(ORDO NEWS) — The sanctions are designed to bring the Russian economy to its knees – but will it work? Russia is unlikely to allow “the reckless inclusion of the money machine,” writes The Telegraph. The restrictions turned out to be not as tough as they used to say in the West.
The international reaction turned out to be stronger than the Russian leader expected, but the sanctions are not as comprehensive as they might seem.
You should always hope for the best. But I fear that in today’s tsunami of Western commentary that Putin has bitten off more than he can chew and that his nose is about to be smashed is wishful thinking.
Nevertheless, predictions about the impending collapse of the Russian president are being circulated with great speed and in large numbers. Here are some of them.
Under the pressure of sanctions, the economy will collapse, mass withdrawal of funds from accounts and hyperinflation will begin; Putin will be killed or fall victim to a military coup; the Russian political and economic elite will rise up against Putin and remove him from power. This wish list could go on and on.
Let’s hope that one or more of these scenarios will come true, although a sober and impartial analysis of the situation indicates that nothing like this will happen, at least in the near future.
Five days have passed since the beginning of the special operation, but the quick victory that Putin had hoped for turned out to be unattainable.
The international reaction turned out to be stronger and more united than the Russian leader expected. The sanctions announced today will certainly cause significant damage to Russia. But will they bring its economy to its knees? There is much less certainty about this.
We are already seeing long queues at Russian banks. Everyone who can still withdraw money from the country does it urgently, which is why the ruble has collapsed. Since the beginning of the crisis, it has lost about 30% of its value. In other words, such a depreciation of the ruble can provoke serious inflation and even hyperinflation, depending on the actions of the authorities.
But for now, they are responding to challenges in a classic manner. The authorities raised interest rates and flooded the system with liquidity.
Elvira Nabiullina, who holds a degree from the American Massachusetts Institute of Technology and heads the Russian Central Bank, is a shrewd and far-sighted banker and is highly respected in the international arena. It is unlikely to allow the reckless turning on of the money machine, which is an essential symptom of hyperinflation.
But this is possible. Applied economics professor Steve Hanke of Johns Hopkins University, who is one of the world’s leading experts on hyperinflation, noted that of the 62 cases of this phenomenon that have occurred in world history, two occurred in Russia. The first hyperinflation was in 1922 after the Russian Revolution, and the second in 1992 after the collapse of the Soviet Union.
Moreover, even according to official data, the inflation rate in Russia rose to 8.73% in January. There is a more realistic estimate, Professor Hank said, that takes into account the depreciation of the ruble and uses comparative purchasing power parity to analyze price movements. According to her, the annual inflation rate today is about 55%.
Thus, Russia is in sixth place in the world in terms of inflation after Venezuela, Lebanon, Zimbabwe, Turkey and Argentina.
But this is not yet hyperinflation, which occurs if the inflation rate exceeds 50% per month. For example, in January 1994, inflation in Serbia under Slobodan Milosevic reached a staggering 313% per month.
“Russia clearly has a big inflationary problem,” Professor Hank said. “But I don’t think hyperinflation is out of the question. It’s possible, but only very remotely.”
Yes, as a result of the imposition of Western sanctions, a significant part of Russia’s reserves, amounting to 661 billion dollars, has been neutralized. But according to an analysis by Charlie Robertson, chief economist at emerging-markets London-based investment bank Renaissance Capital, the central bank likely retained access to reserves held in Russia, China, and gold, which is valued at $200 billion.
This is enough to pay for imports for nine months, even assuming that Russia will not export anything during this time.
As of today, these reserves are increasing by about a billion dollars daily thanks to the export of oil and gas, as well as high energy prices. What is the point of depriving Russia of access to the SWIFT international banking messaging system, if there are many exceptions to this ban for banks that service Russian oil and gas exports to Europe and other countries of the world? Unfortunately, the sanctions were not as comprehensive as they were said to be.
In virtually all cases, countries that become victims of hyperinflation suffer under the yoke of current account and budget deficits. With no access to international bond markets, the authorities can turn on the central bank’s printing press to pay their bills. Russia has no such need, since it earns a lot of revenue from the sale of oil and gas, and it has a significant and ever-increasing current account and budget surplus.
To be sure, in the medium to long term, Putin’s arrogance and arrogance will doom him and his country to oblivion. But don’t expect it to happen quickly. It has a sufficiently powerful economic margin of safety, and it can still cause terrible harm.
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