[ivan_gammel]

>Now you can see with the price of the Ruble that they've run out of the will to prop it up using foreign reserves (probably running low on foreign currency)

It’s not that simple. I don’t think Russia is low on foreign currencies. Due to sanctions and effects of war spending Russian economy doesn’t behave as a normal one. Recession is going to happen, sure, because the current high demand on domestic market is matched by credit-driven growth of supply. As soon as war spending drops, demand weakens and interest rate drops, but some of the businesses which play the chicken game with central bank will have problems. So yes, recession is going to happen. But they will not burn foreign reserves to zero, simply because some of them are frozen and some are in rupees and yuan, which are not easily convertible.

[aguaviva]

I don’t think Russia is low on foreign currencies.

It's definitely "low" on the $327B or so in its sovereign foreign assets that were seized Brussels shortly after the 2022 invasion -- apparently about half its total (of $600+).

The seizure obviously didn't kill the economy, but it would be surprising if it didn't set off a chain of effects within the Russian economy. We may be seeing that now in the form of the precipitous rise in the benchmark interest (to 21 percent).

[ivan_gammel]

The rise of the interest rates is not related to seizure of foreign assets.

It’s macroeconomic basics: government is spending a lot, domestic demand increases and doesn’t match the supply, which cannot be balanced by imports (which would require spending of foreign reserves). The economy is gradually overheating, inflation is rising, so the central bank attempts to control it, because its only target is the inflation. That’s as simple as that.

[aguaviva]

So to the extent the sanctions (of all types) are having any kind of effect on the Russian economy -- how would you best characterize it?

[ivan_gammel]

1. Sanctions on financial sector and airlines are annoying at most and hit the most more liberal Russian middle class and elites, which has had enough in 2012 and would not dare to oppose Putin directly today (so, it's a reason to go to therapy or have a vacation in Asia rather than going to the streets). Russian financial authorities are one of the most competent in the world and it shows, the system is relatively stable and will go through the coming recession with minimal damage (not the first time).

2. Some manufacturing sectors of Russian economy do have problems, which do not hinder manufacturing capacity today but will have more long term effects. Chances are high that this will simply help China to become more competitive at the cost of Western producers of manufacturing equipment and electronics. They do not want confrontation with the West, but will use any opportunity to replace Western companies. Civilian aircraft production is going to be even more localized without the Western engines and may gradually catch up with the demand.

3. Sanctions on oil and gas trade simply do not work and are bigger pain for Europe than for Russia. You cannot cut off major supplier of hydrocarbons without full support of all the biggest consumers. It still goes on, just in other currencies (which may have negative long term impact on use of USD in international trade). Yes, Russian producers do suffer, but nothing really bad is going to happen to them.

4. Unofficial "Cancel culture" sanctions (Western brands pulling off Russia) have negative effect mostly on the Western businesses which may have lost one of their biggest customers, like some German companies. The assets are simply being taken over and they continue to contribute to Russian economy (and paying taxes) after some delay, switching to Chinese supply chain (e.g. car production). At best they will be paying double or triple price to return to the market later, at worst they will get more competition. It will be interesting though to see, how competition in digital services will evolve. For example, YouTube cannot be replaced by anything even when it does not sell ads or premium accounts in Russia.

To summarize, sanctions did not work. They did not and could not stop the war. The most damage Russia has inflicted on itself: excessive military spending increased inflation, from which civil servants and pensioners are going to suffer the most. Attempt to control it is going to result in major recession soon. Besides, massive emigration wave has put a lot of pressure on the job market and immigration from Central Asia can no longer mitigate it, because the attempt to recruit more soldiers from immigrants has scared many of them.

I still believe that the best strategy for the West should have been avoidance and deescalation, and then, when all opportunities were missed and the war started, US and UK should have deployed their military in Ukraine honoring the spirit of Budapest agreements. It was not wise for Ukrainian leadership to choose a side and push for NATO membership, but it was stupid for USA to leave the doors open, promise things that led to more escalation and then let the country slowly burn. This war is a major failure of Western diplomacy and lack of adequate strategy in Eastern Europe.

[aguaviva]

To summarize, sanctions did not work. They did not and could not stop the war.

Well it's pretty clear the sanctions were never intended, by themselves, to stop the war. But it's not like the Western nations really had any other choice.

Fundamentally, sanctions are more about framing -- making it clear to Russia's regime that it simply won't be possible to continue doing "business with usual" with the West after it crossed the line that did.

I agree with you that Western pre-war policy was largely a failure, and certain things should have been done differently. But now that Russia's regime took the action that it did --- it must be opposed, and in any case not simply "greenlighted". Which a refusal to impose sanctions (or substantially help Ukraine in its defense) would have amounted to.

[dismalaf]

> But they will not burn foreign reserves to zero

No, of course not. But it's clear they've burned through enough that they've given up trying to prop up the Ruble, as they did in 2022.

[ivan_gammel]

How is it clear? Their foreign currency reserves decreased just by 15% since December 2021 and their total reserves actually increased. Yes, some of that huge pile of money was frozen, but it’s nowhere close to “giving up” trying. So no, you are wrong, they did not give up, they simply did not have intention to keep ruble strong. The central bank intervenes to prevent high volatility, but that’s it, since 2015 they focus only on inflation.

[dismalaf]

It's clear based on the exchange rate. You absolutely can't trust whatever data they put out there, but you can see based on their behaviour. I mean, they're literally asking North Korea and Iran for help, trading oil and gas directly...

There's no advantage for them to have the Ruble so weak because they absolutely want to import Chinese and Western products, namely technology, to fund their war machine. Even against the Yuan, the value of the Ruble has nearly halved since June 2022. That's not good for a nation that needs to import things...

[ivan_gammel]

You make wrong assumptions about the exchange rate. I suggest you learn more about Russian economy, rather than speculate.

The fact is, they do not target exchange rates in their policy, only inflation. Their trade balance with China is positive (unlike USA), so yuan reserves are growing and they have no problem to buy Chinese goods. The weakness of ruble has nothing to do with it.

[thodin]

The exchange rate is now directly controlled by the Central bank. Trade with China is very problematic - sometimes it takes several months to complete a single transaction.

[ivan_gammel]

> The exchange rate is now directly controlled by the Central bank.

This is false. I don’t know where you have got this, when all information is public and easily available. Here’s how the official exchange rate us determined:

https://cbr.ru/Content/Document/File/162004/metod_6290-u.pdf

They just collect the data on OTC transactions from banks. The only way for Russian central bank to influence the exchange rate is to sell/buy and they do it only to stabilize the market when volatility is high. They do not have exchange rate targets and do not enforce specific rates in transactions.