Western leaders are considering applying harsher economic sanctions on Russia as tensions continue between Moscow and Kyiv.
Russian President Vladimir Putin’s announcement on Monday evening that he recognised the independence of two separatist-held regions in eastern Ukraine and was sending in “peacekeeping” troops, has sparked international condemnation and world leaders are now considering what action to take.
The White House said President Joe Biden is to issue an executive order prohibiting “new investment, trade, and financing by US persons to, from, or in” the two breakaway regions.
And on Tuesday morning, Boris Johnson chaired an emergency COBRA meeting to consider a package of sanctions by the UK.
Russia has been under Western sanctions since its 2014 annexation of Crimea.
Despite this, the country’s economy is more secure than in previous years.
Financially, Russia is much less vulnerable now than during the 2008 invasion of Georgia and the 2014 Crimea conflict.
Russia’s central bank reserves stand at more than $620bn (£458bn). This is a 70% increase since late 2015, after the annexation of Crimea.
Its reserve was bolstered when it was merged with Russia’s National Wealth Fund in 2017.
This fund accumulates oil and gas revenue. It currently stands at $190bn (£140bn) and is set to rise.
Anxiety around the potential Russian invasion of Ukraine is among a number of factors that has seen fuel prices rise, with Brent crude oil prices now approaching the $100 a barrel mark.
Moscow has also adapted its economic policy to sidestep some of the pinch of sanctions.
This includes taking steps to reduce the role of the US Dollar in its savings, trade and financing in a bid to make the country less vulnerable to western financial action.
This is something economists are calling Russia’s ‘de-dollaring’ strategy.
The proportion of dollars in Russia’s reserves dropped from 40.9% in June 2017 to 16.4% last year.
Instead, 2021 saw Euros total around a third of the reserve.
Russia has also been investing in gold, with it making up around a fifth of the reserve last year.
Gold has played an increasingly prominent role in Russia’s reserve.
In August 2008, the same month Russia began its five-day conflict with Georgia, Moscow’s gold reserve was worth $13bn.
In March 2014, when Russia annexed Crimea, its gold reserves had risen to $43bn.
Now, Russia holds $133bn of gold as of the end of December 2021 – the most recent date available.
This ‘de-dollaring’ strategy helps protect the state’s funds but would not shield Russian private citizens who may be targeted by sanctions.
Reid Whitten, a sanctions expert and managing partner of law firm Sheppard Mullin, says that hoarding gold can shield Russia only to an extent from direct sanctions. The US and its allies still have a range of options to inflict severe financial pain on Russia.
He said: “Banning specific Russian banks from the SWIFT international payments network will have an effect. These can be targeted at the top circle that surrounds Putin.”
Other tools such as “secondary sanctions”, where the US effectively prevents European businesses from trading with certain Russian entitles, could inflict a “huge blow” on the Russian state, Mr Whitten added.
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