The economic war between the US-led NATO group and Russia and the real war in Ukraine – Who is fooling who?

Russia: from sanctions to slump?

The economic war between the US-led NATO group and Russia is hotting up alongside the real war in Ukraine itself.  In response to the invasion of Ukraine by Russia, the US and Europe have upped the ante in imposing economic sanctions. The first of these was the suspension of any dealings with several leading Russian banks, including the two largest, Sberbank and VTB.  However, it was significant that the sanctions excluded Gazprombank, the major Russian lender to energy export companies.  Clearly, the West does not want to disrupt oil and gas exports through sanctions, when Germany alone relies on 40% of its energy from Russian imports. 

As a result, the NATO sanctions package has substantial exceptions. Most notably, while it sanctions major Russian financial institutions, it exempts certain transactions with those institutions related to energy and agricultural commodities, which account for nearly two-thirds of total exports.  Significantly, Italy successfully lobbied to exempt the sale of Italian Gucci bags to Russia’s rich from the export ban!

So now EU leader Von der Leyen and Biden in the White House announced that “we will work to prohibit Russian oligarchs from using their financial assets on our markets.” Biden says that the US will “limit the sale of citizenship – so-called golden passports – that let wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems”.  The EU and the US are launching a task force to “identify, hunt down and freeze the assets of sanctioned Russian companies and oligarchs, their yachts, their mansions, and any ill-gotten gains that we can find and freeze.”

The irony and hypocrisy of these proposed measures should not be missed.  For decades, Western governments have been happy to take this ‘dirty money’ and even allow the oligarchs to gain citizenship and special privileges to exert influence in politics in their countries in order to bolster pro-capitalist parties.  Now these privileges are to be withdrawn (although we shall see how far this goes). 

Russia’s super-rich (including Putin) have massively increased their wealth during the COVID pandemic.  Russia’s billionaires (we like to call them ‘oligarchs’ in the West) have the highest share of wealth to GDP of all the major capitalist economies, closely followed by ‘social democratic’ Sweden, and then the US. 

Like other billionaires, Russia’s export and hide their wealth in tax havens, and in obliging Swiss and other banks and also buy property and assets abroad.  Their ‘offshore’ wealth is way higher than other billionaire groups. 

Source: Gabriel Zucman;

Export and trade bans, the suspension of dealings with selected banks, and the withdrawal of some privileges for Russian oligarchs will have little effect on Russia.  Energy trade is to continue, with Russia still providing 25-30% of European energy supplies.  And Russia is no longer dependent on external financing.  Russia’s current account surplus has risen from below 2% of GDP 2014 to around 9% of GDP in 2021, leaving substantial buffers of excess savings that can be tapped should the need arise. The wider public sector, including the Central Bank of Russia (CBR), the corporate sector, and the financial sector are net external creditors. The CBR has over $630bn in reserves, enough to back up three quarters of domestic money supply, so there would be no need to print rubles to fund economic activity.  In addition, Russia has a $250bn sovereign wealth fund, which although relatively illiquid, could be run down to bolster funding.

Russian businesses and the government have prepared for potential future shocks like losing access to the dollar and the use of the USD in trade and financial transactions has already sharply declined. The Ministry of Finance no longer holds any USD-denominated assets in its oil fund and the CBR has also reduced the share of USD in its reserves by half, to around 20%; as the euro, and to a lesser extent the Chinese renminbi, have become preferred alternatives.  Many Russian corporates and banks now routinely include clauses in contracts that stipulate the use of another currency for settlement in case the USD can’t be used. Russia has also accelerated the use of its own payment cards, like Mir, as well as its own SWIFT-like System for Transfer of Financial Messages (SPFS) messaging service. However, both currently only operate domestically, leaving vulnerability to cross-border transactions in other currencies.

That’s why the US and European governments have now decided to introduce much more serious sanctions.  They now plan to kick Russian banks out of the SWIFT international transactions system and to freeze Russian central bank assets.  The SWIFT measure will sharply complicate the ability of Russian banks to conduct international activities.  They will be forced to use bilateral arrangements with ‘friendly‘ banks, or old technology like faxes. 

But this could also damage banking and trade for Europe, in particular, if the Russian energy lender Gazprombank is also removed from SWIFT (not likely).

The most serious measure is the proposal to freeze the dollar assets of the Russian central bank.  This has never happened to a G20 member state before.  Only Venezuela, North Korea and Iran’s CBs have suffered this fate.  If effective, it would mean that Russian FX reserves in dollars could not be used at all to support the ruble in international FX markets or sustain domestic commercial bank dollar financing.  The government would have to rely on ruble financing (and the ruble is plunging in world currency markets) and non-fiat currencies like gold. 

