Collapsing the Russian economy is turning out to be much easier than anybody guessed.
Last week the ruble and the Moscow stock market were in free fall. Fortune called it “the fifth-worst plunge in equity market history,” meaning not in the history of Russia’s equity market but in the history of 90 equity markets around the world that are monitored by Bloomberg. Meanwhile, the ruble fell to 89.60 to the dollar, its lowest foreign-exchange rate in history. In a scene straight out of the Great Depression, Russians raced to their ATMs to pull out what cash they could.
All that happened before the United States, Germany, France, the United Kingdom, Canada, Italy, and the European Union announced on Saturday that they were imposing sweeping restrictions on Russia’s central bank, disrupting its efforts to end the bank runs through stepped-up lending from its $600 billion in reserves. On Monday, the ruble fell further by nearly one-third, the central bank jacked up interest rates to 20 percent, and the Moscow stock market closed. Wrecking the Russian economy, it turns out, is like blowing on a dandelion.
In response to what Putin called an “illegitimate” provocation from the West, he said he was putting Russia’s nuclear forces on high alert. That was an irresponsible and dangerous escalation, but it also demonstrated how weak Putin really is. Just one week ago, experts were saying that Russia’s financial reserves from oil revenue would see it through the Ukraine invasion. Maybe that’s still true. But in a video blog quoted by Politico Europe, Sergei Aleksashenko, a former Russian deputy prime minister, called the central bank sanctions “a kind of financial nuclear bomb that is falling on Russia.” He explained: “The war came, and the money ran out—the money ran out sooner than the war ended.” When Aleksashenko said this, the war was less than a week old.
The economic fallout from Putin’s military aggression doesn’t illustrate only the fragility of Russia’s economy. It also demonstrates the potency of the economic warfare with which Europe and the U.S. are able to retaliate.
A generation ago, the standard line on economic sanctions was that they seldom achieved much. A favorite illustration was Cuba. Poor country, utterly dependent before the revolution on American tourist dollars. Yet the trade embargo imposed by President John F. Kennedy did bupkis to remove Fidel Castro from power. As recently as 2015, Bryan R. Early, a political scientist at SUNY Albany, could write confidently: “It has long been known in academic and policy circles that economic sanctions have a relatively poor track record of success.”
But globalization and computers have made sanctions a much more powerful weapon—so much so that during Donald Trump’s presidency, a report from the centrist Center for a New American Security expressed worry about potentially dire long-term consequences on the international stage from America’s “coercive economic leverage,” to which even China was compelled on occasion to bend.
The preeminent example right now of economic sanctions’ power in a globalized world is the Society for Worldwide Interbank Financial Telecommunication, a Brussels-based international consortium known colloquially as SWIFT. The announcement of sanctions by the EU and the U.S. over the weekend said that “selected Russian banks” would be removed from SWIFT. The next day, Japan said it would do the same.
What is SWIFT? It’s a messaging system that allows banks to move money across international borders. It isn’t the only such system, but it’s the dominant one, and although Russia and China have set up some alternative systems to make them less dependent on the West, these aren’t as good because far fewer banks around the world participate in them. Half of all high-value cross-border payments around the world are handled by SWIFT. SWIFT has been around since the 1970s, but its importance has grown as the global economy has become more interdependent.
Not all of Russia’s banks have been expelled from SWIFT, and the U.S. and the EU have thus far tried to avoid major disruptions in the flow of Russian oil to Europe. But there’s bound to be some disruption to the oil market from these and other measures imposed last week.
Russia has all the oil right now that it could possibly want, and as I write this, the price is close to $100 a barrel. What Russia doesn’t have, and will have a hard time acquiring for the next while, is money. It never had much to begin with, and now the West has put a great deal of it out of reach. That means that in the short term, and possibly in the longer one, Russia lost more from this war than it could ever have hoped to gain. Putin dreams of restoring Imperial Russia, but you can’t run an empire without money.
