EDITOR'S NOTE: At the onset of its sanctions against Russia, the US and NATO-allied excluded Russia from the global SWIFT payment system, forbade western businesses from operating in the target country, shut off all western exports to Russia, and financially targeted its largest banks and oligarchs. The ruble tumbled as a result, and along with it, the Russian economy. Yet Russia’s financial resilience appears relatively solid: its currency quickly bounced back, and its account balance remains ample to continue financing its war on Ukraine. How’d that happen? Russia is still collecting revenue from its energy exports to Europe and other partners. So, despite the West levying what may be the harshest program of sanctions ever directed toward a single nation, the effects weren’t devastating enough to pummel the belligerent nation to submission. So, what’s the West to do? The article below explores this dilemma in greater detail, outlining the effects the current sanctions may have on the Russian people versus Putin’s war machine.
Data: Central Bank of Russia; Chart: Axios Visuals
Russia's cash flows soared during the first quarter, despite economic sanctions imposed by the West. The nation benefited from soaring energy prices brought on by its attack on Ukraine, Matt and Emily write.
Why it matters: Russia's surprisingly healthy finances show its continued sales of oil and gas remain a formidable economic tool for President Vladimir Putin's regime.
Driving the news: During the first quarter, the Russian Federation posted a record surplus in its current account — a broad measure of its trade with the world — as surging energy prices translated into a gusher of export revenues.
- The surplus for the first three months of 2022 rose to $58.2 billion, from $22.5 billion during the first quarter last year, according to figures published yesterday by the Russian central bank.
- The Institute of International Finance, a research group, projects that Russia will post a record $250 billion surplus this year.
- A surplus of that size could essentially make up for the entirety of the Russian central bank reserves that Western powers froze through sanctions, says Elina Ribakova, deputy chief economist at IIF.
Details: While Russia remains effectively severed from much of the world economy by Western sanctions, its big account surplus means it can get the money it needs to finance its war, pay government employees, and stabilize its currency by intervening in foreign exchange markets.
Reality check: Russia's ruble, which plunged by roughly 75% after fresh Western sanctions were imposed in late February, has now more than fully recovered — a sign that Russia is finding ways to adjust to its new status as an economic pariah.
Yes, but: A large current account surplus doesn't mean that the Russian economy, or its population, is thriving. The surplus — exports minus imports — in part reflects the fact that imports into the country have fallen sharply.
- That's because of moves by Western companies to pull out of the country, and the ruble weakness over much of the quarter. Combined, that's left Russian consumers unable to buy foreign goods, resulting in a worsening standard of living.
- Investors also fled the country, as net capital outflows soared by 270% compared to the prior year. About $64.2 billion in capital headed for the exits, according to yesterday's report.
- That's bad for Russia's long-term economic health, but almost certainly won't dissuade Putin from pursuing his chosen path in Ukraine.
The bottom line: Russia's financial resilience underscores the fact that if the West really wants to impose pain on Putin, Europe will need to cut off energy purchases.
Originally published by Axios.