Fortress Russia: How Vladimir Putin’s sanction-proof Moscow leaves the West toothless over Ukraine

Banning iPhones or switching off Russian banks from the Swift transfer system will affect policy but are unlikely to devastate the economy

By Nataliya Vasilyeva, Telegraph, January 27

With Nato and the US having ruled out sending their own soldiers into Ukraine, economic punishment and restrictions on officials - including, possibly Vladimir Putin - are all they have.

A new package of sanctions could include a ban on Russian banks trading in dollars, banning hi-tech US exports including iPhones to Russia, disconnecting Russia from the Swift bank transfer system and even issuing a travel ban for President Putin.

But Mr Putin is unlikely to be scared; he’s been preparing for it, after all, for years.

The Crimea effect

Russia first faced Western sanctions in 2014 after it annexed Ukraine’s Crimean peninsula and stoked a separatist conflict in eastern Ukraine by supplying the rebels with weapons and, occasionally, with troops.

The ruble took a tumble, the economic growth faltered but a prudent macroeconomic and monetary policy helped the Kremlin to stay afloat and even set aside billions from its oil revenues for a rainy-day fund.

Russia launched its own payment system, Mir, in 2015 after several private banks linked to President Putin’s close friends were no longer able to process Visa and MasterCard cards due to Western sanctions.

Mir cards have since become the default means of payment for anyone who receives an old-age pension or any benefits in Russia, and unlike with MasterCard or Visa, Mir is accepted in Crimea.

A recent opinion poll showed that half of Russia’s population owns a Mir card.

Faced with a long-standing threat of getting kicked out of the Swift international bank transfer system, Russia also developed a local system to duplicate it.

The new system currently covers only Russian institutions and a handful of foreign banks but it is generally up and running, Sergey Lavrov, Russia’s Foreign Minister, boasted in parliament on Thursday as he commented on Russia’s long-time efforts for economic self-sufficiency.

De-dollarisation

The Kremlin has also worked to “de-dollarise” Russia’s economy, urging state-owned companies to trade with foreign partners in local currencies and gradually decrease the share of the dollar from its rainy-day fund. In June, Russia’s finance minister said all dollar investment in the National Welfare Fund will be replaced with euros and gold.

Apart from replicating global financial infrastructure, the Kremlin has been saving up.

Russia’s National Welfare Fund earlier this month hit 13.6 trillion rubles (£127 billion), equivalent to 12 per cent of its annual GDP, which is twice as much in ruble terms as Russia’s two major rainy-day funds combined before the Crimea annexation.

Russia also holds the world’s fourth-largest foreign currency reserves, at about $630 billion.

The Kremlin even attracted criticism at home for refusing to dip into its rainy-day reserves to help out individuals and businesses affected by the Covid-19 pandemic.

Being too stingy, however, may have been an intentional policy.

“There are just two things that are required from financial officials in Russia: save up as much as you can and prepare the tools to adapt the economy to the shock of fresh sanctions,” said Tatyana Stanovaya, head of the R.Politik political analysis firm.

“They have been getting ready for Russia to live under sanctions for a long time. In the [Kremlin’s] logic, whatever they do, the worst kind of sanctions are inevitable.”

“Nuclear options” such as switching off Russian banks from Swift and banning Russian banks from trading in dollars will definitely trigger a sell-off on the Russian stock market and spur up the devaluation of the ruble but none of these options are going to leave Russia’s economy “in tatters”, as former US President Barack Obama once predicted.

But political leaders on both sides of the Atlantic - and especially in Europe - are proving to be not ready to cut all business ties with Russia, which would hurt the global economy badly.

Oil, gas and China

The US designation of Russian billionaire tycoon Oleg Deripaska and his companies including Rusal, the world’s largest aluminium producer, in 2018 showed that some people can be too big to sanction.

Several months after targeting Mr Deripaska, the US Treasury Department essentially caved in to the pressure from the markets and agreed to remove Rusal from the sanctions list while Mr Deripaska agreed to divest his majority stake in Rusal and other companies.

“Russia is deeply integrated in the global economy, so the question is: will Europe or the US be willing to stop buying Russian oil and gas?” said Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs.

“Even if the West were to target Russian oil and gas, where are they going to find that much gas? And if they were to switch off Swift for Russia, how are they going to pay for that gas?”

As tensions with the West escalated, President Putin held a televised video call with Xi Jinping.

China may not have joined other countries in slapping Russia on the wrist over Crimea but its businesses did not rush to invest in the annexed peninsula nor did Beijing recognise Russia’s claim on it.

“War with Ukraine would be hugely unpopular domestically, and breaking off relations with the West will put Russia at the mercy of China,” said Kadri Liik, a senior policy fellow at the European Council on Foreign Relations. “I’m struggling to think the Kremlin is ready for that. They want rapprochement with China, but on their terms.”

A badge of honour

The Russian officials who faced visa bans and asset freezes abroad have over the years worn them as a badge of honour, and Kremlin officials dismissed Western restrictions as blackmail that will never make Russia change its course.

The share of Russians who say they worry about Western sanctions has halved since 2014, Thursday’s poll by the Levada Centre showed.

Asked about a US threat of sanctions against President Putin personally, Dmitry Peskov, his spokesman, called such a move “not painful but politically damaging” for those who would impose them.

Many in the Russian establishment including top businessmen and finance officials may be genuinely worried about the prospect of war but they do not have much say when it comes to President Putin’s foreign policy forays.

“For the part of the Russian establishment that does make decisions - Putin and his allies from security services - sanctions have no effect on Russia’s policies and could even be viewed as a positive factor, cultivating a besieged fortress mentality,” Ms Stanovaya said.

“For them, sanctions are the inevitable, necessary cost for ensuring Russia’s security as they see it.”