The war in Ukraine is not yet a week old. By some accounts the invasion has already taken longer than Russia expected. And been bloodier. Other commentators see a grim escalation ahead.
Most of the developed world – though notably not yet China – has moved to ostracize [1] Russia morally, physically, and financially.
There’s been a step-up in military supplies [2] to Ukraine.
But it’s the economic sanctions [3] that are most extraordinary.
The unfortunate Russian people seem to get caught up in all the big developments in warfare.
Russia lost the first modern industrial war, against the Japanese in 1904-05. The revolution of 1917 included arguably the first war for global public opinion. Russian casualties were astronomical in the first two ‘total’ World Wars. (The Soviet Union’s pivotal role in defeating Hitler cost the bloc at least 27 million lives.)
Russia was a linchpin belligerent in the Cold War, obviously.
And as others have explained [4], Putin has been waging a new kind of information war against the West, with strikes aimed at everything from the US presidential elections to the Brexit referendum.
Battlefield status report
Now Russia finds itself on the other side of a ‘hot’ economic war. The barrage of sanctions and prohibitions applied in the past week is unprecedented. They’ve culminated in cutting [5] several Russian banks from the Swift system that facilitates international payments.
The aim seems to be to turn Russia into a North Korea or an Iran, should it refuse to ceasefire. An unbelievable potential fate for (what was) the eleventh largest economy in the world.
Pity the everyday Russians. Their country might have become a kleptocracy where opposition leaders were jailed [6], poisoned [7], or shot [8]. But at least they could shop and go on holiday.
Not for much longer.
This being a financial blog, let’s consider some dramatic scenes from this economic war.
Collapse of the Russian ruble
Putin’s regime derived popular legitimacy for tackling the economic chaos of the 1990s that culminated in Russia’s currency collapsing in 1998.
The following graph must therefore make grim and portentous viewing in the Kremlin:
[9]Source: CNN [10]
Bank runs in Moscow and elsewhere
With their currency in free-fall and their banks under immense duress, Russians have been trying to get their money out of their accounts and into something that might hold its value. This has the makings of a bank run [11].
5am and the run on ATMs begins in Russia https://t.co/uYqADASMrI [12]
— Olga Lautman 🇺🇦 (@OlgaNYC1211) February 27, 2022 [13]
No wonder. Older Russians well remember going hungry in previous bouts of chaos.
Such scenes indicate the sanctions having their intended affect. But could financial chaos for everyday people harden support for Putin, just as the Blitz bolstered Britain’s resolve in World War 2?
Interest rate jumps to 20%
The Russian central bank isn’t looking for any strategic bright side. To support the ruble and to try to keep money in accounts – and the country – its key interest rate has been more than doubled [14] to 20%, from 9.5%.
And we were cheering UK savings accounts paying out better than 1% again.
Domestic firms have also been ordered [15] to sell 80% of their dollar assets held overseas in an attempt to circumvent US, EU, and other country’s new restrictions on Russian central bank action.
Collapsing asset values
The result of this economic shock and awe has already been devastating for Russian assets.
To give just one example, here’s what’s happened to Sberbank of Russia, sometimes cited as Eastern Europe’s largest financial institution:
[16]Invading Ukraine has initiated Russia’s own bespoke version of the financial crisis of 2008 and 2009. No wonder the likes of hedge fund veteran Bill Ackman says Russian banks cannot be trusted [17] to hold at this point.
A few Russian assets have been popular with UK private investors over the years. One is Raven Russia, an operator of Russian warehouses. Raven’s preference shares were seen by some as attractive for their high dividend yield.
Holders of Raven Russia have sat through plenty of dramas in the past. As this latest invasion unfolded, some bulletin board posters saw another opportunity to load up [18].
Unfortunately for them, it looks like this game of Russian roulette may have finally played out:
[19]Even those of us who don’t believe we have direct exposure to Russia will be hit by the fallout from Russia’s turmoil.
For example, BP [20] and Shell [21] – major components of the UK stock market – are going to have to take writedowns to get out of Russia.
