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Russia’s financial system shaken after US imposes new sanctions
A new series of tough US sanctions sent jitters through the Russian financial system on Thursday and forced Moscow’s main financial trading platform to halt transactions in dollars and euros, further raising the cost of President Vladimir Putin’s war against Russia. Ukraine.
The Treasury Department’s sharp escalation of sanctions prompted former Russian President and Prime Minister Dmitry Medvedev, now a senior security official, to call on the population to “inflict maximum damage” on Western societies and infrastructure in retaliation. Meanwhile, several major Russian banks and brokers on Thursday blocked access to hard currency business accounts.
O sweeping new sanctions – announced by the Treasury Department on Wednesday – singled out the Moscow Exchange, Russia’s main financial market, for helping Russians “profit from the Kremlin’s war machine,” and increased the risk of secondary sanctions for any institution foreign financial institution doing business with Russia’s war economy. .
The Moscow Stock Exchange operates trading markets for stocks, bonds, derivatives, currencies and precious metals.
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The new sanctions also targeted China-based companies that sell semiconductor chips to Russia, as well as more than 300 individuals and entities in Russia, Europe, Asia and Africa.
Russia has managed to increase spending on military production since it invaded Ukraine in 2022, despite facing the largest barrage of sanctions and export controls ever unleashed by the United States and its allies against a country’s economy.
Instead of giving in, Russia has turned to China and India and a myriad of shadowy intermediaries to circumvent restrictions, with the West unable to fully cut itself off from Russian goods..
The push to tighten sanctions against Russia reflects a growing recognition among policymakers that measures so far, including unprecedented export controls, have proven insufficient to prevent the Kremlin from obtaining Western parts for its military supply chain. , said Edward Fishman, who served as a senior official. State Department official in the Obama administration.
Ukrainian authorities have documented thousands of foreign-made parts in Russian military supplies recovered from the battlefield despite Western restrictions.
To reduce trade, the Treasury this week expanded “secondary sanctions,” which seek to make foreign banks unwilling to process Russian bank payments.
The secondary sanctions, which target entities doing business with sanctioned Russian companies or individuals, are now applicable not only to entities working with Russia’s defense industry, but also those working with any sanctioned Russian company or individual, including the largest banks in the country.
US officials wanted to implement the sanctions before a meeting of world leaders at a Group of Seven summit in Italy. “There is enormous frustration that export controls are not working as well as would be expected,” Fishman said. “They are basically saying that if we isolate Russia financially, it could make it much more difficult for it to pay for its military imports.”
In response to the new measures, Medvedev, who has become one of the most vociferous Russian officials in condemning the West, called on Russians to “look for vulnerabilities” in Western economies and to “attack them in all areas.”
“We must find problems in their most important technologies and attack them mercilessly,” he said. “Literally destroy their energy, industry, transport, banking and social services.”
Shares on the Moscow Exchange initially plunged on Thursday but recovered later. Economists and former senior officials have warned that the new measures banning the trading of dollars and euros on the central exchange would have a significant impact on the cost of doing business for Russia’s export- and import-based economy, possibly further fueling inflation, which already is high – officially at 8 percent.
As a result, Russian companies must now convert dollars and euros on the Moscow interbank market rather than on the centralized exchange, allowing banks to charge high commissions for each transaction and increasing the spreads at which dollars and euros are bought and sold, reducing transparency.
Although Russians have increasingly switched to the Chinese yuan since the February 2022 invasion – 54 percent of all currency transactions on the Moscow Exchange are now Chinese – dollars and euros are still important to Russia’s economy.
“Russia still relies on using Western currencies for trade with all countries except China,” said Janis Kluge, an economist at the German Institute for International and Security Affairs. “There is a huge demand to trade these currencies.”
The new sanctions, Kluge said, “will increase costs for importers and exporters” and add new “layers of complexity” to Russian business transactions. “The impact is initially psychological,” he said, and further increases Russia’s isolation.
Kremlin spokesman Dmitry Peskov appealed for calm and told Russians to look to the Central Bank as a “mega-regulator capable of ensuring stability” after Russian banks began drastically increasing the dollar exchange rate. following the ban on trading on the Moscow Exchange.
Some have increased rates to as much as 200 rubles per dollar, Russian newspaper Kommersant reported. The day before, the rate set on the Moscow Exchange was just under 90 rubles per dollar.
The Central Bank said it would set daily exchange rates for the dollar and euro based on aggregate data on purchases and sales from commercial banks. It set Thursday’s official rate at 88.2 rubles per dollar.
A former senior Russian financial official said the Russian economy would not run out of dollars or euros, but that the new sanctions would clearly increase the growing costs of Putin’s war on the economy.
“This is not a question of financial stability, but it is a question of financial costs,” said the former senior official. “Import costs will increase and this will be an additional factor that will lead to higher prices.”
The huge increase in government spending on Russia’s defense industry, which is further driving inflation, will eventually become unsustainable, the former senior official said. There are growing signs that the Kremlin was aware of this, which is why tax increases for next year have already been signed into law.
“If oil prices do not grow further, sooner or later the budget will reach a ceiling and it will not be possible to continue spending without printing money,” said the former official. “But there is another instrument, which is taxation, and it is no coincidence that a law was approved that increases taxes on companies.”
Putin announced the increases for 2025, including an increase in corporate profits tax from 20% to 25%, as well as increases in income tax. He referred to them as “fine-tuning” the system.
“Putin has many ways to continue financing the war machine this year and next, but after that, it becomes more difficult,” said Alexandra Prokopenko, a former adviser to the Central Bank of Russia based in Berlin.