Can the United States really reduce the Russian ruble to rubble?

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The United States and its allies around the world are waging an unprecedented economic war against Russia with no end in sight, and it is unclear whether the sweeping sanctions will change the Kremlin’s calculus in Ukraine or help trigger a global economic recession.

Russia withstood the initial shock of a wave of US and other financial sanctions, and managed to shore up its currency with drastic measures, despite President Joe Biden’s vow to reduce the ruble to “rubble”.

But even if Moscow manages to avoid short-term economic collapse, the long-term impact could be permanent damage to its status among the top ranks of world economies. Russia is heading into a recession and could emerge from the war stripped of its ability to use oil and gas as a geopolitical weapon, as European governments scramble to break their dependence on Russian energy , according to experts.

“I think there will be a real economic cost,” said Daniel Yergin, vice president of S&P Global and author of “The New Map: Energy, Climate, and the Clash of Nations.” “Russia will continue to be a major energy producer, but it will no longer be an energy superpower.”

In the meantime, Russia is selling fossil fuels and other raw materials to keep hard currency flowing into the country and to soften the blow of a virtual financial blockade and an exodus of foreign companies.

“As long as Russia can continue to sell oil and gas, the Russian government’s financial position is actually quite strong,” said Jacob Funk Kirkegaard, nonresident senior fellow at the Peterson Institute for International Economics (PIIE). “That’s the big escape clause from the sanctions.”

Sanctions can take years to gain traction, if at all, and often never achieve the stated political goal. But appalling scenes of destruction and credible reports of alleged atrocities have political leaders on both sides of the Atlantic looking for ways to tighten the screws on Russia and increase the cost of the Kremlin’s attack on Russia. ‘Ukraine.

From Brussels to Tokyo to Washington, governments have unveiled more punitive measures in recent days, including US and European restrictions on more Russian banks, shipbuilding companies, a US ban on exports to three Russian airlines, including Aeroflot, and sanctions against the children of Russian President Vladimir Putin. .

The Biden administration says the sanctions are having a serious impact and will gain strength in the months ahead. And officials say the draconian measures taken by the Russian central bank to protect the ruble show that the Russian financial system is in crisis.

“Russia will most likely lose its status as a major economy, and it will continue a long descent into economic, financial and technological isolation,” the White House said in a statement on Wednesday.

“The combination of the exit of Western companies and the imposition of sanctions on export technologies has cut off access to equipment and spare parts, which is already hampering operations in industry and transport and will be more crippling over time,” a Treasury Department official told NBC. News.

Prior to the invasion, US and European officials had ruled out measures that would affect Russia’s energy exports, fearing disruption to the global economy. But now Western leaders say they are debating how to clamp down on sales of oil and gas from Russia – the lifeblood of the country’s economy.

The European Union is banning Russian coal imports and European leaders say they plan to cut European natural gas imports by two-thirds by the end of the year. But there is growing pressure to go further, with Ukraine’s Eastern European neighbors leading calls to cut Russian energy imports to Europe.

Europe depends on Russia for around 40% of its natural gas and 25% of its oil. A debate is raging across Europe over how quickly countries can find alternatives to Russian energy, and some European government officials say it’s impossible to quit Russian natural gas overnight given the degree of dependence on Europe.

German Economy and Climate Minister Robert Habeck said recently that his country would not be able to wean itself off Russian gas until at least 2024. If a Russian gas embargo comes into effect now, the product Germany’s gross domestic could contract by up to 5 percent, with devastating effects for the German population, according to Habeck.

Despite warnings of economic backlash, a recent poll showed a majority of Germans, 55%, support a Russian energy embargo, according to a survey by broadcaster ZDF.

Whatever restrictions are ultimately imposed on Russian energy exports, the combined effect of war and major sanctions is fueling soaring inflation in Europe, the United States and elsewhere.

Washington and its allies are now bracing for even more inflation as the war drags on, and some economists are warning that growth in Europe and America is likely to slow this year. As central banks try to tame inflation with higher interest rates, the result could mean a recession for Western economies or at least “stagflation” – anemic growth coupled with rising prices.

“The purpose of the penalties is to hurt the other guy more than yourself, so it’s a balancing act and I think they’re just going to have to keep calibrating that,” said Brian O’Toole, a former Treasury Department official and now a member of the Atlantic Council think tank.

Since World War II, sanctions of this magnitude have never been imposed on an economy as large as Russia’s, and the consequences are still uncertain – both for Russia and for the global economy, said Gerard DePippo , a former US intelligence official specializing in economic analysis. .

“We’ve never tried to hit such a big economy, which is so important to commodity exports, with such severe sanctions, and the world is grappling with that,” said DePippo, now a researcher. principal at the Center for Strategic and International Studies. thinking group.

Besides the energy market, war and sanctions are driving up global food and fertilizer prices, with aid organizations warning of impending doom in the poorest countries. Ukraine and Russia are the main exporters of cereals and fertilizers.

The sanctions also reinforced the shift away from globalization towards a bifurcated global economy, with two supply chains – one linked to China and its partners and the other linked to the United States, India. EU and its partners, according to experts.

Cut off by financial and other sanctions from most of the world’s advanced economies, Russia could look to China to fill the gap in manufactured goods and technology. But there are limits to what China can do for Russia, as it doesn’t necessarily have the high-end technology products needed to keep Russia’s aviation and military export industries functioning, experts say.

Moreover, China’s big banks and companies will be reluctant to flout sanctions and do business with Russia if it means jeopardizing lucrative businesses in major markets, Kirkegaard said.

“Do you really want to trade access to a shrinking Russian captive market for access to all the advanced democracies in the world, Europe, the United States, the G-7, South Korea, Singapore? Do you really want to do this?” said Kirkegaard. “I certainly don’t think the most technologically sophisticated Chinese companies, banks, etc. want to do that.”

Although Russia’s central bank avoided a collapse of the rouble, Russia is heading into an economic recession, with estimates ranging from 5-15% contraction.

“There is no world in which the Russian economy, if it holds up, does not suffer substantial damage. He will be hurt,” DiPippo said.

How the war ends in Ukraine and what terms Russia eventually accepts remain open questions. But Russia may have lost a wider struggle for power and global influence, according to Yergin, of S&P Global, who wrote a seminal book on the oil market called “The Prize”.

Putin said two weeks ago that Russia is a reliable energy supplier, but “Europeans don’t believe it anymore. They don’t want Russian energy,” Yergin said.

Russia “will not have the capital and the technology to maintain its current position,” he said. “Russian industry will again be cut off from the world as it was in Soviet times.”

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