Russia and the West have been engaged in a series of sporadic escalating economic conflicts for eight years. So far, this economic tug-of-war has had some notable effects on Russia, but little on the broader global economy. However, this situation is likely to change as Russia’s unprovoked war of aggression against Ukraine unfolds at devastating speed.
Russia made the first move in this war and it concerned Ukraine. In December 2013, at the height of the Euromaidan protests, Moscow offered the pro-Russian government of Viktor Yanukovych a highly complex $3 billion loan loaded with unique clauses that provided significant economic leverage over Ukraine’s future.
Just a few months later, in February 2014, protesters overthrew the Yanukovych regime and a new debate emerged over whether Ukraine should pay back to Russia.
When Russia launched its first invasion of Ukraine, capturing Crimea in March, the Obama administration blacklisted a number of Kremlin officials and announced a new adapted sectoral sanctions regime. It aimed to incur direct economic costs to the Russian state and important businesses. The European Union has imposed similar restrictions, although slightly less stringent and far-reaching.
The United States also moved to help save Ukraine economically and manage its post-war debt restructuring, as the International Monetary Fund adjusted its rules to undermine Russia’s earlier credit gimmicks. Russia’s then Prime Minister, Dmitri Medvedev, likened the move to “opening Pandora’s box” for the global financial framework.
The new US measures have placed limitations on Western investment in Russia’s oil and gas industry, but further restricted the ability of affected companies to raise Western financing. While Russia’s state-owned oil company Rosneft was among the largest emerging markets lenders, it was almost completely absent from such loans to Western banks. Despite sending the ruble into free fall, it was supposed to be bailed out at the end of 2014, an action taken with the complicity of the Bank of Russia. Credit to other Russian entities also dwindled, and the previous flow of Russian IPOs on the London Stock Exchange came to a halt.
After Donald Trump took office in 2017, the Republican-controlled Congress was skeptical of his comments during the transition, when it criticized the Obama administration’s sanctions strategy and praised Vladimir Putin’s response. In a rare act of bipartisan unity, Congress overwhelmingly passed the Countering America’s Adversaries Through Sanctions Act, 419-3 in the House and 98-2 in the Senate. It further tightened the financial restraints of sectoral sanctions and imposed and expanded other sanctions against the Russian defense and mining sectors.
Russia responded to these measures with efforts to create a “fortress balance sheet”. As a result, Russia’s net reserve position exceeded its net foreign debt in mid-2018. This response was not without significant costs for the Russians, with underinvestment by the state and the weakening ruble simultaneously helping to increase inflationary pressures.
But Russia has quietly added clauses to its own foreign bond contracts that, if triggered, could have significant costs for foreign holders of Russian debt. It has also broadened its willingness to fund US-led efforts to undermine the international financial order, including taking on a hilariously unsuccessful effort by the Maduro regime in Venezuela to launch a cryptocurrency to evade US sanctions.
Moscow has had somewhat more success in de-dollarizing its own economy, although this is still markedly constrained by the fact that Russia is a hydrocarbon-dependent economy and oil and gas are almost universally priced in US dollars. Russia has largely only been able to reach agreements to settle transactions with partners in other currencies, but they are still ultimately usually priced in dollars.
There have been occasional signs of the economic war cooling off in recent years, but these have always been short-lived. Russia’s energy and metals conglomerate EN+ was listed on the London Stock Exchange in November 2017, but its main shareholder, Oleg Deripaska, was sanctioned by Washington less than a year later.
While President Trump continues to spark controversy for his occasional laudation of Putin, the move to punish Deripaska has shown that at least some in his Administration, whom he usually barely controls, are as determined as Congress to not back down from these economic conflicts. .
Still, Trump would ratify a controversial deal nine months later that loosened sanctions on Deripaska; Deripaska has since been investigated by the FBI for violating the sanctions imposed on him. It would later delay further restrictions on Russian debt due to the attempted assassination of former double agent Sergei Skripal in the UK in March 2018.
After taking office, the Biden administration zeroed in on its sanctions policy, focusing on blacklisting both individuals and organizations and restricting Russia’s access to finance. He also tried to make clear which steps Russia would guarantee further escalation.
This clearly did not deter the Kremlin. Wherever the debate takes place over whether Putin’s reoccupation of Ukraine was pre-emptive or the result of a failure of diplomacy, we will only know whether or when the frenzy that Putin demonstrated during his war spell on February 22 was real or unfolded. the archives have been opened, and it is impossible to imagine that until now – threatened Western sanctions are now emerging.
The US and EU responded to Putin’s recognition of Russian proxies in Donetsk and Luhansk by announcing that they would impose sanctions on Russia’s primary debt issuance. After another embarrassing communications mess from Boris Johnson, the UK government has announced it will take a similar step. The US has already sanctioned Russia’s Vnesheconombank (VEB), a bank often referred to as Putin’s “slush fund”, but also at the center of the country’s foreign payment installation.
The initial US sanctions, announced on February 23, also included a ban on secondary trading of Russian debt issued after March 1. These will include numerous individual members of the Kremlin elite and their pals, but the blacklisted can only go so far.
The US and EU – and the UK acting together – will move to effectively cut Russia off from global financial markets. As Biden has already acknowledged, this will have far-reaching economic implications. Russia will respond by taking action to arm its own debt stock in the event of a freeze, but will likely seek to deliberately wreak havoc on the hydrocarbon markets. Medvedev promised that Europe should prepare for very high gas prices for the foreseeable future. Its effects will be felt far beyond Europe. Russia and Ukraine remain key global breadbaskets for grain production, and Russia is gradually consolidating political control over the grain trade and fertilizer industries. The aforementioned Deripaska sanctions have put the aluminum markets in the queue and many metals may be similarly affected in the current crisis. While Russia cannot have any hope of success here, at least without full coordination with China, it will invest more in efforts to undermine the US-led financial order.
The US and the rest of the West’s political leadership seem poised to fight. Washington is already taking non-traditional allies – Singapore, Japan and Taiwan – on board. But sustained inflationary pressure and market turmoil will undoubtedly have an effect. But given the Kremlin’s unilateral aggression, there is no alternative.
However, policymakers and the public should keep in mind that debt sanctions and economic wars from smaller conflicts are the main precursors of major wars when they are not matched by increased diplomatic efforts—see the call made by US President Franklin Delano Roosevelt in 1941. Before World War II, the Trade with the Enemy Act, or German Chancellor Otto Von Bismarck’s World War I Act, to freeze Japan from dollar markets.
The outbreak of a full-blown Russia-Western economic war means that the turmoil in the agricultural, metals and hydrocarbon markets is permanent. The real costs though are what this could entail.
The views expressed in this article are those of the author and may not reflect The Exquisite Post’s editorial stance.