The ruble’s recovery has been wrongly used as evidence of Russia shrugging off the west’s sanctions. But there are signs that the country’s financial sector is finding its feet after the initial barrage from the sanctions.
The Institute of International Finance’s economists Elina Ribakova and Benjamin Hilgenstock rightly point out that the ruble’s bounce should not really surprise anyone. Imports have been crushed, interest rates have been doubled, harsh capital controls have been put in place, and Russia’s oil and gas sales means it continues to accumulate foreign earnings.
Those revenues are absolutely monstrous. The IIF estimates that Russia made more than $ 1ba day in March, which – absent further action on oil and gas sales – will help make up for chunks of its central bank reserves being frozen by the west:
While the CBR’s reserve operations have been limited due to sanctions, historically-high current account surpluses – $ 39bn in January-February, likely an additional $ 30-40bn in March, and possibly above $ 250bn for the full year (absent an energy embargo) – Russia should be able to regain “lost” reserves in a relatively short period of time.
The domestic banking sector also seems to have stabilized, after bank runs in the initial days of the war. The need for central bank liquidity has faded sharply and the commercial banking sector as a whole could soon end up having surplus deposits with the CBR, the IIF notes.
The IIF therefore concludes that if the west wants to maintain the pressure on Russia, let alone ramp it up, then sanctions will have to be continuously calibrated and expanded, such as by cutting more Russian banks off from Swift.
The next big step, however, would be an embargo on oil and gas exports, which the IIF seems to think might be coming. FT Alphaville’s emphasis below:
Western sanctions have largely focused on the financial sector so far, even if some sanctions have de facto become trade sanctions, partly due to self-sanctioning by international companies. However, as Russia’s economy and financial sector adapt to a new equilibrium of capital controls, managed prices, and economic autarky, it is not surprising that some of the domestic markets stabilize.
Furthermore, due to the policy response and likely large current account surplus, sanctions have become a moving target and will require adjustments over time to remain effective.
We believe that the likely next steps will be a further tightening of financial sector sanctions, potentially the disconnecting of additional Russian institutions from SWIFT. Finally, while resistance to an energy embargo remains substantial in many European countries, including but not limited to Germany, it is increasingly unlikely that this position can be upheld for much longer should more evidence of Russian war crimes emerge.