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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 will cap cash withdrawals from citizens holding foreign currency accounts at $10,000 until September 9.
The decision came amid a warning from Fitch Ratings of an impending Russian government default on its foreign debt. At the end of February, Russia’s central bank had already introduced capital controls and doubled its key rate to 20% per year. The measure was an attempt to prevent the ruble from freefalling since the start of the invasion of Ukraine on February 24 and the sanctions imposed by the United States, EU, United Kingdom and Japan.
But is the war sustainable in the long term?
“There are two main sets of reserves that many believe would allow Russia to fund its war and its weather sanctions. The first relates to foreign exchange reserves held by the CBR, worth about $640 billion. Sanctions against the CBR mean that it cannot access these foreign-held reserves, nor can it easily trade its locally-held reserves in international markets,” said Robert Person, Professor of international relations at the US Military Academy (West Point). personal capacity at Arab News.
This situation essentially limits Russia’s ability to support the rouble, use its funds to pay off part of its debt or pay for imports. Many have pointed to Russia’s growing 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 can’t access much of those funds, Person explained.
National Wealth Fund
The second set of reserves is the National Wealth Fund of Russia, known as the NWF. “This is where excess revenue from energy sales is deposited when oil prices are high. Again, many people pointed to this fund as proof of Putin’s ability to finance a long-term war indefinitely or resist sanctions,” Person pointed out.
However, the academician felt that this hypothesis had two main problems. During the financial crises of 2009 and 2014 in Russia, Moscow had to dip massively into this fund to support the economy. “It’s not a bottomless piggy bank,” Person added.
Valued at $189 billion in June 2021, Russia’s NWF is far smaller than Saudi Arabia’s PIF by comparison, valued at around $430 billion, he notes.
The NWF value stood at $174.9 as of February 1, 2022, according to the most recent data from the Russian Ministry of Finance.
Another issue facing the Russian government is banking sanctions, which block Russia’s ability to convert its funds into foreign currencies, limiting their use, Person said. “The recession that Russia is likely to experience from 2022 will be far more severe than what it saw in 2009, 2014 or 2020. Whatever NWF funds Russia may spend, it is unlikely that ‘they take a very long time to provide macroeconomic stability,’ argued The Person.
Analysts polled by the CBR showed that the Russian economy is expected to contract by 8% in 2022. However, this survey was conducted before the 20% interest rate hike was announced by the CBR.
Additionally, Bloomberg Economics predicts inflation will peak at 19% annually around July, from 9.2% last month, and end the year at around 16%.
The Russian NWF was severely depleted by the crises of 2008 and 2010. A low-level conflict in Ukraine between Russian separatists and the Ukrainian government in 2014 further reduced Russia’s funds. “Russia had to spend heavily on the NWF to cover federal budget deficits and fund off-budget stimulus,” the professor said.
Historical data shows that the value of NWFs fell to approximately $60 billion at the end of June 2019, from $88.6 billion at the end of 2013, to $125.6 billion at the end of 2019 and continued to increase to reach $197.8 billion at the end of October 2021.
Today, the most intriguing question is how much Russia has been spending on its war efforts since tensions began in 2014. No one said it’s hard to estimate, especially since Russia has denied any involvement in the Donbass conflict from 2014 until its current invasion.
“However, overall Russian military spending has steadily increased throughout Russian President Vladimir Putin’s reign, peaking at just over $200 billion in 2016,” he added.
Other challenges facing Russia stem from US President Joe Biden’s announcement on March 9 to impose an immediate ban on imports of oil and other Russian energy in retaliation for Russia’s invasion of Ukraine. The UK has said it will phase out imports of Russian oil by the end of 2022. If more countries follow suit, it could prove disastrous for Moscow. Russia is counting on high oil prices to boost its income.
“On the other hand, one would expect Russia to use whatever funds it can spend to prevent the Russian economy from collapsing. I would expect the value of NWF to drop sharply as Moscow tries to deal with a severe recession,” Person said. One advantage it still enjoys is that the Russian economy is not heavily indebted.
“Before COVID-19, annual growth from 2016 to 2019 averaged 1.7%. It recorded a 2.95% decline in its GDP in 2020, while it recorded a 4.3% recovery in 2021. But there are many deep structural features of the Russian economic system that have significantly limited its potential of long-term growth, even before the sanctions were imposed,” explained The Person.
Russia’s economic strength is that it is one of the least indebted countries in the world, with a national debt equivalent to 17.88% of GDP, according to Person.
Budget deficits are often in positive territory. In 2019, the Russian budget deficit was a surplus of 1.8%, followed by a deficit of 3.8% in 2020 and a surplus of 0.4% in 2021.
Still, Russia’s Finance Ministry said it was preparing to repay some of its foreign-currency debt in rubles if sanctions prevented banks from paying their debts in the currency in which they were issued, according to Reuters.
Person further said it was still too early to tell how hard the sanctions would hit key macroeconomic indicators such as GDP, inflation and unemployment. “But we are already seeing the effect of this with the bank runs and the collapse in the value of the ruble,” he added.
The Russian currency was trading at 121.85 at midday on March 14, down from the previous close of 132.9, representing an extraordinary drop from the pre-crisis 75 rubles to the dollar.
“With the Bank of Russia unable to use its reserves to defend the rouble, domestic unrest could grow in Russia as citizens’ purchasing power evaporates,” he said.