Most of Russia’s currency FX reserves are held in Western central banks.  Russia has about 23% of its reserves in gold, but it is not clear where this is physically held.  If this proposed sanction is applied, then it could seriously damage monetary flows and the Russian ruble, causing accelerated inflation and even runs on banks. 

Then there are the ‘slow burn’ sanctions on Russia’s access to key technologies.  The US aims to cut Russia off from global chip supplies.  The move shuts off supply from leading US groups such as Intel and Nvidia.  Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker, which controls more than half the global market for made-to-order chips, has also pledged full compliance with these new export controls.  Russia is now effectively denied access to high-end semiconductors and other tech imports critical to its military advancement.  However, it’s possible that Chinese companies, especially those that have themselves been the target of US sanctions, might help Russia circumvent the export controls. Huawei could step in to develop the Russian telecom equipment market.

All in all, Putin’s invasion of Ukraine is a huge gamble which if it does not succeed in ‘neutralising’ Ukraine and forcing NATO into an international agreement, will seriously weaken the Russian economy.  And Russia is no super power, economically or politically.  Its total wealth (including labour and natural resources) is way down the league compared to the US and the G7. 

World Bank Wealth Report

The collapse of the Soviet Union in 1990 was followed by Yeltsin and the pro-capitalist government accepting the ‘shock therapy’ policies of Western economists to privatise state assets and dismantle public services and the welfare system.  A small elite, mainly former Soviet government officials, were able to buy massive state assets in energy and minerals on the cheap and through bribery and thuggery.  Russia’s oligarchs emerged, along with an increasingly autocratic regime personified by Putin.  Russia’s GDP plummeted and average living standards dropped sharply.  The Russian capitalist economy eventually recovered with the global commodity price boom after 1998, but by 2014, Russia’s average annual GDP growth was still only 1.0%. 

Life expectancy in capitalist Russia has now been surpassed by China.

World Bank

And when we look at the World Bank’s Human Development Index, which measures key dimensions of human development (a long and healthy life, being knowledgeable and having a decent standard of living), we find that since 1990 Russia has performed worse among major emerging economies and compared to the world average.

Human Development Index – World Bank

The Russian economy is a ‘one-trick’ pony, relying mostly on energy and natural resources exports.  After a short boom from rising energy prices from 1998 to 2010, the economy has basically stagnated.  Although Russia’s economy is larger than it was in 2014 in real terms, final domestic demand is still at its pre-2014 level. And cumulative GDP growth over this period was only positive because exports were 17% higher in real terms in 2019 than in 2014.  Russia’s capital stock is still lower in real terms compared to 1990, while the average profitability of that capital remains very low. 

The World Bank reckons that the long-term potential real GDP growth rate for Russia is just 1.8% a year – and even that is faster than it has achieved in the last decade. This war is going to be costly for Russia and its people.  Oxford Economics reckons it will knock at least 1% pt a year in real GDP growth over the next few years.  If that happens, basically Russia will be in economic recession for several years.

Of course, much depends on how the war pans out.  If Putin can gain control of Ukraine, that opens up significant riches to be exploited.  Ukraine is rich in natural resources, particularly in mineral deposits. It possesses the world’s largest reserves of commercial-grade iron ore—30 billion tonnes of ore or around one-fifth of the global total. Ukraine ranks second in terms of known natural gas reserves in Europe, which today remain largely untapped.  Ukraine’s mostly flat geography and high-quality soil composition make the country a big regional agricultural player. The country is the world’s fifth-largest exporter of wheat and the world’s largest exporter of seed oils like sunflower and rapeseed. Coal mining, chemicals, mechanical products (aircraft, turbines, locomotives and tractors) and shipbuilding are also important sectors of the Ukrainian economy.

All of this remains to be fully exploited.  The EU and the US have also been drooling over the prospect of getting hold of these resources.  As I showed in my last post, the Ukraine government plans to sell off huge tracts of land to foreign and domestic investors to develop.  That could deliver huge dividends to whichever power controls the country.  Either way, once the war is over and after thousands have been killed or injured, Ukraine’s people will see little of the benefit.

Article from Michail Roberts BlogFebruary 27, 2022

Oil, the rouble and the spectre of deflationDecember 8, 2014In «capitalism»

Ukraine: trapped in a war zoneFebruary 14, 2022In «marxism»

From Poroshenko to Putin – it’s all downhillNovember 10, 2014In «capitalism»

14 thoughts on “Russia: from sanctions to slump?”

