Is Russia Really on the Verge of a Financial Collapse? Is it true that our oil imports are funding Putin's military effort?
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| [European Energy Crisis] |
For the West, President Putin's choice to invade Ukraine represents a big issue. How can we know which military, diplomatic and economic responses are the most successful in a situation like this? Political action must be founded on a good economic understanding, no matter how tough the situation may be.
There are times when this isn't the case. As an example, it is now being asserted that the Russian state is on the brink of bankruptcy. We overemphasise the ruble's present decline. Online rumour has it that the devastation of Ukraine is being financed in part by Western payments for Russian energy exports. Some German leaders have called for a full ban on EU energy exports, saying "Enough of our money for Putin's war!" as a result of this. As sensible as this desire may be, it is founded on a number of major misinterpretations about the nature of conflict.
Let's begin with the fundamentals. Foreign currency transactions, such as dollars or euros, must be distinguished from transactions paid in rubles. Products that can presently be manufactured in Russia or one of its allied partner nations (or one that may be reasonably soon) are differentiated from those that Russia must buy from "enemy" countries in a similar but not identical way.
In Russia, the ruble is a currency issued by the government or central bank. Central banks in Western countries have also used quantitative easing to create money by raising or issuing taxes or by issuing government bonds. Therefore, the first misunderstanding is that transactions in rubles might lead to a "state bankruptcy" in Russia. As for the country's foreign-currency debt, that's another matter entirely.)
In contrast, the only way to get rid of foreign currency is to price or convert current and prior exports (less imports) in foreign currency. This represents an influx of foreign currency.
In contrast, the only way to get rid of foreign currency is to price or convert current and prior exports (less imports) in foreign currency. This represents an influx of foreign currency.
For Moscow, the sanctions implemented in reaction to Russia's campaign of aggression and the subsequent inability or reluctance of important partners to deal with Russia are the fundamental concern.
On a daily basis, the West/Europe is said to be spending $x million or €y million on the war, whereas Putin is spending $x million or €y million on military expenditures. Putin's military financing might be cut off by abandoning the purchase of energy, according to this analysis. In contrast to the latter, the former is a (estimated) amount of military spending in rubles, which is subsequently translated to dollar or euro amounts using an assumed exchange rate. The Russian government, on the other hand, pays its troops, contractors, and suppliers almost exclusively in rubles.
A combination of high inflation and decreased after-tax earnings, depending on how military expenditure is funded, might restrict the scope for civilian output and consumption. The bottom line is this: more guns, fewer buns. This is a well-known problem for countries engaged in conflict.
That, however, has nothing to do with the topic of currency exchange. Of course, Russia has a nearly unlimited supply of fuel, doesn't have to pay foreign mercenaries, and relies mostly on locally built military equipment, of which there are no doubt still large quantities. Foreign currency may be required for the importation of military items, like as components. However, in the short and medium term, this is not a significant problem. Even in this narrow context, the idea that genuine infusions of foreign currency are required to pay Russia's military is mistaken.
It is projected that Russia possesses 630 billion dollars in foreign currency reserves from past export surpluses. Sanctions in place, notably against Russia's central bank - an extraordinary step that amounts to the expropriation of financial assets - imply that this emergency fund cannot readily be used to purchase goods Because of sanctions implemented in reaction to Russia's actions in Ukraine, Russia's fundamental difficulty is the inability or reluctance of important trading partners to deal with Russia, not the flow of money from continuous exports.
In the same manner, the relevance of the ruble's fall in external value is misleading: the exchange rate is irrelevant when commerce is banned for other reasons and convertibility is constrained. Russia's Central Bank does not rely on the country's present trade surplus to maintain its currency.
Exports to Russia from nations that don't accept ruble payments are severely restricted by the sanctions already in place. As a result, obtaining completed goods and intermediates from other countries is becoming more difficult for Russian consumers and industries. People in the middle and upper classes, particularly, will feel the effects of this. Furthermore, if Russian industry is unable to receive inputs and intermediate goods from other international or local sources, it is likely to face catastrophic consequences.
Rather than aiming to harm Russia's military might, Western sanctions aim to inflict economic hardship on the country and therefore stir up opposition to Putin among the country's citizens and elite. The people and oligarchs may respond this way when their access to high-end consumer goods and earnings is limited, but it is questionable if the circumstance enables the tyrant in the Kremlin to establish a waggon camp mentality and even consolidate his authority.
Key to gauging the economic effect of sanctions is whether China, India and other smaller nations are ready to continue dealing with Russia, either as a political calculation or because Russia's imports are too expensive to produce in-house. Prior to the present economic crisis, Russia's main and third-largest suppliers were China and Belarus, respectively. Stopping Russia's foreign currency inflows would impair the country's position in the event that certain nations insisted on future payments in dollars. This, however, is not a need. The exchange of products will not be hampered by the lack of a proper unit of account if political will and mutual benefit are present. As long as each national finance ministry has access to a shared Excel table, this should suffice.
It is ultimately a game of threat and counter-threat, escalation - and possibly de-escalation - when it comes to economic penalties, including the planned complete ban on imports. A wide range of topics, including military ones, are addressed in this game. It's almost impossible to predict the long-term effects of different policy options. Ukraine needs Western support. It's not clear how to get Putin to cease the conflict, but it's not impossible. All policy choices must be based on a solid understanding of the economic landscape.
One thing is for certain: Russia's military effort is not being significantly aided by the West's continuous energy purchases. It is also apparent that Russia's economy is suffering greatly as a result of the sanctions. However, the absence of inflows of foreign currency will not cause the state to fall bankrupt. Europeans would pay a significant price if they stopped importing energy right once, and they would be forced to get their energy from countries they don't want to. Because of this, the transition to renewable and alternative energy sources must be accelerated to the fullest extent possible.
Ukrainians deserve to live in peace and dignity, and we can only hope that politicians can find a solution that ends the violence, while also limiting the harmful economic impacts.
The author Andrew Watt heads the European Economic Policy department of the Hans Böckler Foundation.