Efforts to decimate Russia’s economy threaten to boomerang

Efforts to decimate the Russian economy in order to punish Moscow for its invasion of Ukraine could have serious and unpredictable implications for the United States and its allies.

Russia’s economy began to collapse after the United States, United Kingdom, European Union and other partners imposed unprecedented sanctions with staggering speed.

The Russian government and major financial corporations have been cut off from much of the global financial system, dozens of international companies have pulled out of the country and the value of the ruble has plunged as Russia’s central bank struggles to avoid a deeper crisis.

“The United States and the Europeans are explicitly declaring that they are engaging in economic warfare with Russia,” Daniel Glaser, former assistant secretary of the Treasury for financial crimes, said during a webinar on Thursday hosted by the company. K2 Integrity compliance.

“Normally, when you hear the United States and the Europeans talking about the application of sanctions, you hear a lot about how much they want it to be targeted,” he continued. “I’m not saying that the United States and the Europeans don’t care about collateral damage, but that’s not the talking point they use. The talking point they use is the pain they use. are trying to inflict on Russia, and it’s breathtaking.”

US and allied officials argued that intense economic pain was essential to punishing Russian President Vladimir Putin domestically for the invasion of Ukraine.

The sanctions regime is designed not only to hamper the Russian economy, but also to limit Moscow’s ability to alleviate economic pain. The United States and its allies blocked transactions with Russia’s Central Bank and froze about half of Russia’s $600 billion in foreign exchange reserves, which Moscow had parked in other countries. The move locked up what experts called Putin’s sanctions war chest.

The threat of future sanctions has also caused a mass exodus of international companies from Russia. Dozens of companies that may be able to operate outside of sanctions are leaving Russia instead of risking a backlash from the US government and losing access to the US dollar.

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“There are certain tools they can use to manage,” said Rachel Ziemba, founder of macroeconomic advisory firm Ziemba Insights, from the Russian government.

“They’re headed for, yes, a recession but a much more inward-focused economy that basically takes all the reforms of the last two decades and almost does the reverse,” she added.

Even so, growing economic difficulties in the country have not dampened Putin’s military ambitions in Ukraine.

Russian forces claimed to have taken control of the Zaporizhzhia nuclear power plant overnight in Ukraine, causing deep concern among US officials. The attack on the factory, which sparked a fire overnight, sparked widespread panic and fueled calls among US lawmakers to take more aggressive action against Putin’s regime.

Members of Congress from both parties have stepped up pressure on President Biden to block Russian oil. This would almost certainly drive up gas prices given the globally connected nature of oil markets.

The United States is a net exporter of oil, but increased demand for U.S. crude will drive up energy prices globally as European allies scramble to replace Russian oil and natural gas.

While Biden has sought to prepare Americans for potential economic fallout at home, experts say the unprecedented nature of the sanctions creates unpredictable risks for the US economy.

Energy and food prices are the quickest way for Americans to feel the shock waves of Russia’s decline, especially if Biden takes action against Russian oil imports.

According to economists at Goldman Sachs, crude oil prices have risen about 20% over the past two weeks, enough to knock down US gross domestic product by 0.2 percentage points.

They also expect inflation measured by the personal consumption expenditure price index at 0.2 percentage points thanks to “higher food prices, higher production costs due to higher raw material prices and increased transport costs due to disruptions in shipping”.

Ziemba said a ban on Russian oil imports would largely be “symbolic” and would simply send barrels to other markets.

“When we think about the cost-benefit analysis, it’s not clear to me that the pain here justifies the pain in Russia,” she said.

But Ziemba said lifting current exemptions for processing energy-related payments could deal a devastating blow to Russia’s energy industry. If US companies and the US dollar can no longer be used to buy Russian oil and gas, Ziemba said foreign companies are likely to abandon Russia to protect their access to US markets.

“If there is a situation where Russian entities cannot be paid for the oil and gas they produce, they will not give away the supplies for free,” Ziemba said.

“As the price adjusts, it would be very painful,” she added.