  1. Jim DenhamThe economic analysis is very interesting and I know that’s your central brief here, not broader political issues: but I’d be interested to know what you think about Russian imperialism and Ukraine’s right to defend its national self determination in the face of the invasion.Reply
    1. michael robertsHi Jim. yes this blog concentrates on the economic issues but of course they cannot be separated from politics; one leads to the other and back. The answer to your questions would require a separate post. But suffice it to say that Russia is not imperialist in the economic sense. It is a weak capitalist state without military bases around the world, without a major technology base and without the financial tentacles of the g7 imperialist bloc. Instead, it is a crony capitalist state, controlled by an autocrat based on bunch of billionaire oligarchs- nothing new there: Turkey; Saudi Arabia; Egypt; Morocco; Myanmar, Iraq, Syria etc. – none of which are imperialist in the Marxist sense.Ukraine as an independent state has the right to defend itself and resist the Russian invasion. But the current pro-capitalist government in Ukraine, by demanding to join NATO; preparing to open up Ukraine’s rich resources to EU and US exploitation; and its discrimination against the Russian-speaking minority has created the crisis. The refusal of the Ukraine government (egged on by the US) to follow through the Minsk accords was the tipping point.The US wants to establish its hegemony in Eastern Europe and weaken Russian influence as Putin has not played ball with US interests. In turn, Putin has tried to re-establish what he sees as Russian control over Ukraine and resist NATO advance – eventually by force. Ukraine is the pawn in all this and will suffer the most.Reply
      1. Giovanni AlvesMichael, the defeat of NATO and the US could mean another step towards the decline of the hegemony of the Americanist West. China is closely following the real dispute of the 21st century: the geopolitical dispute.
  2. Nad M.I think the racist and hypocritical attitude towards Christian and white European Ukrainians and non-scarf-wearing women as opposed to brown and black refugees is worth a mention. Countries that built or have been building fences to ward off non-European refugees are now declaring they are ready to receive hundreds of thousands of Ukrainians.Reply
  3. Giacché VladimiroGood as always.
    But unfortunately Gucci is owned by Kering (Pinault), France – as much of the fashion italian Industry.
    Best regards.
    VladimiroInviato da iPhoneReply
    1. michael robertsYes, but Draghi called for the exemptionReply
  4. vkThe objectives of the West (NATO) is to make Ukraine a “swamp” for the Russian military, therefore making it a war of long duration, and to, with the financial and economic sanctions, cripple the Russian economy. The goal is to trigger a liberal unrest in Russia, which would topple the United Russia (Putin) government, and install another Yeltsin.However, it is important there is a lot of unfounded optimism in the West over this strategy. Scholz has already made a public announcement stating the Russian economy is already collapsing (based on the sole data that the Russian stock market fell 30% in one day). Some pro-war NATO ideologues (journalists, analysts) are talking in terms of weeks before a color revolution topples the Putin government. They calculate the Russian people will blink before the European people in terms of revolting against higher gas and energy prices.In my opinion, this strategy, albeit mathematically possible, is very unlikely to be successful. It arises from a deep misunderstanding of modern Russia.Misinformation is rampant on both sides, as is common with every war (no side will ever admit it is losing). However, all indicates the Russian invasion of Ukraine is highly successful. I think Ukraine will capitulate in a matter of days, boosting Putin’s approval ratings to the roof in Russia (it has already risen to 69% on February 24th). Ukraine will not – and could not – become a “swamp” to Russia, for many reasons that I’ll not write here because this is an Economics blog.–//–I would like now to reflect about the immensity of Russia in today’s geopolitical affairs.On the surface, Russia is a failed Third World country. However, the rise of China changed this picture.Russia declared the independence of the two Donbass republics and the invasion of Ukraine for one reason: the expansion of NATO to the Ukraine would render its nuclear arsenal useless, which would certainly pave the way to the balkanization of Russia, killing millions in the process, making the destruction of Yugoslavia look like children’s literature. For Russia, therefore, the calculation was pretty straightforward: this battle for the Ukraine is a battle for simple survival, for its existence.But see how the other countries in the West are reinterpreting this simple, straightforward war: in the UK, there’s a debate about oligarchic funding of the Tories; in the USA, it triggered the process of discussing the fate of the world, between “freedom and democracy” and “autocracy and darkness”; in Brazil, the debate became whether Bolsonaro deserves being reelected because he visited (a completely irrelevant visit) Putin days before the war and it fractured the Brazilian Left between the liberal vital-centrists and the communists (i.e. it probably ended the Brazilian Left); in Germany, it became a debate about whether the country should go full green energy powered or not; in France, it accelerated the conflict between the European imperialists and the Atlanticists. I could go on, but the underlying factor is this: everybody is interpreting the war for its domestic politics interests, it is shaking and fracturing Western domestic policy.If that is not an testament to Russia’s centrality in modern-day world affairs, I don’t know what it is. Sure, I agree that Putin is a transitional leader – collapsing or reemerging, the consensus he built inside Russia will not last after he’s gone – but we cannot deny the fact that, today, Russia is central to world politics, to the point a simple straightforward military operation for a very simple political objective sends a shock wave to the Western world.