RIYADH – On March 9, Russia’s central bank ordered new capital controls limiting foreign currency withdrawals.
The Bank of Russia, or the Central Bank of the Russian Federation, CBR, said it would limit cash withdrawals by citizens with foreign currency accounts to $10,000 through September 9.
The decision came amid a warning from Fitch Ratings that the Russian government was about to default on its external debt. At the end of February, Russia’s central bank had already introduced some capital controls and doubled its key interest rate to 20 percent per year. The move was an attempt to stem the ruble’s free fall since the February 24 invasion of Ukraine and sanctions imposed by the US, EU, UK and Japan.
But is the war sustainable in the long run?
“There are two main groups of reserves that many thought would allow Russia to fund its war and weather sanctions. The first is the approximately $640 billion worth of foreign exchange reserves held by the CBR. Sanctions on the CBR mean it cannot access its foreign-held reserves, nor can it easily exchange its domestically-held reserves in international markets,” said Robert Person, professor of international relations at the US Military Academy (West Point), during in his speech he spoke personal capacity to Arab News.
This situation essentially limits Russia’s ability to support the ruble, use its funds to pay off part of its debt, or pay for imports. Many pointed to Russia’s rising reserves from 2015 as evidence of Russia’s growing war chest. But that money is only good if Russia can access it, and right now it doesn’t have access to a large portion of those funds, Person explained.
National Wealth Fund
The second group of reserves is Russia’s National Wealth Fund, known as the NWF. “This is where excess income from energy sales is invested when oil prices are high. Again, many people pointed to this fund as evidence of Putin’s ability to fund a long-term war or weather sanctions indefinitely,” Person emphasized.
However, the academic argued that this assumption has two main problems. During the financial crises in Russia in 2009 and 2014, Moscow had to withdraw heavily from this fund to support the economy. “It’s not a bottomless piggy bank,” Person added.
Valued at $189 billion as of June 2021, Russia’s NWF compares far smaller than Saudi Arabia’s PIF, valued at around $430 billion, he notes.
According to the latest data from the Ministry of Finance of Russia, on February 1, 2022, the NWF value was $174.9.
Another problem the Russian government is facing is banking sanctions that block Russia’s ability to convert its funds into foreign currencies and limit their usability, Person said. “The recession that Russia is likely to experience from 2022 onwards will be far more severe than what they experienced in 2009, 2014 or 2020. Whatever the funds of the NWF Russia are able to spend, they are unlikely to ensure macroeconomic stability for very long,” the person argued.
Analysts polled by the CBR showed that the Russian economy is expected to shrink by 8 percent in 2022. However, this survey was conducted before the 20 percent rate hike was announced by the CBR.
In addition, Bloomberg Economics forecasts that inflation will peak around July at 19 percent a year, compared with 9.2 percent last month, and end the year at around 16 percent.
Russia’s NWF was severely depleted by the 2008 and 2010 crises. A low-level conflict in Ukraine between Russian separatists and the Ukrainian government in 2014 further drained Russia’s funds. “Russia had to spend large sums from the NWF to cover federal budget deficits and fund extrabudgetary stimulus,” the professor said.
Historical data shows that the NWF value fell from US$88.6 billion to around US$60 billion at the end of June 2019, only to rise to US$125.6 billion at the end of 2019 and continue to rise and through the end To reach $197.8 billion by October 2021.
Today, the most intriguing question is how much Russia has been spending on its war effort since tensions began in 2014. One person said it’s hard to estimate, especially as Russia denies any involvement in the Donbass conflict from 2014 to its current invasion.
“However, total Russian military spending increased steadily during the tenure of Russian President Vladimir Putin, peaking at just over $200 billion in 2016,” he added.
Further challenges for Russia came from US President Joe Biden’s March 9 announcement that he would impose an immediate ban on Russian oil and other energy imports in retaliation for Russia’s invasion of Ukraine. Britain said it would halt its Russian oil imports by the end of 2022. If other countries follow suit, it could prove disastrous for Moscow. Russia expects high oil prices to increase its revenues.
“On the other hand, Russia can be expected to use all available means to prevent the Russian economy from collapsing. I would expect the value of the NWF to fall sharply as Moscow tries to cope with a severe recession,” Person said. One advantage it still benefits from is that the Russian economy is not heavily indebted.
“Before COVID-19, annual growth averaged 1.7 percent from 2016 to 2019. It recorded a 2.95 percent contraction in GDP in 2020, while posting a 4.3 percent recovery in 2021. But there are many deep structural features of the Russian economic system that severely constrained its long-term growth potential even before sanctions were imposed,” Russia Person explained.
Russia’s economic strength lies in the fact that it is one of the least indebted countries in the world, according to Person, with a public debt of 17.88 percent of GDP.
Budget deficits are often in positive territory. In 2019, Russia’s budget deficit showed a surplus of 1.8 percent, followed by a deficit of 3.8 percent in 2020 and a surplus of 0.4 percent in 2021.
But Russia’s Treasury Ministry said it was preparing to service some of its foreign currency debt in rubles if sanctions prevented banks from paying their debt in the currency in which it was issued, according to Reuters.
Person said it was too early to tell how hard the sanctions would hit key macroeconomic indicators like GDP, inflation and unemployment. “But we are already seeing the impact with bank runs and the collapse of the ruble,” he added.
The Russian currency was trading at 121.85 midday on March 14, down from the previous close of 132.9, marking an extraordinary drop from 75 rubles to the dollar before the crisis.
“With the Bank of Russia unable to use its reserves to defend the ruble, internal unrest could increase in Russia as citizens’ purchasing power dwindles,” he predicted.