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RIYADH: On March 9, Russia’s central bank ordered new capital controls, limiting withdrawals in foreign currencies.
The Bank of Russia or the Central Bank of the Russian Federation, CBR, declared that it would cap cash withdrawals of citizens holding accounts in foreign currency to $10,000 until Sept. 9.

The decision came in the backdrop of a Fitch Ratings warning of an imminent Russian government default on its external debt. At the end of February, Russia’s central bank had already introduced some capital controls and doubled its key policy rate to 20 percent per annum. The measure was an attempt to prevent the free fall of the ruble since the beginning of the Ukraine invasion on Feb. 24 and sanctions imposed by the US, the EU, UK and Japan.

But is the war sustainable in the long run? 

“There are two main sets of reserves that many people thought would allow Russia to fund its war and weather sanctions. The first is the foreign reserves held by the CBR worth about $640 billion. Sanctions against the CBR mean that it cannot access those reserves held abroad, nor can it easily exchange its domestically held reserves on international markets,” said Robert Person, professor of international relations at the US Military Academy (West Point), while speaking in his personal capacity to Arab News. 

This situation essentially limits Russia’s ability to shore up the ruble, use its funds to pay off some of its debt, or pay for imports. Many hinted at Russia’s rising reserves from 2015 onward as evidence of Russia’s growing war chest. But that money is only good if Russia can access it and, right now, it cannot access a large portion of those funds, explained Person. 

National Wealth Fund

The second set of reserves is Russia’s National Wealth Fund, known as NWF. “This is where surplus revenue from energy sales gets deposited 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,” pointed out Person. 

However, the academician reasoned that this assumption has two main problems. During the financial crises of 2009 and 2014 in Russia, Moscow had to withdraw heavily from this fund to support the economy. “It is not a bottomless piggy bank,” added Person.

Valued at $189 billion in June 2021, Russia’s NWF is far smaller than Saudi Arabia’s PIF in comparison, valued at around $430 billion, he remarks. 

The NWF value stood at $174.9 as of Feb. 1, 2022, according to most recent data from Russia’s Ministry of Finance.   

Banking sanctions

Another problem the Russian government is facing is banking sanctions, which block Russia’s ability to convert their funds into foreign currencies, limiting their usability, said Person. “The recession Russia is likely to experience in 2022 onward is to be far more severe than what they saw in 2009, 2014, or 2020. Whatever funds from the NWF Russia can spend is unlikely to last very long in providing macroeconomic stability,” argued Person.

Analysts polled by the CBR showed the Russian economy is expected to contract by 8 percent in 2022. However, this survey was conducted before the 20-percent interest rate hike was announced by the CBR. 

In addition, Bloomberg Economics predicts inflation will peak at an annual 19 percent around July, in comparison with 9.2 percent last month, and end the year at about 16 percent.

Russia’s 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 dwindled Russia’s funds. “Russia had to spend heavily out of the NWF to cover federal budget deficits and finance off-budget stimulus,” said the professor.

Historic data shows NWF value fell to some $60 billion at end of June 2019 from $88.6 at end of 2013 only to jump to $125.6 billion at end of 2019 and continued rising to reach $197.8 billion at end of October 2021.   

Military expenditures

Today, the most intriguing question is how much is Russia spending on its war efforts since the onset of tensions in 2014. Person said it is tough to estimate, especially since Russia denied any involvement in the Donbas conflict from 2014 until its current invasion.

“However, overall Russian military expenditures rose steadily throughout Russian President Vladimir Putin’s reign, reaching a peak of just over $200 billion in 2016,” he added. 

Other challenges faced by Russia stemmed from US President Joe Biden’s announcement on March 9 to impose an immediate ban on Russian oil and other energy imports in retaliation for Russia’s invasion of Ukraine. The UK said it would phase out its Russian oil imports by the end of 2022. If more countries follow suit, this could prove disastrous for Moscow. Russia is counting on high oil prices to boost its revenues.

“On the other hand, Russia can be expected to use whatever funds it can spend to prevent the collapse of the Russian economy. I would expect the value of the NWF to drop sharply as Moscow tries to deal with a severe recession,” said Person. One advantage it still benefits from is that the Russian economy is not heavily indebted. 

“Before COVID-19, the annual growth from 2016-2019 averaged 1.7 percent. It posted a 2.95 percent decline in GDP in 2020, while it registered a 4.3 percent recovery in 2021. But there are many deep structural features of Russia’s economic system that severely limited its long-term growth potential, even before sanctions were imposed,” explained Person.  

Economic strength

Russia’s economic strength is that it is one of the least indebted countries globally, with its national debt equalling 17.88 percent of the GDP, according to Person.

Budget deficits are often in positive territory. In 2019, the Russian budget deficit was 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.

Yet, Russia’s Finance Ministry said it was preparing to service some of its foreign currency debt in rubles if sanctions prevented banks from paying their debts in the currency they were issued in, according to Reuters.

Person further said that it was still too early to tell how hard the sanctions would hit the key macroeconomic indicators such as GDP, inflation, and unemployment. “But we’re already seeing the effect with bank runs and the collapse in the ruble’s value,” he added.

The Russian currency was trading at 121.85 in mid-day trading on March 14, down from previous close of 132.9, representing an extraordinary drop from the 75 rubles to a dollar, before the crisis. 

 “With the Bank of Russia unable to use its reserves to defend the ruble, domestic unrest may grow in Russia as citizens’ purchasing power evaporates,” he augured.