Since Russian forces invaded Ukraine on February 24th, the West has fought back with a devastating raft of economic and financial sanctions on Russia, labelled by some as the "most far-reaching and punishing ... ever levelled at an adversary".
The Extent of the Sanctions
The full tally, which can be found here, includes the banning of Russian oil imports by the US and Canada (with determinations to phase out imports by the UK and the EU), as well as the severance of several major Russian banks from the SWIFT financial messaging system, as well as asset freezes and transaction bans launched against the Russian central bank by the US, UK, EU, Canada and Japan. As of June 2021, more than half of all of the foreign exchange reserves of the Bank of Russia were denominated in dollars (16.4%), euros (32.3%) or pound sterling (6.5%), with Chinese RMB accounting for 13.1%. At the end of February 2022, the foreign exchange reserves of the Bank of Russia amounted to roughly US$630 billion; combining these figures, we can estimate that hit to Russia's forex reserves of the sanctions amounted to roughly US$350 billion, about a quarter of Russia's GDP in 2020.
According to the Financial Times, the sanctions on Russia's central bank are the "first time this weapon [financial sanctions] has been used against a major economy and the first time as part of a war". The large-scale freezing of foreign exchange reserves was tantamount to "declaring financial war on Russia". Though in this sense, it could be seen as the culmination of a weapon deployed and development by the United States increasingly over the last twenty years, ever since 9/11 turned its gunsights on the financial networks that support Islamist terrorist networks worldwide.
The economic weapon has long helped inflict damage on adversaries without the material and political cost of "kinetic" warfare.
Source: Financial Times
Rouble to Rubble?
The impact on the value of the Russian rouble has been precipitous. In a speech given by US President Biden on March 26th in Warsaw, he famously quipped that the rouble "almost is immediately reduced to rubble". In response, the Russian government imposed harsh capital controls to prop up the value of the rouble, including mandating Russian exporters to convert 80% of their foreign currency earnings into rouble within three days of acquiring them. The result is that the rouble has recovered virtually all of its pre-war exchange rate against the US dollar.
The RUB:USD exchange rate from October 17th, 2021 to April 17th, 2022. On this latter date, the value of the rouble stood at 0.0120 USD, after a precipitous decline in the wake of financial sanctions.
Source: BloombergMarkets
Bond Troubles
By cutting off Russia from the US financial system, the Americans have also made life difficult for Russia in terms of servicing its dollar-denominated sovereign debt. On April 5th, the US blocked the Russian state from accessing dollars that it could use for bond payments (it accomplished this by forbidding JP Morgan to process the payment). On April 6th, Russia was forced to resort to paying US$650 billion worth of dollar-denominated debt in roubles, an outcome that was not provided for in the terms of the bond issuance (the bond payments were due on April 4th, but now Russia enjoys a grace period until May 4th, after which bondholders can vote to attempt to seize Russian assets forcibly).
By April 10th, Standard and Poor's, one of the world's three major ratings agencies, placed Russian sovereign debt under a "selective default" rating (the scale can be found here), indicating that it was defaulting on a selected portion of its debt. On April 14th, Moody's another of the 'big three' ratings agencies, followed suit with a judgement that Russia's failure to pay bondholders in dollars by May 4th would be considered a sovereign default - which would be Russia's first foreign currency default since the Bolshevik Revolution in 1917. Fitch, the last of the 'big three', withdrew its rating altogether after downgrading it to a "C" on March 8th, as a result of the EU issuing a ban on "providing credit ratings to legal persons, entities, or bodies established in Russia."
The "Dawn of Financial Warfare"
On April 7th, the Financial Times published a piece raising the possibility that the weaponisation of the US dollar - the attempt by the US to convert the dollar's omnipresence into a source of pain for its enemies - will erode the very preeminence of the dollar that the strategy is based on. The idea is that sovereign states around the world would witness the manner in which the dollar is being weaponised and make moves to guard themselves against this possibility by shifting their foreign exchange reserves away from the dollar, thus weakening its status as the ultimate reserve currency of the world.
Source: Financial Times
However, merely a day later, the FT followed up by mentioning that many financial experts seemed "very relaxed about threats to the dollar". The greenback is the currency most widely used in trade, financial transactions and central bank reserves around the world. US Treasuries - American government bonds - are the ultimate safe asset in the world's financial markets, accounting for a US bond market worth around US$14 trillion in Q1 2017. This reality would make it very difficult for the dollar to be displaced as the world's preeminent currency. As the FT reminds us, "Inertia is a powerful force in cross-border finance: once a currency is widely used, that becomes a self-perpetuating position".
The continuing strength of the US dollar, even in the face of US sanctions against Russia, sends a clear message to US policymakers: they need not be worried about conducting this line of attack again in the future. Will we see the dawn of a new era of financial warfare?
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