"Western Financial Sanctions on Russia Show Limited Effect... Economy Completes 'Fortification'"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] As the U.S. government announced its intention to fully implement financial sanctions against Russia, experts predict that the shock Russia can endure will be limited, given that the country has already undergone significant economic "fortification." Since the annexation of Crimea in 2014, Russia has minimized its external debt and increased its foreign exchange reserves in preparation for Western sanctions, making it unlikely to be easily shaken by financial sanctions.

On the 22nd (local time), U.S. President Joe Biden announced in a speech at the White House that sanctions against Russia would be intensified. He stated, "We are imposing comprehensive blocking sanctions on Russia's major financial institutions, the Vnesheconombank (VEB) and the Military Bank, and broadly sanctioning national debt," explaining, "This means we have cut off Western finance to the Russian government." He also announced personal sanctions targeting President Putin's close associates, saying, "We will also sanction Russia's elites and their families."

However, the anticipated impact on Russia is expected to be limited. Considering Russia's level of foreign exchange reserves and external debt, it is difficult for financial sanctions to have a significant effect. Last month, the Russian Central Bank announced that its foreign exchange reserves amounted to $631 billion (approximately 752 trillion KRW), ranking fourth in the world. External debt is also minimized at about 16% of the Gross Domestic Product (GDP), leading to assessments that a severe financial crisis due to Western financial sanctions is unlikely.

Furthermore, according to the Institute of International Finance (IIF), the Russian Central Bank's reserve composition is diversified with 35% in euros, 22% in gold, 16% in dollars, and 13% in yuan, resulting in a relatively small dollar share. Even if dollar transactions are blocked through the Society for Worldwide Interbank Financial Telecommunication (SWIFT), Russia is expected to withstand sanctions for a considerable period. The Russian National Wealth Fund (NWF), which mainly invests in domestic and overseas energy companies, holds assets worth $186 billion, providing ample ammunition to prepare for sanctions.

Paul Feldberg, a sanctions specialist lawyer at the major U.S. law firm Jenner & Block, told major foreign media, "The current level of sanctions is limited and appears to be a warning that deliberately misses the main targets," adding, "It does not seem to be at a level that President Putin would be concerned about."

The New York Times (NYT) analyzed, "The direct blow to the Russian economy would come from a drop in oil prices, but for the economy to be seriously affected, prices would need to plummet to the $40 range," and "Considering the current high oil prices near $100, the impact of sanctions is expected to be limited."