On Friday morning, February 25, Sergei Glazyev published the following analysis of US sanctions against the Russian economy and of the Russian options for defense and counter-attack. Glazyev is a Russian state official with ministerial rank. He has served for many years as an economic policy adviser to President Vladimir Putin; since 2019 he is the minister for integration and macroeconomics of the Eurasian Economic Commission, the bloc of former Soviet states coordinating customs, central banking, trade and fiscal management policies together.
By Sergey Glazyev
Translated and introduced by John Helmer, Moscow
Published on Dances with Bears, Feb 25, 2022
On Friday morning, February 25, Sergei Glazyev published the following analysis of US sanctions against the Russian economy and of the Russian options for defence and counter-attack.
Glazyev is a Russian state official with ministerial rank. He has served for many years as an economic policy adviser to President Vladimir Putin; since 2019 he is the minister for integration and macroeconomics of the Eurasian Economic Commission, the bloc of former Soviet states coordinating customs, central banking, trade and fiscal management policies together.
Glazyev, now 61, has also been the longest surviving force on the left of Russian policymaking since the end of the Soviet Union in 1991 and of Boris Yeltsin’s destruction of the Congress of People’s Deputies in 1993. He has been a consistent critic of the monetary policies of the Russian Central Bank; and of the oligarch system promoted by Anatoly Chubais, Alexei Kudrin, German Gref and their business allies in Moscow, and by the financial centres of New York and London. For 25 years they have proved stronger inside the president’s circle than Glazyev; they have persuaded Putin to overrule him publicly, then ignore and sideline him. Until now.
Commencing with Putin’s February 21 speech, the recognition of the Donetsk and Lugansk People’s Republics, and the commencement of the military campaign in the Ukraine, the management of the Russian economy has moved on to a war footing. In the interpretation of a leading European banker, the escalation of US and European Union (EU) sanctions intends to confiscate Central Bank assets and destroy all financial links between Russia and the west. He comments that nothing on this scale against a major world power has been attempted since President Franklin Roosevelt froze the foreign assets of Japan on July 26, 1941, and imposed an embargo on Japanese oil and gasoline imports six days later.
The new sanctions commenced on February 22 in response to Russian recognition of Donbass independence, and the signing of a treaty of military and economic cooperation. The first sanctions strike targeted two state banks; three sons of Russian state officials; and state bonds to be issued from Wednesday of this week.
The second-strike sanctions escalated on February 24 to “target the core infrastructure of the Russian financial system — including all of Russia’s largest financial institutions and the ability of state-owned and private entities to raise capital — and further bars Russia from the global financial system. The actions also target nearly 80 percent of all banking assets in Russia and will have a deep and long-lasting effect on the Russian economy and financial system.”
In addition, the targets were expanded to include for the first time state-owned Alrosa, the diamond producer and international diamond market maker; and Sovcomflot, the world’s largest energy tanker fleet operator. At the same time, the US Treasury said it would not block Russian payments for “agricultural and medical commodities and the COVID-19 pandemic; overflight and emergency landings; energy.”
The third strike began overnight between February 26 and 27. The White House announced the disconnection from the SWIFT interbank payments system for “selected Russian banks” . Russian press reporting has speculated that Sberbank and VTB will be disconnected, along with the other banks targeted on February 24. It is not clear whether Alfa Bank, the leading commercial bank owned by Mikhail Fridman, will appear on the SWIFT disconnection list.
The White House also announced the launch of “a multilateral Transatlantic task force to identify, hunt down, and freeze the assets of sanctioned Russian companies and oligarchs – their yachts, their mansions, and any other ill-gotten gains that we can find and freeze under the law.”
US and European Union officials are claiming that “restrictive measures that will prevent the Russian Central Bank (CBR) from deploying its international reserves” amount to a freeze on the Central Bank’s US dollar and Euro denominated holdings. As of January 31, the CBR reported holding $469 billion in foreign exchange. Of that aggregate, year-old CBR data suggest that 22% is in US dollars; 29% in Euros, and 6% in British pounds.
