Professor Mark Harrison is an expert on the Russian economy. He said: “Russia’s currency crisis has two lessons, one already clear, the other in the making. The first lesson is about the surprising effectiveness of ‘new’ sanctions. “Old” sanctions were applied to international trade. Two hundred years of experience included the blockades of the Napoleonic wars and two world wars, sanctions on the Soviet bloc, Cuba, South Africa, Iraq, and many others. These showed that trade sanctions are rarely effective in the short run – say, over a few months or even a year or so. Any middle sized, moderately industrialised economy could find ways around external restrictions by finding out substitutes and tightening belts a little. Any effects tended to be gradual, cumulative, and undramatic.

“’New’ sanctions are applied to international lending. They have been made possible by two things, one the growing dependence of modern business on credit markets; two, the measures the United States undertook to shut off funding for international terrorism after 9/11. The result of ‘new’ sanctions on Russia, arising from the Ukraine crisis, is not just that western banks are not supposed to lend to Russia any more. Western banks are now terrified of even retaining counterparties that might give the appearance of being linked to others that might be lending to Russia, in case this invites a costly regulatory challenge. They’d rather drop the business than take the risk. This was already apparent at the end of the summer, before the oil price began to slide.

“Normally Russia would easily ride out an oil price decline. In this situation, however, external credit to Russia has suddenly dried up. A year ago Russia had plentiful reserves and a large trade surplus. But the trade surplus reflects capital flight from Russia, which is continuing. Meanwhile big Russian companies can no longer roll over short term debt and are turning to the government to meet their credit needs. At the same time the reserves are shrinking. Meanwhile, the market has turned against the rouble. This is affecting import prices and the value of debts denominated in foreign currencies. Suddenly the Putin administration is in a bind.

“The other lesson, one that we have still to learn, is what Putin will do about it. In a currency crisis there ought to be (and usually is) hope. The currency needs to find a new, lower value. The government needs to find new policies (or the country needs a new government). The people need to adjust to temporarily reduced incomes. Then the economy can recover, and prosperity can return. But it is hard to see this as an outcome for Russia, as long as Putin is president.

“Western sanctions were designed to bring home to Putin that he has behaved badly in Ukraine, and to make him stop and think. Regardless of the rouble crisis, Putin’s policies were already threatening European peace and stability through continued support for Ukrainian rebels, in funding for major rearmament, and by keeping the Russian armed forces in war readiness through continuous large-scale exercises and the probing of NATO air and sea defences. Experts have pored over Putin’s recent speeches to see whether his words express more or less caution than one might predict. But this is a tough problem because Putin is not a predictable factor in the situation any more. He has become an autocrat, meaning that he has become less accountable to laws, institutions, and public opinion.

“The thing that usually maintains world peace in a crisis is the shared belief that it’s better to wait and see than take precipitate action. We no longer know whether Putin shares this belief."

Note to Editors:

Issued by Lee Page, Communications Manager, Press and Policy Office, The University of Warwick. Tel: +44 (0)2476 574 255, Mob: +44 (0)7920 531 221. Email: l.page@warwick.ac.uk.

Contact:

Lee Page, Communications Manager,

Tel: +44 (0)2476 574 255

Mob: +44 (0)7920 531 221

Email: l.page@warwick.ac.uk