It’s also possible restricting Russian money could hit the high-end London property market. That might hurt listed developers like Berkeley Group, although it’s thought [22] Russians are responsible for only a small share of sales.1 [23]
Luckily for passive investors, exposure to Russia in emerging market funds has already dwindled to about 4%, according to [24] data provider Lipper.
Bitcoin panic buying
Russian citizens face financial ruin, at least relative to their global peers. Perhaps that’s why the price of Bitcoin just leapt more than 10% in 24 hours:
[25]Cryptocurrencies are notoriously and unpredictably jumpy. But this move is mostly being pinned on younger Russians trying to turn their money into something that can’t be frozen by the State or devalued by sanctions – and that perhaps can be taken out of the country.
It may also be due to people buying and donating [26] cryptocurrency to the Ukranian army.
Ukraine has also asked [27] for crypto exchanges to freeze Russians’ accounts. The big exchanges are reluctant, for commercial and legal reasons – and also because it goes against the grain of crypto.
The ‘flippening’ of the Russian ruble
It’s hardly apples-to-oranges, but for the record Bitcoin’s price surge and the collapse in the Russian ruble makes the market cap of Bitcoin ($815bn [28] as I write) greater than the Russian currency’s money supply [29] of 63 trillion rubles (just over $630bn right now).
Crypto-pundits call this a ‘flippening’. The upstart Bitcoin has ‘flipped’ Russia’s national currency. (The ruble has actually been flipped [30] before, back at Bitcoin’s previous all-time high.)
This doesn’t mean really anything. There are US tech companies with a bigger market cap than Bitcoin, let alone the Russian money supply.
But it does illustrate again the sudden stress in the Russian financial system.
Hyper-inflation looms
At this point the Russian state may already be running out of long-term options. True, Russia is still able to export energy. Paradoxically this is sold for hard currencies like the US Dollar and Euro – even as the West also shuts off Swift to try to crush Russia’s finances.
Energy is by far the most important Russian export. Europe, the US, and the UK buy around $270bn in Russian goods and services [31] in a typical year. Energy predominates.
For as long as Russian fossil fuel can be swapped for hard currency, Russia might limp on. I’m no macro-economic expert but one wonders for how long though, before Russia’s central bank must start printing money to pay the State’s obligations?
Russians have endured several periods of high inflation over the past 40 years. If foreign reserves dwindle and access to fresh euros, dollars and other hard assets worsens further, hyper-inflation may loom.
For a country so reliant on imports for much of the stuff of modern life, this could be catastrophic.
China may well be the lifeline here. That sets up the unedifying prospect of a bipolar world and a new Cold War.
Economic warfare hits home
I don’t say this to offend anyone, but I can’t help feeling a little sorry for ordinary Russians going about their business in the face of all this mayhem.
Obviously it completely pales besides the fate of Ukrainians seeing their apartment blocks reduced to rubble, their friends and family killed, and autocratic repression on the horizon.
But when I think back to the financial crisis of 15 years ago, I do not underestimate the fear of seeing your life-savings going down the pan.
Even in the West, the average person has very little say over major events. For instance many of us bewailed how Brexit [32] crushed the pound and curbed our options to live and work abroad – despite us being personally against the whole folly. We marched and moaned, but ultimately we had to lump it.
Well, the West’s economic warfare waged against Russia make such privations look like a cut in a kid’s pocket money.
And this is on a people who truly have very little voice – where opposition is chopped down to size whenever it rises much above the level of a babushka bewailing the price of bread.
Again, compared to what Ukraine is enduring that’s trivial. We can debate Western policy missteps at the margin, but ultimately the Russian state has brought this misery on its people.
Still as someone who has spent my adult life pursuing financial freedom, I can’t imagine the gut punch of seeing your country’s economy implode.
Let’s hope for all our sake [33] this war ends soon.
p.s. The image above is by 19th Century Russian realist Konstantin Savitsky [34].
- The use of offshore holding companies and the like makes it hard to be sure. [↩ [39]]