- The Russian incursion into Ukraine is almost a week old and the futility of waging an undesirable war is gradually unraveling from the region. The international community is flabbergasted with the turn of events hoping fervently that better sense will prevail upon the Russian strongman Vladimir Putin to call off the devastation wrecked by his forces on Ukraine. Not for nothing, it is often mentioned that there is no clear winner in any war. At most, such claims can be termed as a pyrrhic victory. Undeniably, Vladimir Putin is a Russian nationalist and even his strident critics will grant him that.
PC: Susan B. Glasser
- Therefore, it’s ironic that in a space of ten days his decisions have brought Russia to the brink of an abyss. Looking back, not even in the most chaotic phase of Boris Yeltsin, his predecessor as president, had the country’s future looked so bleak. Even if Russia achieves its immediate military objectives in Ukraine, its economy stands severely damaged, and most unwelcomingly, invasion provides NATO with a new lease of life. Let us look at with what assumptions Putin went ahead with his adventures. Understand, Russia’s strategic aims were to be undergirded by its fortress balance sheet’ – around $640 billion in foreign exchange reserves and gold.
- A break-up of this balance sheet by the Institute of International Finance (IIF) showed that it was based on one key assumption. Russia’s response to US sanctions after its annexation of Crimea in 2014 has been to partially switch its holdings of US dollars to gold and renminbi. Note that the weakness in this assumption is that any Russian action that invited a forceful combined response of the US, EU, UK, and Japan put almost 70% of this balance sheet at risk. Expectedly, the worst-case scenario unfolded on February 28 when additional sanctions by the US and its allies immobilized a large part of the Bank of Russia’s assets.
PC: IIF.com
- The Western response is working through the Russian central bank’s balance sheet to destabilize the financial system. A hobbled central bank more than doubled its policy rate to 20% to make deposits attractive and prevent a run on banks. Simultaneously, the collapse of the ruble required it to compel Russian enterprises to sell 80% of their export revenues. Consequently, Russia’s economy has to now largely rely on domestic savings raised at abnormal interest rates as households hold 21% of their deposits in currently inaccessible foreign currency. Nonetheless, the high-interest rate scenario and a collapse of confidence will severely undermine the economy. Of course, there’s a carve-out for energy industries from severe sanctions to help Europe.
- Though it may not last long and Russia’s hydrocarbon fields will be deprived of critical investment. Thus, the time is ripe for Putin to pause and rethink his strategies vis-à-vis the fast unfolding geopolitical/geostrategic scenario. On scrutiny, it is evident that Putin has achieved what he envisaged in projecting himself as a strongman catering to domestic as well as international consumption. Talks between the top leadership of Russia and Ukraine have begun which should be concluded logically by calling a ceasefire of the raging war forthwith. Continuing to press ahead with the misadventure much against the wishes of all concerned will only further isolate Russia. As such, Russia should act prudently, pragmatically, and logically to ensure the issue does not precipitate anymore.
