Yes, it’s painful but we must hit Putin where it hurts: his finances
Attacking Russia’s weakened economy with sanctions is our best weapon… even if it means rising prices
Daddy, what’s an explosion? Who is Putin?’ Those are the questions my three-year-old daughter has been asking this week after watching Vladimir Putin on TV threatening to blow us all up. For the first time in decades I have stopped watching the news – and it’s not just to protect my daughter’s sensibilities.
However, this terrible war has at least created something rare in most democracies: unity.
Liberal democracy has flaws, constantly eating itself up with selfcriticism and debate, but Ukrainians are fighting for the right to do just that.
And their terrible situation and the urgent need for help has made us to forget arguing about ‘golfgate’ and things that now seem like ‘woke nonsense’.
When first attacked by fascist tyrants, democracies are usually demiliatarised, unprepared and initially driven back.
Then they unite and fight harder and better than their attackers because they have something worth fighting for – as well as industrial and financial power.
Economies built on merit and freedom are thankfully far richer and dynamic than oppressive regimes where obedience and brutality are rewarded.
Yes, I know these are the Money pages.
But recent events have made us look at money a little differently.
Now, it’s not so much about mortgages, interest rates and health insurance.
It’s about sanctions, boycotts and donations.
It’s about what declaring economic war actually means.
Yes, sanctions are going to hurt us. There are no worthwhile sanctions that don’t.
We shouldn’t complain or be shocked about the obvious result, which is rising prices.
Let’s keep perspective on why we’re doing this. There is a war on, not unlike WWII.
An evil fascist tyrant with a seemingly invincible army has invaded a democratic nation and, after the initial shock impact, has encountered increasingly fierce resistance.
This time around only one country is doing the actual fighting – Ukraine.
What we are being asked to do is impose sanctions, provide what money we can and stop buying Russian oil, gas, vodka and the few other bits and bobs its dysfunctional economy manages to make.
Downloading a yellow and blue avatar is not enough.
Don’t be fooled by all the tanks and rockets – Russia is not a world power economically. It is vulnerable.
The economy is pretty pathetic for its size – not much bigger than Spain in money terms but spread among 100 million more people.
It’s the world’s biggest country with only the 11th largest economy. Its population is falling.
All they managed to do with such vast resources is pump oil and gas, mainly to enrich oligarchs and build and equip a vast army.
Oil alone accounts for 44% of Russian exports and 17% federal tax.
The incompetence and lack of drive and dynamism that characterised Soviet Russia is increasingly apparent – and not only in the invasion of Ukraine.
Oligarchs might have been pretty slippery at moving their assets to avoid sanctions, though not all of them.
Yet while enjoyable entertainment, this is a sideshow compared to the really powerful weapon brilliantly deployed recently – the freezing of hundreds of billions in Russian foreign reserves, which were inexplicably not moved quickly enough out of the West.
Vladimir Putin had built up $630bn as a war chest to offset the impact of sanctions and buy more inhumane weapons – yet his central bankers left around half of this lying around in Western banks, which froze it with impressive efficiency.
‘As a central banker myself I cannot understand what they [the Russians] did. It was so stupid. They lost half – hundreds of billions – in no time. In 15 minutes,’ a source told us.
When Britain effectively seized Spanish gold reserves in 1804 by intercepting a convoy bound from South America, it ruined the Bourbon dynasty.
It also led to a (gulp) declaration of war.
The fact that Putin has chosen not to interpret the seizing of hundreds of billions in Russian money as an act of war is at least reassuring, implying he doesn’t want to go down that road.
The money was even languishing in low-interest accounts earning little.
Without these reserves, the rouble crumbled overnight, as inflation spiked to a crippling 20%. Russians will struggle to buy anything that isn’t locally produced, mainly food and energy.
More than 300 businesses, led by the tech and payments industry, have also suspended operations in Russia, hitting jobs and pay.
In two weeks, the Russian economy has gone from
imperial pomp symbolised by the lavish yachts of the oligarchs – to a downright basket case.
After a rapid series of downgrades, Russia’s sovereign debt has become what is known in financial circles as ‘junk’.
A default, where Russia can’t pay its debts, is seen as ever more likely.
Encouragingly, the last time this happened this was before the Bolshevik revolution of 1917.
Hopefully, if this is on the cards again, it will also presage a change of regime.