London banking sources and a leading oil trade figure believe that if the third-strike sanctions halt US dollar and Euro payments for Russian oil, gas, coal, titanium, palladium, diamonds, and other commodity exports, along with servicing of interest and principal loans, then the Russian side will stop all debt payments. They will also stop all deliveries to the US and Europe.
The domestic Russian political implications are not less dramatic; they are potentially revolutionary, though not in the direction US figures like Antony Blinken, Victoria Nuland, and William Burns have been calculating in public. Glazyev is one of the Russian revolutionaries they least want to see take power over the oligarchs now.
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It would be childish to assume that ‘when we are beaten, we get stronger.’ Although we have indeed strengthened our national sovereignty in the economic sphere under the influence of American sanctions, but not to such an extent that we do not pay attention to them at all. The damage from sanctions, of course, is there and it is significantly enhanced by the passive policy of the monetary authorities.
Permanent intimidation of Russia with new ‘sanctions from hell’ has long ceased to excite Russian public opinion. I remember how in 2014, like others in the first list subjected to US sanctions, I was interviewed and we all assured journalists that we were proud of such recognition of our services to Russia. Since then, the number of individuals and legal entities sanctioned by the United States and its satellites has increased many times and has not had any noticeable impact on our country. On the contrary, the retaliatory measures introduced by our Government in terms of restricting food imports from these countries significantly contributed to the growth of domestic agricultural production, which has almost completely replaced the import of poultry and meat.
Defense and energy industry enterprises have learned to circumvent these sanctions by refusing to use the dollar, and at the same time American banks, in favour of national currencies and banks of partner countries. The next step is the development of digital currency instruments that can be used without resorting to the services of banks which are afraid of falling under sanctions. The Russian people are following with interest the return to the country of the capital exported by the oligarchs and themselves, who are afraid of confiscation and arrest in NATO countries.
American sanctions have affected not so much Russia as third countries which have been subjected to pressure from Washington. First of all, our European neighbours, who have curtailed most of the cooperation projects in the scientific, technical and energy spheres. They also affected Chinese commercial banks operating in the dollar zone, which preferred to stop servicing Russian customers. Russia’s trade turnover with the EU and the United States has naturally decreased, while with China it has grown. In the period 2014-2020, in monetary terms, Russia’s trade turnover with China increased by 17.8% from $88.4 billion to $104.1 billion. The share of APEC [Asia Pacific Economic Conference] and SCO [Shanghai Cooperation Organisation] countries in the external trade turnover of the EAEU [Eurasian Economic Union] increased during this period from 29.6% to 36.4% and from 16.3% to 24.1%, respectively. The share of the EU in the external trade turnover of the EAEU, on the contrary, decreased from 46.2% in 2015 to 36.7% in 2020. Trade turnover with the United States during the period under review decreased by 18.1% from $29.1 billion to $23.9 billion.
In fact, with the help of sanctions, the United States is trying to oust Russian goods from the markets of its satellites, replacing its own. This was most clearly manifested in the European natural gas market, where the US share has increased sharply, although it has not yet been possible to displace Russia in the European natural gas market.
The main result of the US-European sanctions was a change in the geographical structure of Russian foreign economic relations in favor of China, the expansion of cooperation with which fully compensates for the curtailment of trade and economic relations with the EU. European consumers have to switch to more expensive American energy carriers, and their producers simply lose the Russian market. The total losses of the EU from anti-Russian sanctions are estimated at $ 250 billion.
Another important result of the US sanctions was the fall in the share of the dollar in international settlements. For Russia, as for other countries which have been subjected to US sanctions, the dollar has become a toxic currency. By tracing all dollar transactions, the US punitive authorities can block payments, freeze, or even confiscate assets at any time. For 8 years after the sanctions were imposed, the dollar’s share in international settlements decreased by 13.5 percentage points (from 60.2% in 2014 to 46.7% in 2020).
Sanctions have become a powerful incentive for the transition to settlements in national currencies and the development of national payment systems. Thus, in the mutual trade of the EAEU states, the share of the dollar decreased by more than 6 percentage points (from 26.3% in 2014 to 20.0% at the end of 2020).
