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How does Vladimir Putin hope to withstand international sanctions?
Does the Russian president have any plans to win the economic war?
What exactly are Russia's assets for fighting this battle?
Why did the ruble plummet after the invasion but then regain almost all its value soon
after?
Does this mean that the Kremlin is getting its way?
Well VisualPolitik fans, in this video we are going to answer all these questions.
So...
Let's get started.
The Ukrainian war, the cruel and ruthless invasion of Ukraine is not only proving to
be a huge nightmare on the battlefield, it is also having a far greater economic impact
than expected.
And that is particularly the case for the Russian economy, no one in Moscow imagined
that things in 2022 would go so badly.
What was announced as a special operation has turned into an intense and tiresome war
with an enormous cost in terms of lives, equipment and resources of all kinds.
A war that has also unleashed an international reaction of such caliber that it has surpassed
any contingency plan managed by the Kremlin.
Within weeks of the invasion, Russia became something of a pariah turning it into an isolated
country, with much of the world's airspace closed to its aircraft, with international
businesses fleeing in terror, as the nation was largely excluded from the international
financial system and saddled with a host of trade restrictions.
In Moscow alone, tens and tens of thousands of jobs are now at risk due to the departure
of multinational companies.
And it’s not just us saying it, the Mayor of the Russian capital himself is saying it.
Take a look.
C1("According to our estimates, about 200,000 people are at risk of losing their jobs."
Sergey Sobyanin, Mayor of Moscow)
After the firestorm in Ukraine, the outlook for the Russian economy has become bleak.
As sanctions have choked imports, as many Russian companies are having to scale back
operations due to lack of supplies, as hundreds of Western companies are leaving the country,
and as thousands of Russians are losing their jobs, the Russian economy is faltering.
To give you an idea, according to the Bank of Russia itself, Russia's GDP will plummet
by at least 8% in 2022, a forecast that the European Bank for Reconstruction and Development
raises to 10%, the World Bank to over 11% and the Institute of International Finance
to 15%.
We are talking about the worst recession in Russia since the early 1990s.
And keep in mind that we are only talking about the first year.
In the medium and long term, many analysts expect things to get even worse, much worse.
C2("The best estimates that I'm seeing coming out right now suggest that the Russian economy
is going to be trimmed to half of what it was before this invasion."
Daleep Singh, US Deputy National Security Advisor)
C3("There will be less investment, less international trade, less integration of Russia into global
value chains, and this combined with people leaving Russia means lower productivity growth
in the long run."
Beata Javorcik, chief economist at the EBRD)
Now, let's go back to the questions we asked at the beginning:
How does Vladimir Putin hope to withstand international sanctions?
What is his plan?
Well, first of all, it is necessary to know exactly how Russia is currently doing and
what has distinguished Putin's time at the helm.
Listen up.
T1(A NEW CZAR FOR AN EMPIRE IN DECLINE)
We have told you in several videos here on VisualPolitik, the fall of the Soviet Union
and the transition to a market economy was anything but a bed of roses.
Economic mismanagement, rampant corruption, almost bankrupt public finances and finally
a gigantic financial crisis made the 1990s a dramatic decade for Russia.
For example, between 1990 and 1998, the real GDP per capita of Russians plummeted by more
than 40%.
Not that the starting point was particularly impressive.
Well, out of such a debacle emerged Vladimir Putin.
He became president in 2000 promising to launch a wide-ranging reform process to modernize
the country.
Starting, of course, with the economy.
And that is exactly what he did.
Shortly after coming to power, Putin's government launched the so-called Gref plan, a plan that
sought to attract investors.
And guess what?
In a way the plan was a success.
Yes, corruption remained sky-high but things in Russia improved substantially.
The government pushed for privatization and deregulation of large sectors of the economy,
they sought to attract international investors and established a flat income tax of 13%.
A flat tax that won Putin many points in the international economic community.
The fact is that the reforms together with rising oil prices boosted Russian income per
capita from $2,000 to a peak of $16,000 in the early 2010s.
An increase that, of course, multiplied Putin's popularity both inside and outside Russia.
The problem is that the reforms soon came to an end.
Between 2002 and 2008, oil prices increased almost fourfold.
This left the Russian government with so many resources that it ignored these reforms.
In fact, the phenomenon was instead the exact opposite: little by little the Russian economy
pivoted more and more around the Kremlin as corruption continued to skyrocket and the
new reform plans that were presented never got off the ground.
This coupled with the collapse of oil prices in 2014 and sanctions following the Crimean
invasion turned things around.
Take a look at this chart:
If we look at Russia's share of world GDP, the situation 20 years after first taking
power had come full circle and was back to square one.
Yes, the Russians are richer today than they were in 2000 but they have not improved any
more than the rest of the world has improved.
