Could Western sanctions bring the Putin regime down?

Could Western sanctions bring the Putin regime down? Russian President Vladimir Putin presides over an economic work conference at the Kremlin. (February 28, 2022) Share Comment Print MOSCOW- Will Western sanctions lead to a social crisis and economic collapse in Russia, which will then shake the Putin regime? Many analyses have come to very different conclusions.

Could Western sanctions bring the Putin regime down?

At the same time, many sanctions are also considered double-edged swords. And China’s role in Russia’s economy under Western sanctions is even more interesting. After Russia invaded Ukraine, the Western world began to impose unprecedented and severe sanctions against Russia. The two biggest hits to the Russian economy are the closure of the SWIFT bank payment system and the freezing of the Russian Central Bank’s assets in the West.

Sanctions on Russia’s central bank catastrophic blow to Russia’s economy The EU’s just-released list shows that Russia’s second-largest state-owned bank – the Russian Foreign Trade Bank – and several other banks will soon be shut down from the SWIFT system.

However, 70% to 80% of the deposits of the Russian people are concentrated, and the largest savings bank in Russia is not included in the list of closing the SWIFT system, which shows that the EU and the West are merciful. Some analysts believe that the EU relies on Russia’s energy supply and the SWIFT system for payment transfers, and the EU is afraid that closing the SWIFT system of Sberbank will cause an energy supply crisis.

Some Russian economists and market analysts, who have always been more optimistic, described the freezing of Russian central bank assets as dropping a nuclear bomb on the Russian economy. Some say it would be a catastrophic blow to the Russian economy. They believe that Western sanctions will have a long-term impact. It will make the Russian economy more and more decoupled from the international community and become increasingly backward. The living standards of the people will continue to decline, and the Russian economy will decline sharply this year.

The Russian central bank did not detail the size and composition of its own gold reserves. But many commented that the Russian central bank has already prepared for this and spread the risk, including reducing the dollar and increasing the reserve share of renminbi assets, while storing a large amount of gold and dollar cash. Russia’s central bank can respond to sanctions in many ways, including by selling gold to the population or exchanging its reserves of yuan assets for dollars and euros.

Some Russian media said that a negative effect of the relevant sanctions will be that it is likely to alarm China and some other countries, so that the central banks of these countries will also reduce the dollar and euro asset reserves to reduce risks and reduce dependence on the West.

Whether Putin was ready to collapse differs

. Putin’s administration apparently began to deal with today’s crisis many years ago. Unlike Russia in the late Soviet Union and the 1990s, which relied heavily on borrowing and an empty treasury, the current Russian budget, foreign trade and current account have been overrun for many years, and there is no deficit, which is rare in countries around the world. Relying on energy revenue, Putin’s authorities have built up a huge sovereign wealth fund to reserve funds for the coming of the dark day.

Since many areas of Russian economic life, including daily necessities, are heavily dependent on imports, the sharp depreciation of the ruble caused by Western sanctions and inflation will lead to large-scale price increases, and the first will be Russian places, especially those in small and medium-sized cities. The core voters who support Putin.

But it is unclear whether popular dissatisfaction can naturally turn into anger against Putin, or be exploited by Putin’s authorities. Because Putin’s propaganda machine may convince the public that it is the West who intends to cause difficulties for Russia, it can divert popular anger towards the West.

Satalov, a political adviser to the President during the Yeltsin era, wrote in an article that the morale of the Russian army is low, Putin may fall into the quagmire of Ukraine and suffer a military defeat, coupled with the socio-economic crisis that may result from sanctions, the wave of popular protests will rise, and the fall of the Putin regime has already Not far.

Nekrasov, a former senior official of the Putin regime, said in a Facebook post that the decline in people’s living standards would not necessarily trigger a wave of anti-Putin protests. Between 2014 and 2016, people’s income fell by 10%, but Putin’s approval rating rose by 30%. He cited, for example, that of the five cases of regime collapse in the former Soviet Union due to popular protests, four occurred after sustained economic growth, and only one occurred because of a recession.

Nekrasov believes that many people still believe in official propaganda. Russia’s debt levels are low, and even if some of the Russian central bank’s assets are frozen, there are still plenty of assets at their disposal. Although the Russian army lost, it still maintained an absolute advantage over the Ukrainian army.