I remember how ten years ago, when considering the risks to the Russian banking system at the National Banking Council, I asked the then head of the Central Bank: ‘Is the risk of disconnecting Russian banks from the international SWIFT banking transmission system being considered, as Western partners did in relation to Iran?’ To which I received the answer: ‘We cannot consider the risk of an atomic bomb hitting the Bank of Russia.’ However, the management of the Central Bank has taken measures — today Russia has its own system for transmitting electronic messages between banks — the Bank of Russia’s Financial Message Transmission System (SPFS), as well as its own payment system for Mir bank cards, which is interfaced with the Chinese Union Pay system and can be used for cross-border payments and transfers. Both of them are open to foreign partners and are already widely used not only in domestic, but also in international settlements. Disabling SWIFT is no longer seen as a large-scale threat — it will benefit the development of our payment and financial information systems.
However, it would be childish to assume that ‘when we are beaten, we get stronger.’ Although we have indeed strengthened our national sovereignty in the economic sphere under the influence of American sanctions, but not to such an extent that we do not pay attention to them at all. The damage from sanctions, of course, is there and it is significantly enhanced by the passive policy of the monetary authorities.
Since 2014, when, with the connivance of the regulator, currency speculators brought down the ruble exchange rate by manipulating the market, the latter has been used by sanctions as a fail-safe fuse of macroeconomic stability. At the same time, it was in 2014, on the eve of the already announced US sanctions, that the Bank of Russia switched to a free-floating exchange rate regime. And only after that, the United States introduced their sanctions, being sure that speculators would multiply their negative effect. When the ruble fell by almost half, Obama was pleased to say that ‘the Russian economy is torn to shreds.’ As a result of this manipulation of the Russian currency market, ruble incomes and savings depreciated, and speculators received over 35 billion rubles.in profit. But this happened not because of sanctions, but rather because of the complicity of the Bank of Russia, which left the exchange rate formation at the mercy of international speculators on the recommendation of Washington financial organizations.
Only very naive people can believe in the formation of an equilibrium ruble exchange rate in the free-float mode. The Bank of Russia’s exclusion of itself from ruble exchange rate regulation means that international currency speculators are engaged in this. On the rocking of the ruble exchange rate, which has become one of the most unstable currencies in the world with a threefold provision of foreign exchange reserves, international speculators receive multibillion dollar profits, and Russians, the depreciation of their ruble savings and income together with bursts of inflation. At the same time, the investment climate is hopelessly deteriorating — the instability of the ruble exchange rate creates uncertainty about the main parameters of investment projects using imported equipment and export-oriented products.
Thus, the damage caused by US financial sanctions is inextricably linked to the monetary policy of the Bank of Russia which is the ideal one for them. Its essence boils down to a tight binding of the ruble issue to export earnings, and the ruble exchange rate to the dollar. In fact, an artificial shortage of money is being created in the economy, and the strict policy of the Central Bank leads to an increase in the cost of lending, which kills business activity and hinders the development of infrastructure in the country.
Sanctions restrictions have caused an extremely high demand for corporate financing in the domestic market. Against the background of a relatively low key rate and access to cheaper funding, large banks consistently keep a net interest margin above the average market level, 5.4% to 6%; whereas for the largest banks in China, the USA, Germany, France, Great Britain and Japan, the net interest margin ranges from 0.8% to 2.3%.
However, these windfalls are not directed to financing infrastructure projects, but to the acquisition of disparate non-core businesses that are combined into ecosystems. Most of these businesses remain unprofitable even at the EBITDA [earnings] level. Despite this, billions of rubles are still spent on their development. These figures are quite comparable to the volume of investments in a major infrastructure project in the real sector of the economy, which can bring both job growth and contribution to the development of the economy. But such projects (as well as filling the budget) are still left to the raw materials companies, while the largest financial corporations prefer to direct their income to the creation of chimeras.
In fact, it was the connivance of the Central Bank which led to the fact that Russia and its industry were drained of blood and unable to develop.
