The economic war between the US-led NATO group and Russia is hotting up alongside the real war in Ukraine itself.  In response to the invasion of Ukraine by Russia, the US and Europe have upped the ante in imposing economic sanctions. The first of these was the suspension of any dealings with several leading Russian banks, including the two largest, Sberbank and VTB.  However, it was significant that the sanctions excluded Gazprombank, the major Russian lender to energy export companies.  Clearly, the West does not want to disrupt oil and gas exports through sanctions, when Germany alone relies on 40% of its energy from Russian imports.

As a result, the NATO sanctions package has substantial exceptions. Most notably, while it sanctions major Russian financial institutions, it exempts certain transactions with those institutions related to energy and agricultural commodities, which account for nearly two-thirds of total exports.  Significantly, Italy successfully lobbied to exempt the sale of Italian Gucci bags to Russia’s rich from the export ban!

So now EU leader Von der Leyen and Biden in the White House announced that "we will work to prohibit Russian oligarchs from using their financial assets on our markets.” Biden says that the US will "limit the sale of citizenship – so-called golden passports – that let wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems”.  The EU and the US are launching a task force to "identify, hunt down and freeze the assets of sanctioned Russian companies and oligarchs, their yachts, their mansions, and any ill-gotten gains that we can find and freeze."

The irony and hypocrisy of these proposed measures should not be missed.  For decades, Western governments have been happy to take this ‘dirty money’ and even allow the oligarchs to gain citizenship and special privileges to exert influence in politics in their countries in order to bolster pro-capitalist parties.  Now these privileges are to be withdrawn (although we shall see how far this goes).

Russia’s super-rich (including Putin) have massively increased their wealth during the COVID pandemic.  Russia’s billionaires (we like to call them ‘oligarchs’ in the West) have the highest share of wealth to GDP of all the major capitalist economies, closely followed by ‘social democratic’ Sweden, and then the US.

Like other billionaires, Russia’s export and hide their wealth in tax havens, and in obliging Swiss and other banks and also buy property and assets abroad.  Their ‘offshore’ wealth is way higher than other billionaire groups.

Source: Gabriel Zucman;

Export and trade bans, the suspension of dealings with selected banks, and the withdrawal of some privileges for Russian oligarchs will have little effect on Russia.  Energy trade is to continue, with Russia still providing 25-30% of European energy supplies.  And Russia is no longer dependent on external financing. Russia’s current account surplus has risen from below 2% of GDP 2014 to around 9% of GDP in 2021, leaving substantial buffers of excess savings that can be tapped should the need arise. The wider public sector, including the Central Bank of Russia (CBR), the corporate sector, and the financial sector are net external creditors. The CBR has over $630bn in reserves, enough to back up three quarters of domestic money supply, so there would be no need to print rubles to fund economic activity. In addition, Russia has a $250bn sovereign wealth fund, which although relatively illiquid, could be run down to bolster funding.

Russian businesses and the government have prepared for potential future shocks like losing access to the dollar and the use of the USD in trade and financial transactions has already sharply declined. The Ministry of Finance no longer holds any USD-denominated assets in its oil fund and the CBR has also reduced the share of USD in its reserves by half, to around 20%; as the euro, and to a lesser extent the Chinese renminbi, have become preferred alternatives.  Many Russian corporates and banks now routinely include clauses in contracts that stipulate the use of another currency for settlement in case the USD can’t be used. Russia has also accelerated the use of its own payment cards, like Mir, as well as its own SWIFT-like System for Transfer of Financial Messages (SPFS) messaging service. However, both currently only operate domestically, leaving vulnerability to cross-border transactions in other currencies.

That's why the US and European governments have now decided to introduce much more serious sanctions.  They now plan to kick Russian banks out of the SWIFT international transactions system and to freeze Russian central bank assets. The SWIFT measure will sharply complicate the ability of Russian banks to conduct international activities.  They will be forced to use bilateral arrangements with ‘friendly‘ banks, or old technology like faxes.