–//–Finally, in the economics area, I’m from the opinion that the great winner in this conflict (assuming Putin won’t be toppled) is China. Cutting Russia from SWIFT will only accelerate China’s project to defy the USA in the financial front.If Russia finalizes the Ukraine quickly as is expected, this could well be the beginning of the end of what the center-leftists of the post-war called “Western Civilization” (i.e. Western hegemony).Reply
    1. Henry Rech“If Russia finalizes the Ukraine quickly as is expected, this could well be the beginning of the end of what the center-leftists of the post-war called “Western Civilization” (i.e. Western hegemony).”I would say you are being a little hopefully presumptuous declaring a Russian victory over Ukraine and the demise of western civilization.The Ukraine may well fall to Russia but it may not be a clean win.The question is, while NATO has stood aside in Ukraine, will it as easily capitulate if Russia moves on other buffer (NATO) states?If NATO does capitulate in such circumstances then it will give the Russian and Chinese imperialists much encouragement.Reply
    2. Henry Rech“If that is not an testament to Russia’s centrality in modern-day world affairs,”Russia has a land mass equal to one eighth of the Earth’s land surface. It has immense natural wealth. It has a highly educated population. It could be one of the great economic powerhouses.Yet it has allowed its paranoia and desire for empire to distract it from building on what it already has in abundance.Reply
  5. Henry RechMichael,Have you looked at how the pre-existing sanctions regime has affected Russian growth?Reply
  6. jlowrieI note that both Abramovich’s daughter and Yeltsin’s daughter have expressed their concern about Putin’s bloodletting!Reply
  7. ucanbpoliticalThe USA willed this war, and Putin could not sidestep it. But he overreacted as all great Russian Chauvinists do forgetting the lessons of the past. It seems that the USA anticipated this with their training and equipping of special forces in the Ukraine for close quarter fighting. Sanctions on their own will not break Russia but getting bogged down (literally the rain and with it the mud comes in two weeks time) in an unwinnable war, together can.What worries me is that the peace movement has been hijacked by the chauvinists in the West. Many on these peace protestors and speakers would not only jeer Putin but cheer NATO if it invaded Russia.And how the US is laughing, now that it has embroiled Europe in War. Gas prices which had a differential of between 60 and 80% now have a 240% differential burdening the EUs competitive position. And Wall Street knows this. As soon as Putin invaded Nasdaq shares soared to rise by 7% or $2 trillion by the week end. The Yanks know that war in Europe is good for US business because it is bad for European business.Honestly, the EU does not deserve to exist. If it can be played in this manner by the US it is a political embarrassment paralyzed by its internal divisions. So maybe our slogan should be RUSSIA OUT OF THE UKRAINE, THE US OUT OF EUROPE.Reply
    1. Anti-CapitalThe EU does not “deserve” to exists, regardless of the US’s presence. The EU is a confederation of capitalists. Why should that be preserved, when such a confederation can only act against a workers social revolution?Slogans might not do the trick here. At least not the US out of Europe. Europe out of NATO might be a better slogan as it holds much more significance when coupled with “For a unified workers’ Ukraine.” And even then there has to be a concrete program accompanying the slogans that includes cancellation of the IMF programs; review of EU, and World Bank reconstruction programs by worker commissions; and other programs that speak to a different class exercising social power..Shameless self-promotion:
  8. benl8The average wage income in Ukraine is $267/month, $3204/year, and $1.54 per hour. The U.N. Human Develpment Index puts it medium low, near Argentina and Moldova, Armenia, Romania, and just below Russia. Citizens of the capital Kyev earn about triple the average. I was reading a book about population reaching 11 billion, Eleven is the title by Paul Hanley, 2014. He said most of agricultural production in both Russia and Ukraine happen on small family plots of between a quarter to a full hectare (about half a football field to 2 football fields). 70% of Russian families are engaged in agriculture, same in Ukraine. Ukraine’s soils are richest in the world, up to 50 centimeters deep, and if Ukrainian farmers produced the same yield as European farmers, they could feed 619 million (not 46 million), and a maximum production could produce enough to feed 980 million people. Russia is also under-productive, and could feed 2.9 billion. But their average yield per acre or hectare is half the European average. What are investors thinking?

About ivarjordre

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Dette innlegget vart posta under Europa, Imperialism, Marxism, nedrustning, Our global world, Politic&Society og merkt , , , , , , . Bokmerk permalenkja.

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