If the Central Bank fulfilled its constitutional duty to ensure the stability of the ruble — and it has all the possibilities for this due to the threefold surplus of the currency reserves of the monetary base — then financial sanctions would be nothing to us. They could even be turned, as in other sectors of the economy, to the benefit of the banking sector, if the Central Bank replaced the loans withdrawn by Western partners with its own special refinancing instruments. This would increase the capacity of the Russian credit and banking system by more than 10 trillion rubles. Also, it would fully compensate for the outflow of foreign financing of investments, preventing a decline in investment and economic activity without any inflationary consequences. Thus, it would be possible to avoid a long period of decline in real incomes of the population caused solely by the peculiarities of the monetary policy pursued in Russia, which ensured the effectiveness of sanctions in the monetary and financial sphere.
Assessing the consequences of anti-Russian sanctions, it is impossible to ignore the consequences of severing economic ties with Ukraine. The mutual abolition of the free trade regime and the imposition of an embargo on a wide range of goods led to the rupture of cooperative ties that ensured the reproduction of many types of high-tech products. Blocking the work of Russian banks led to the depreciation of multibillion-dollar Russian investments. The refusal of the Ukrainian authorities to service the debt to Russia caused several billion dollars’ more losses. In total, their volume is estimated at about $100 billion for each of the parties. This is really significant and in many ways irreparable real damage, which we ourselves have aggravated with retaliatory sanctions.
To date, the outcome of the economic consequences of anti-Russian sanctions is as follows. Ukraine suffered the biggest losses relative to GDP, in absolute terms — the European Union. Russian losses of potential GDP, since 2014, amount to about 50 trillion rubles. But only 10% of them can be explained by sanctions, while 80% of them were the result of monetary policy. The United States benefits from anti-Russian sanctions, replacing the export of Russian hydrocarbons to the EU, as well as China; replacing the import of European goods by Russia. We could completely offset the negative consequences of financial sanctions if the Bank of Russia fulfilled its constitutional duty to ensure a stable ruble exchange rate, and not the recommendations of Washington financial organizations.
Consider the threats of American and European Russophobes against the new ‘sanctions from hell’. It has already been mentioned above that the threat of disconnecting Russian banks from the SWIFT system, widely discussed in the media today, although it will interfere with international settlements at first, will benefit the Russian banking and payment system in the medium term.
The threat to ban transactions with Russian bonds will also benefit us, since their issue in a budget surplus is nothing more than a source of profit for foreign speculators. And their profitability is overestimated three times in relation to the market assessment of their riskiness. The termination of the self-serving [самоедской] policy of the monetary authorities, who are borrowing money which is objectively unnecessary to the budget at exorbitant prices, will allow us to save billions of dollars. If the sanctioneers try to prohibit the purchase of the foreign currency bonds of Russian corporations, then it will be possible to compensate for the missing financing for the purchase of imported equipment by buying them out at the expense of part of the excess foreign exchange reserves. If foreign loans are cut off to them, then the risk of their default will fall on the European and American banks themselves.
There is also a potential risk of seizure of Russian state assets. But we can respond to this symmetrically by imposing an embargo on servicing debt obligations to Western creditors and also arresting their assets. The losses of the parties will be approximately equal.
There remains, in fact, one threat – to take away foreign assets from Russian oligarchs. For all its popularity among the common people, this will stimulate the return of capital exported from the country, which will also have a positive effect for the Russian economy.
At the same time, we need to protect ourselves as much as possible from the expected escalation of US-European sanctions. The most vulnerable place for our economy is its excessive offshoring. Up to half of the assets of the Russian industry belong to non-residents. There are more than a trillion dollars of capital exported from the country abroad, half of which is involved in the reproduction of the Russian economy. The simultaneous freezing of these assets can really dramatically worsen the situation of a number of strategically important enterprises dependent on the external market. The Americans showed how this is done using the example of Rusal, establishing their control over it under the threat of stopping foreign trade activities. We could respond to this by nationalizing at least the giant hydroelectric power plants transferred to this corporation for a song and on dubious grounds, on the operation of which the lion’s share of its profits is based. But for some reason, they did not protect this one of the structural branches of our economy from the raider seizure by the US Treasury.
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