And what is much worse: the Russian economy is increasingly dominated by large, inefficient
and corrupt companies whose activity depends primarily on the government's favor.
This is what explains why Russia basically exports only raw materials for example.
Of course, we have all, absolutely all been able to see the enormous impact of corruption
through the disastrous performance of the Russian military in Ukraine.
Be that as it may, the fact is that now, with the sanctions approved against Russia after
the invasion of Ukraine, things promise to get much, much worse.
And as you can see, Russia does not seem to be going into this crucial battle in its best
condition.
The Russian economy is riddled with corruption, beyond raw materials its companies are very
inefficient and both consumption and local production itself are highly dependent on
international supplies.
So far, perhaps what Putin has done best has been to keep spending and public debt in check.
Especially after the invasion of Crimea, when the Kremlin understood after receiving the
first round of sanctions that having healthy public accounts and a lot of international
reserves was necessary to fight the economic war.
You see, in 2014 the Russian government began to develop a contingency plan that now has
to be fully implemented.
A plan in which this woman you see on screen plays a key role: Elvira Nabiullina.
Yes, okay I know, it is not the typical image of an oligarch with a cartoon villain face,
but this woman is leading the counter-offensive with which Putin hopes to win or at least
resist the economic war that the allies have launched against Russia.
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And now, let’s continue with today’s video
T2 (PUTIN'S RIGHT-HAND EXPERT IN THE RUSSIAN ECONOMY)
Winning the war in Ukraine and avoiding economic collapse.
These are the two objectives that the Russian government has set as its top priorities.
Well, Elvira Nabiullina, the head of the Central Bank of Russia is one of the key players in
achieving the second objective.
Nabiullina, who comes from Russia's pro-market and pro-democracy circles, has been one of
Putin's highly trusted people since he took over the country.
She first served as Deputy Minister of Economic Development and Trade.
In 2007 she was promoted to Minister in the same field until 2012.
She then served as the President's chief advisor for economic affairs and, since 2013, has
held the position of Head of the Central Bank.
Something that, by the way, she does with much more authority than most of her international
counterparts: because Nabiullina controls everything: finance, monetary policy, insurance,
investment funds, banking, government reserves…
In the financial field she is probably the most important person in Russia and also the
Russian manager with the highest international prestige.
For years, her goal was to stabilize the ruble and fight inflation.
She did this with an iron fist: she closed 500 banks, raised interest rates well above
international rates and liberalized the ruble to promote Russia's integration into the international
economy.
Well, she also ended up encouraging the nationalization of almost 70% of the Russian banking system.
But that is another story.
The fact is that now her goals have completely changed:
C4("For years, the central bank did everything it could to help Russia integrate further
into the global economy.
Then suddenly, on 24 February, it had to do the opposite.
Andrei Movchan, former Russian bank executive and currently a financier in London)
VisualPolitik fans, Putin has just renewed her for a third term.
She is now in charge of leading Russia's economic response.
The question is, what has been done to prepare this country, what are they doing now and
what do they intend to do?
Listen up.
T3(THE KREMLIN'S ECONOMIC COUNTEROFFENSIVE)
We can divide the Russian response into two parts: the short-term measures and the strategy
to make the Russian economy resilient over the coming months, and even years if, as seems
likely, the punishment is to be prolonged over time.
In this vein, since 2014, the first thing the Russian government did was to increase
its foreign reserves, increase the weight of assets such as the Chinese Yuan and gold
and, possibly, hide a good part of them.
Yes, that’s right.
Russia's Central Bank is suspected of having hidden tens of billions of dollars out of
the reach of international sanctions in opaque offshore accounts.
There is talk of up to $80 billion in US government debt securities hidden through overlapping
companies in places like the Cayman Islands or even Belgium, where Euroclear, one of the
world's largest asset custody companies, is headquartered.
There is also speculation that the Russian Central Bank has been able to accumulate some
$30 billion in cash in its own vaults.
The point is that this could give the Russian government a lifeline to continue operating
in the international market.
For example, they could self-purchase Russia's foreign debt for a fraction of its value or
pay for critical imports or investments.
Then, on the other hand, as soon as the international sanctions were approved, the Russian central
bank responded with an emergency package that included a rate hike to 20% – later set
at 17% – and the imposition of strong capital controls.
For example, withdrawals from bank accounts in foreign currency were limited, a tax and
even in some cases a temporary ban on the purchase of foreign currency was introduced,
and exporting companies were obliged to repatriate and convert 80% of their foreign revenues
into rubles.
International investors were also prohibited from liquidating their positions on the Moscow
exchange or receiving dividend or interest payments.
On 9 March, the government even abolished the tax on the purchase of precious metals.
