There are sanctions but no crisis
March 20, 2022
Russia’s aggression against Ukraine continues into its fourth week, and it seems that the military campaign is gradually turning into a protracted confrontation. The optimism of the negotiators is beginning to fade, and more and more often, they are talking about the details where the devil lies. The Russian army is gradually expanding its occupation zone between Crimea and Donbas, slowly advancing toward the major cities of Zaporizhia and Dnepr. In addition, the Russian military has begun to move from the Donbas area toward Kharkiv. It is likely that soon we will see another belt of exclusion along the legal border between Russia and Ukraine, which will connect the two groups of Russian troops. Neither in the Kharkiv area, nor in the Kyiv area, can the Russian military make any noticeable advance; moreover, the Ukrainian army has learned to conduct short offensive operations that boost morale and bolster Ukraine’s faith in success. The Kremlin continues to bombard Ukrainian cities with the most advanced weapons; on Friday, the hypersonic Kinzhal (Dagger) missile, launched from Russian territory, was put into practice.
In my opinion, there is no good way out for Vladimir Putin in this situation; he has driven himself into a dead end. The chances of Ukraine’s unconditional surrender have practically disappeared. It is now well understood that even the capture of Kyiv (which in itself is not apparent) will not lead to Ukraine laying down its arms. Turning the war into an occupation regime would intensify the guerrilla movement and increase Russian army losses.
For Putin to stop the war right now and withdraw troops would show weakness and admit defeat, which would eventually become known throughout Russia. After that, he will face substantial criticism from the radical militant group in power, which will blame him for not being tough enough, and the technocratic pragmatists, who will loudly discuss the price of a senseless war.
Perhaps two factors could encourage the Kremlin to be more flexible in its search for a way out, but both depend on the position of Western countries, primarily the United States. The first has to do with increased military support for Ukraine and the supply of more modern weapons systems, including those designed for offensive operations. However, the probability of this is not very high: Washington openly says that it seeks to avoid a direct armed conflict with Russia, while Putin, listening to such statements, shifts his tactical “red lines” further and further, saying that specific actions of the West will be perceived as aggression against Russia. Of course, one can believe that Putin’s rhetoric is a bluff, but no one is 100% sure of this.
The second factor that could influence the Kremlin’s position is the pressure of economic sanctions. Sanctions are an instrument of diplomacy, and their effectiveness increases dramatically if the strength of the pressure varies depending on the behavior of the country against which the sanctions are imposed. In this respect, it is well evident that in recent days, despite Putin’s transition to increasingly fierce strikes against Ukrainian cities and civilians, the pressure of Western sanctions has not increased. The introduction of a large number of new personal sanctions plays an important image role but does not affect the situation in the Russian economy. Just as the U.S. refusal to buy Russian oil does not affect the situation in Russia’s economy—their volume is so small that it is not even worth talking about.
Overall, it seems that the emotional shock of the first wave of sanctions in Russia has already passed—among the authorities, businesses, and the population. The freezing of the Ministry of Finance and the Central Bank accounts led to a short-term destabilization of the currency market, for which the Russian authorities compensated with the introduced currency restrictions. The volume of foreign currency trading on the exchange and over-the-counter markets fell by 3-5 times compared with pre-war levels, allowing the Bank of Russia to control the dynamics of the dollar exchange rate, which has been strengthening over the past week. The presence of many banks, preserving the settlements in dollars and especially in euros, allowed the development of a chain of correspondent relations between Russian banks and a guarantee of the stability of inter-country payments.
The banking panic which arose in the first days without any significant problems has been extinguished by the Bank of Russia, which in 10 days has increased the volume of loans to banks by 8.8 trillion rubles (6.7% of GDP-2021), of which two-thirds went to the payment of deposits to the population. However, increased interest rates on deposits and the inability to purchase foreign currency led to two-thirds of the cash received in banks being returned to deposit accounts.
The restrictions imposed on exporting goods to Russia and the boycott by container shipping companies are not yet felt by the real sector—save the accumulated stocks. As a result, the most substantial and noticeable effect of the sanctions was the rapid rise in prices, which most companies note. A survey of almost 6,000 companies conducted by the Stolypin Institute shows that a week before the war, the effect of the sanctions was felt by slightly more than a quarter of the respondents (26.1%), but a week after the start of the Russian aggression, this figure rose to 84%. Eighty-six percent of the respondents stated that the effect of the sanctions manifested itself in an increase in prices; almost 40% reported the severance of economic ties, and 15% noted the inability to import familiar goods.