Russia is facing a financial collapse. In response to its invasion of Ukraine, the United States and its global allies struck Russia with financial sanctions, isolating the country from the global financial system. In particular, the sanctions imposed on the Russian central bank effectively froze the vast majority of its assets held abroad.
The scale and unprecedented unanimity of these sanctions will cripple the Russian economy, according to Mark P. Taylor, Dean of Olin Business School and Donald Danforth Jr. Professor Emeritus of Finance at Washington University in St. Louis.
But what does all this mean? And what effect might these sanctions have on the global economy now and in the future? Taylor, a leading global authority on international finance, has answered these questions and more.
What does freezing a country’s assets mean?
According to Taylor, freezing a nation’s assets is very similar to freezing an individual’s bank account. The money is still there and may even earn interest, but the account holder – in this case, the Russian government and wealthy oligarchs – cannot access it.
While it’s hard to get an accurate picture of how much Russian money is being held outside its borders, Taylor said there is evidence Russia has hoarded more than $600 billion in reserves. of foreign currency. The vast majority are frozen. Of the countries where Russia holds most of its foreign exchange reserves, only China has not imposed sanctions on Russia to date.
“In addition to that, there are other penalties against individuals and businesses,” Taylor said. “For example, Russian individuals currently have approximately $11 billion in deposits in Switzerland, a major financial center. And that’s bank deposits. This does not include securities and bonds. The true figure could be five times higher, like $50 billion, in Switzerland alone. This money is frozen.
Historically, the Russian government, corporations and wealthy oligarchs have chosen to hold their assets in foreign banks because the currencies are less vulnerable than the rouble, Taylor explained.
Worse still for Russia, the country has also been cut off from SWIFT – a platform facilitating money transfers integrated into banking systems around the world – making international payments difficult.
“People initially thought that Russia would route payments through China,” Taylor said. “But that’s not the case, interestingly. There is no evidence that Russians are circumventing sanctions through China, perhaps because Chinese banks are also worried about sanctions.
What was the impact of these sanctions on Russia’s global economies?
The effect of these sanctions on the Russian economy was severe and immediate. The ruble and the stock market are down 30-40%, Taylor said. Russians line up outside banks and ATMs to withdraw their money. And it will be increasingly difficult for Russia to import basic necessities with a large percentage of its assets frozen and no way to make international payments.
Russia’s biggest trading partners, India and China, are still willing to trade with the country, Taylor said. But many companies across Europe had already stopped buying and selling from Russia since sanctions imposed on the country during the 2014 invasion of Crimea.
Globally, the biggest concern is the impact these sanctions will have on energy prices and how this could contribute to inflation.
“Russia is the largest producer and supplier of oil and natural gas to Europe in particular,” Taylor said. “Prices were already high and have increased further since the beginning of the conflict. This will have an impact on global energy prices and will therefore have a ripple effect beyond Europe and will also be felt in the United States, for example.
If energy price increases continue, this could exacerbate inflation. Faced with higher energy bills, households will have less money to spend elsewhere. And companies will be forced to raise prices in response to rising energy costs. But we’re not there yet, Taylor said.
“People are panicking right now. Much of the rise in energy prices depends on what happens during the conflict. If the price rises don’t last long, they won’t have a significant impact on trade and inflation. The pain will be tolerable,” Taylor said.
A new form of economic warfare
Financial penalties are nothing new, of course. In recent years, the EU and the US have imposed financial sanctions on Myanmar and Belarus, for example. What makes this situation different, however, is the near global unanimity in which they have been applied, Taylor said. The G7 – the US, Canada, Germany, France, Italy, the UK and Japan – as well as Switzerland and the wider EU acted in unison to isolate and punish Russia.
While many were surprised that Switzerland had broken its neutrality, Taylor sees the situation differently. “What does it mean to be neutral? If virtually the whole world is lining up to say this act of aggression is wrong, then agreeing with it doesn’t necessarily mean you’ve broken neutrality,” he said.
According to Taylor, the unprecedented unanimity in these financial sanctions against Russia is one of the few positive things to come out of the conflict. And it could change how world powers respond to threats in the future. China, for example, will be monitoring the situation closely.
“These types of sanctions would not have been effective during the Cold War because Russia and the entire Soviet bloc was largely a sealed communist economic zone. Today, however, Russia is a capitalist economy that relies on global trade and international finance, which makes them more vulnerable to sanctions,” Taylor said.
“It’s a new form of economic warfare. No one wants to enter into a conventional war with Russia, but it will certainly affect them badly.