Let's just say that if Russians wanted to protect their savings and did not trust the
ruble, they should buy gold on the local market instead of dollars, pounds or euros.
According to Sberbank, the demand for gold quadrupled during the first weeks of March.
The aim of all these measures was to stop capital flight and the collapse of the ruble
at all costs.
Something that Ms. Nabiullina temporarily succeeded in doing, even if the cost was to
make the ruble a practically useless currency on the international scene due to intervention.
In any case, it is these capital controls together with the collapse of imports that
explain why the Ruble soared during the month of March to regain its pre-invasion value.
Of course, if you have a currency with so much intervention, it does not have much merit
and certainly does not prevent the rest of the effects on the local economy.
For example, ceasing to import components does reduce the demand for dollars, but it
may mean that many local companies will collapse.
Remember that the Soviet Union's ruble – which was worth practically nothing – had an official
exchange rate of 0.6 rubles to the dollar.
In the same way, the Argentine peso also has an official exchange rate and then another,
very different, market rate.
Be that as it may, these are urgent measures designed for the short term.
The question is, what does Russia plan to do if this situation drags on for years?
The first thing was to announce that, in the future, it will require payment for its exports
of raw materials to be made in rubles, while the Central Bank has set a fixed price for
gold purchases.
That is, 5,000 rubles per gram of gold.
And the question is, what's the point of all this?
Well, you see, as getting hold of rubles today may not be so easy or desirable for governments
and large multinationals, the idea is that they end up paying for their purchases in
gold.
Which would be exchanged for rubles at the price set by the central bank.
You see, despite what many media outlets are saying, it is not about returning to the gold
standard because the Russian currency will not be convertible in any case, but let's
say it is a way to strengthen the ruble, increase the Russian gold reserves and very importantly,
to attack the petrodollar system, that is the purchase of oil using Uncle Sam's currency.
Something that is considered one of the cornerstones of the dollar's value and a strength that
countries like China are also trying to erode.
The problem is that, in the end, Russia may end up selling far fewer raw materials and
having far fewer foreign currencies with which to trade on the international market.
Then, on the other hand, the Russian government seems to be preparing a strategy to buy up
Russian stocks and assets held by foreign investors,at a steep discount of course.
The idea would be something like creating a group of national champions, large companies
that would take over practically everything.
So, Basically to further enhance the strategy of economic control that Putin's government
has been pursuing in recent years.
It is also being considered that some of these companies could then be listed on offshore
markets where they could raise money from investors in less hostile countries.
From countries such as China or the Persian Gulf petro-monarchies, without running the
risk of sanctions.
And finally, the Kremlin has already announced that it will reinforce the import substitution
policy by supporting domestic companies with cheap financing, while trusting that countries
such as China and India may end up being a lifeline for its economy.
It even hopes that the sanctions will not go much further or will soon be turned around,
even partially.
Moscow understands that the world will not be willing to do without its raw materials.
And so VisualPolitik community, this is Putin's plan:
Isolate itself from Western economies, strengthen its currency with gold, recover domestic assets
and trust that China, India and other similar countries can function as a sufficient lifeline
to weather the storm.
Of course, this may be easier said than done.
At the moment it does not look at all easy for Putin's plan to succeed.
Russia is increasingly isolated from the global economy and as we have seen here on VisualPolitik,
even China may not come to its rescue.
C5(We will only feel the real impact when production lines break down.
Most of what is produced in Russia depends on components made in the West.
[...] And so without these parts, work will stop.
In automobile factories, offshore drilling, aviation, and so on.
Natalia Zubarevich, Russian economist and geographer)
Nor can we say that we are surprised.
Putin's plans in economic matters have not been working for a long time.
In recent years the Russian economy has gone from bad to worse.
From its peak of $16,000, Russian per capita income had fallen to around $12,000 before
the invasion of Ukraine.
And now with the sanctions, everything points to it falling well below $10,000.
This would represent a contraction of almost 50% since the Russian government set aside
reforms and implemented its more nationalistic – and despotic – agenda.
And everything points to the fact that Russians are going to pay dearly for the aggression
against Ukraine.
Especially if European countries and other allies begin to reduce purchases of Russian
oil and gas.
If that happens and we take into account how dependent the Russian economy is on energy
sales, then collapse would be by far the most likely scenario.
Let's say it loud and clear: no plan can withstand such an impact.
But, having reached this point, it's your turn:
Do you think the Russian economy will manage to circumvent international sanctions?
Can the economic war unleashed by the West bring down the Putin regime?
Will the sanctions last long enough?
Should allied countries increase their punishment of Russia?
Leave us your comments below.
And you know, if you found this video interesting don't forget to like it and of course subscribe
to VisualPolitik.
Once again thank you very much for watching.
All the best and see you next time.