | National Review


People stand in line to use an ATM money machine in Saint Petersburg, Russia, February 27, 2022. (Anton Vaganov/Reuters)

It will be quite some time before we can judge just how effective the sanctions now being applied to Russia will be. It may not be so long before we see what Russia does in response. Looking at the ruble’s slump and the long lines outside Russian banks, it’s easy to think that the country, and thus possibly the regime, is in deep trouble. But, in part, that underestimates the resilience of the ‘silent majority’ (seemingly an important source of Putin’s support) outside the biggest cities, who have missed out on much of the prosperity enjoyed in a Moscow or St. Petersburg. Times have always been tough; if they become a bit tougher, well . . .

Writing for the Daily Telegraph, Jeremy Warner:

[So] far, [the financial authorities] have met the challenge in textbook fashion; they’ve ramped up interest rates and flooded the system with liquidity. For a hyperinflation to take hold, even in times of war, requires a very high degree of economic incompetence, and there is very little sign of that among those overseeing the Russian economy.

That’s not to say it is impossible. Of the 62 historical cases of hyperinflation identified by Steve Hanke, Professor of Applied Economics at the Johns Hopkins University and one of the world’s leading experts on the phenomenon [and a frequent contributor to Capital Matters], two of them have been in Russia, one in 1922 after the Russian Revolution, and the other in 1992, after the fall of the Soviet Union.

With a PhD from MIT in the United States, Elvira Nabiullina, head of the Central Bank of Russia, is as astute a central banker as they come and is hugely respected on the international scene. She’s very unlikely to preside over the reckless money printing which is a hallmark of virtually all hyperinflations.

That’s not to say it is impossible…What is more, even on the official data, the Russian inflation rate was already at an elevated 8.73pc in January. According to Prof Hanke, a more realistic assessment, that takes account of the collapse in the value of the rouble since then and uses purchasing power parity comparators to assess relative price movements, would put today’s annual rate of inflation at around 55 percent…

“Russia plainly has a big inflationary problem”, says Prof Hanke, “but I think we can take hyperinflation off the table. It’s possible, but only very remotely so”.

That, of course, wouldn’t play well anywhere in the country, but it would be interesting to know the extent to which, one way or another, inflation will bite less sharply in the hinterland than in wealthier parts of Russia. There is also the question of the degree to which pensioners, an important constituency in an aging country and on a fixed income, will be helped out.

Back to Warner:

War is an expensive business, but appalled as she must be by the turn of events, Ms Nabiullina is under no apparent pressure to ramp up the central bank printing press to pay for it.

True enough, Western sanctions will have neutralised a very considerable proportion of Russia’s $661bn of reserves, but according to analysis by Charlie Robertson, chief economist at Renaissance Capital, a London based emerging markets investment bank [which is Russian-owned], the central bank likely retains access to reserves located either in Russia, China or held in gold valued at about $200bn. That’s enough to pay for nine months of imports, even assuming Russia exports nothing in the meantime to offset them.

As it is, those reserves are growing at the rate of around $1bn a day, thanks to still buoyant oil and gas exports and elevated energy prices. What use denying Russia access to Swift, the international bank messaging system, if there are notable carve outs for those banks that facilitate Russian oil and gas exports to Europe and the rest of the world? Sadly, the sanctions are not as all embracing as they are made out to be.

In virtually all cases, countries that fall victim to hyperinflation will labour under the yoke of massive current account and budget deficits. Denied access to international bond markets, governments then turn to the central bank printing press to pay their bills. There is no such imperative in Russia, which thanks to buoyant oil and gas revenues enjoys substantial and growing current account and budget surpluses.

Warner’s conclusion?

To be clear, in the medium to long term, Putin’s hubris will no doubt doom him and his country to oblivion. But don’t expect it to happen quickly. He’s enough economic resilience to do an awful lot of damage in the meantime.

So far as that first sentence is concerned, I don’t know. But I have a nasty feeling that Warner’s conclusion is all too accurate.





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About the Author

Tony Beasley
Tony Beasley writes for the Local News, US and the World Section of ANH.