Sanctions trigger financial shocks

in Russia After the disintegration of the Soviet Union, Russian society has experienced many economic and financial crises, both professional senior officials in the Russian Central Bank and ordinary people have accumulated a lot of coping experience. After the news of the most severe sanctions in the West came, the Russian people immediately withdrawn cash on a large scale. In the capital Moscow, cash withdrawals in rubles are currently no problem and there are no queues. But many cash machines still don’t have cash in dollars and euros. Many depositors fear that if the economic situation deteriorates, the worst development will be that their foreign exchange deposits could be frozen and that the authorities will force their foreign exchange deposits to be converted into rubles at the official exchange rate.

Reports said that more than a week ago, Russia’s banking system had prepared $5 billion in cash in response to a potential run on the population. Some banks in Moscow said there were no foreign currency notes in the ATMs because they were too late to refill the machines.

One of the latest sanctions by the EU is to limit the supply of euro cash to Russia. Some Russian media believe that more than 30 years after the disintegration of the Soviet Union, the Russian market has traditionally had a huge circulation of US dollars and not many euros. Some Russian banks can buy euro cash from outside the euro zone through intermediaries. Although they will pay more fees, they can solve the shortage of euro cash in the Russian market. But the EU’s sanctions may hurt the impact of the euro, allowing the market to reduce demand for the euro.

Volkov, a Russian financial market analyst, said that the biggest impact of Western sanctions is now reflected in the instability of the ruble exchange rate, while shaking confidence in the Russian banking system.

Volkov said: “This is first reflected in the sharp fluctuation of the ruble exchange rate. Many people are converting their deposits into dollars and euros, which will seriously affect the bank’s credit and other business operations.”

Volkov said, Officials will now try to build confidence in the banking system. If the uncertainty persists for a long time, the Russian economy will be in trouble.

In order to prevent the financial market from collapsing and stop the people from running, Russia has officially launched a series of measures, including the stock market still halting trading so far, raising the central bank’s interest rate from 9.5% to 20%, and requiring Russian exporters to pay 80% of the foreign exchange they receive. % into rubles, while taking some measures to limit foreign currency outflows from Russia.

Financial market analysts say the Russian central bank, in order to conserve ammunition, did not use its foreign exchange reserves to enter the market as in the past to prevent the ruble from depreciating sharply. With oil and gas prices soaring because of the Ukrainian war, Russian exporters were able to earn large amounts of foreign exchange at this time, most of which were forced to be converted into rubles to stabilize the exchange rate. But how long these measures to stabilize currency markets will last remains unknown.

The sharp increase in interest rates, while reassuring the public not to withdraw their ruble deposits, would also severely constrain the Russian economy, with corporate and personal lending coming to a standstill. Financial analysts say the central bank doesn’t have much to do now, as the priority now is to stabilize financial markets.

Russia’s response to sanctions on China’s role is intriguing

Moody’s and Fitch, two major international rating agencies, have just announced a downgrade of Russia’s rating. Russia’s rating is now between Argentina and some African countries. Some Russian economic analysts say China is benefiting from the crisis. Because China has obtained cheap energy and raw materials from Russia, it has raised the prices of many commodities exported to Russia to earn considerable profits.

Many foreign investors and foreign investors have expressed their decision to withdraw from the Russian market in recent days. For example, Exxon Mobil, BP, etc. have announced their withdrawal from Russian energy projects and stakes in energy companies. Russian officials have also taken some steps to try to prevent foreign investors from leaving and selling their holdings of Russian assets and government bonds.

Many Western countries have closed their airspace to Russia. Russia responded by closing its airspace to these countries. Air traffic between Russia and the European Union and North America was halted. But flying from the EU to China and Asia can also cause trouble for many EU countries because they cannot fly over Russian airspace.

In another sanction move, Airbus and Boeing stopped supplying aircraft spare parts and various technical services to Russia, and aircraft leasing services were also halted. The Russian civil aviation fleet is mainly composed of Airbus and Boeing aircraft, which will undoubtedly paralyze Russian civil aviation. Russia cannot count on China to help in this area. Russian media said that a large part of Russia’s civil aviation fleet is leased. Stopping the rental service will also cause great losses to related fields in the West. Russian officials are discussing nationalizing the leased planes. But the current problem is that the software systems on these planes need to be updated regularly. If the updates are stopped due to sanctions, these planes cannot be used even if they are state-owned, and no insurance company is willing to insure.

Stopping chip supply will also deal a huge blow to Russia’s private industry, especially the military industry. China can’t do much to help Russia in this area either. But after American iPhones, Western cars, etc. leave the Russian market, Chinese products can take their place. Russia can also use some Chinese oil and gas drilling and drilling equipment to resist sanctions.

Sunbal Razzaq

Sunbal Razzaq is the founder & CEO of Sunshine Tips.

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