The economic sanctions against Russia were designed to weaken Vladimir Putin's regime. But the repercussions on ordinary citizens are inevitable.
Wars are fought in many ways. With weapons, with technology, and also with economic manoeuvres. The war we are living through in Europe, as a result of the invasion of Ukraine by Russia, is no exception. The extremely harsh words of European Commission President Ursula von der Leyen are proof of this. "The European Union and its partners are working to paralyse Russian President Vladimir Putin's ability to finance his war machine. We have decided that Russia will pay an unprecedented price for this aggression. All of this will erode their economy. They want to destroy Ukraine, but what they are doing is destroying their own country too," she stated at a press conference. But how do the economic sanctions against Russia actually work in practice? And who will bear the consequences? The stated aim is to target the oligarchs linked to Vladimir Putin's regime, but they will inevitably weigh on ordinary citizens too. All the more so because, without knowing the outcome of the negotiations between Russia and Ukraine, it is impossible to predict how long they will last.
One of the choices that EU member states had to deliberate over at length was the exclusion of certain Russian banks from the Swift system. This acronym stands for Society for worldwide interbank financial telecommunication. It is not a bank that moves money itself, but rather a platform that enables financial institutions to exchange transactions securely, through a code (the Swift code) with which they can mutually verify each other's identity. In January 2022, more than 11,000 institutions were using it, averaging more than 40 million transactions per day. If it did not exist, each of these would have to be handled manually by a clerk, with a latency of a few hours — and an estimated additional cost of one hundred dollars per transaction.
After days of discussions, the leaders of the United States, the European Commission, France, Germany, Italy and the United Kingdom have made their decision: certain Russian banks will be cut off from the Swift network. In their own words, this means being "disconnected from the international financial system." Because from now on any overseas transaction (even something as routine as paying an invoice) will have to be carried out manually, with longer processing times and a greater risk of errors.
In practice, however, the consequences could be "fundamentally symbolic." That is the view of Alistair Milne, a professor at Loughborough University and the author of several studies on the subject. This is because the Swift platform is used to communicate and validate transactions, not to execute them materially. Russian banks will therefore be free to adopt alternative circuits, such as SPFS (created by the Russian central bank precisely after the invasion of Crimea in 2014) or the Chinese CIPS. Or even a basic messaging system such as WhatsApp.
To prevent a company of Gazprom's calibre from selling its gas abroad, Professor Milne argues, the only way is to freeze its accounts. Conversely, small businesses could find themselves in difficulty. Because when the value of a transaction is low, an increase in management costs has a proportionally greater impact — to the point of becoming unsustainable.
"Secondly," continues the joint communiqué announcing the economic sanctions against Russia, "we commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions." In other words: the Russian central bank, in order to prepare itself in advance for shocks of this kind, had over the years set aside foreign currency reserves with a total value of 643 billion dollars. Reserves which, however, it is now unable to touch. And it is equally inconceivable that capital from international investors will arrive at this stage.
Also for this reason, in the wake of the announcement of economic sanctions against Russia, the value of the rouble against the dollar collapsed. Up until Tuesday 22 February, 78.8 roubles were enough to buy one US dollar; by 2 March, 110 were needed. The same applied to the rouble-euro exchange rate: on Sunday 27 February, 90.9 roubles were needed to buy one euro; by Wednesday 2 March, 120.
On 28 February, the Russian central bank attempted to limit the damage by doubling the interest rate, raising it from 9.5 to 20 per cent. Despite this, the agency S&P Global nonetheless cut the rating of Russian sovereign debt to BB+, considered speculative. "We believe the announced sanctions could have significant direct and indirect effects on economic activity, confidence and financial stability," the agency stated in a note.
The sudden rise in interest rates is also driven by another consideration. When the cost of money increases and access to credit becomes more difficult, there is less currency in circulation, and inflation — that is, the generalised rise in the level of prices — is thus kept in check. This phenomenon would have an immediate knock-on effect on citizens who, overnight, would be forced to pay far higher sums for everything (from the weekly shop to electricity bills) and would see the value of the savings held in their bank accounts diminish. Were the Russian central bank to decide to print more roubles to revive the economy, it would end up entangled in precisely this dynamic.
Alarmed by this situation, Russian citizens have flocked en masse to the counters of their banks. Partly to stock up on cash, given that some electronic payment systems — such as Apple Pay and Google Pay — no longer work. They were managed by the bank Vtb, which has been hit by the economic sanctions against Russia. Many people had grown accustomed to using them to pay for their metro tickets more quickly; the long queues at the turnstiles are thus explained.
Others endure hours of waiting outside their bank to get hold of foreign currency, above all dollars, which have by now become impossible to find in many branches. The hope is to safeguard the value of their savings before the rouble depreciates further.
To get around the obstacle, some are also turning to cryptocurrencies. Exchanges involving the rouble have doubled since the start of the war in Ukraine, reaching 60 million dollars a day on Monday 28 February. It is impossible to know whether these involve citizens trying to protect their savings (or at least diversify the risk), or oligarchs with ties to the government who intend to move their capital elsewhere, evading the targeted sanctions against them.
So much so that Mykhailo Fedorov, deputy prime minister and minister for Digital Transformation of Ukraine, urged the exchange platforms to block Russian IP addresses. A request that was initially rejected out of hand. "It would be in contradiction with the reason why cryptocurrencies exist," replied Binance, the world's leading exchange by volume of transactions handled. Only to then partially backtrack, promising Reuters that it would block only the accounts of politically exposed persons.
