The power of central bank sanctions
The FT reports:
Of all the sanctions the west imposed on Russia last week, sanctioning Russia’s central bank is by far the most fateful. “We will cause the collapse of the Russian economy,” said the French Finance Minister Bruno Le Maire. This is not hyperbole. And if managed smartly by the west, these sanctions can also stop the war in Ukraine and beyond.
This is the aim – to stop the war. The more sanctions pile on, the more the incentives shift for Putin to halt the invasion, and negotiate a peaceful outcome.
With 60 per cent of FX reserves out of commission, Russia has to rely on the remaining 40 per cent, but there is no freedom to operate there either. The central bank cannot sell gold for dollars and euros because all transactions with it are prohibited and foreign bankers and dealers do not want to invite western wrath. The IMF reserve position is untouchable. Some $84bn in Chinese securities could, hypothetically, have been sold back to China, with a discount, to be paid in dollars, cut to $50bn, but China’s state banks have already refused financial deals with Russia. Which leaves only $30bn in cash — too little to prevent financial and economic ruin. The rouble is already in freefall and the run on banks in full swing. Russian corporate and individual depositors have $280bn in dollar and euro denominated account balances with Russian commercial banks. Banks cannot have that much foreign cash on hand and the central bank doesn’t have cash to save them. Now people want to withdraw rouble deposits, not because they are afraid that next time the roubles won’t be there but because they expect that next time their bank won’t be there. The Russian people saw bank failures during the default of 1998 and expect no less. The final implosion will be over supply chains. Businesses will demand dollars for payments. The successful part of the economy, producers of natural resources and high-value goods, will operate in dollars. The rest will have to resort to barter and endure supply interruptions, work stoppages and unemployment. The government may ban foreign currency transactions and demand that businesses trade only in roubles. This is unenforceable. The economy will break and a GDP contraction follow.
The challenge is can Ukraine hold out long enough for the Russian economy to break.