Western countries repeatedly imposed economic sanctions on Russia after the Ukraine invasion. But, why does it not make any sense to Putin? Did Putin prepare for such a challenge? 

Exactly, yes. Putin knew about it and prepared for it in 2014, with the annexation of Crimea. Here are the key points that can see significant changes in Russia and we can assume it is a pre-preparation for an invasion.

With the annexation of Crimea, Russia was hit by many economic sanctions especially aimed at Russian individuals and companies. Russia learned a lesson from past experiences and prepared well to build a shield that made for future sanctions.

De-Dollarization

Here, Russia identified its greatest weaknesses and tried to find solutions for them. One of its weaknesses of Russia is depending on dollars. The US dollar is the most commonly used currency around the world due to its stability and worldwide acceptance. Most countries in the world hold dollars in their vaults for trade and loans. In the context of Russia, before 2013, 95% of the Russian exports to India, Brazil, and China were paid in US dollars and now it’s 10%. This is a significant difference. 

The reason for this is very simple.  Since 2014, Russia gradually decreased its Dollar reserves by collecting more gold and other currencies such as Euro. With the sanctions Russia had after the annexation of Crimea, Russia understood its vulnerability towards the US dollar. Shifting towards de-dollarization makes Russia less painful in future sanctions. For example, the Russian dollar reserves were cut to 16.4% in the first half of 2021, and in the same period last year,  it was 22.2%. In 2020 Euro took as the primary currency than US dollars to price Russian exports to China.

Gold Reserves

Russia’s gold reserves also increased in recent years and Russia planned to replace the trade in dollars with gold. In 1995 Russia had only $2 billion worth of gold and the significant thing is now Russia has $130 billion worth of gold which means 20% of its total reserves. Also, only the US, Germany, and Italy hold more gold.  

Now, the Russian Central bank has also resumed again to buy gold from the domestic market. These significant moves toward increasing gold reserves will now insulate Russia from an economic threat from the West.  

Gold is very important for a weaker economy, especially against economic sanctions. According to the experts, if a county has monetary gold in its own vault, it cannot be seized by foreign adversaries.  Also, Specie can move physically around the world, especially outside of the digital financial system, without tracking. On the other hand, countries can trade gold for foreign exchanges in an illegal manner, in unregulated markets. 

However, the US and its allies moved toward blocking Russia from using its gold in any kind of transaction. The US believes that Russia can swap its gold for another currency that is not subjected to the sanctions imposed by the west. And the US said that Russia can sell bullion in the gold market.  

Military Preparation

Not only in the terms of economy, Russia prepared for the Ukraine invasions in terms of the military also. Putin always tried to modernize the Russian armed forces recently. The top generals and intelligence chiefs were trained in the modern art of warfare. Some of those training was practically implemented during 204 such as “little green men”.

Also, military expenditure in Russia also increased gradually in recent years. In 2013 the military expenditure of Russia as a percentage of its GDP was 3.8% and in 2020 it was 4.2% according to the data shown by the world bank.

Alternative for SWIFT

SWIFT or Society for Worldwide Interbank Financial Telecommunication provides services related to financial transactions between banks around the world. The US, UK, Canada, Italy, and European Commission have announced recently that they will remove some of the Russian banks from the system. There are about 300 banks and financial institutions in Russia in SWIFT. This action will prevent Russian banks and financial institutions from the global transaction of money.

However, Russia had found an alternative for SWIFT to continue its financial functions despite the ban. The alternative is SPFS and it has been in development since 2014.

Does The Preparation Sufficient? 

As for the details above, it is clear that Putin was ready for international pressure when Russia invaded Ukraine. The Western allies believe that tougher sanctions will make Russia weaker and it will affect for stop the war. Apparently, the sanctions imposed by Western allies on the Central Bank of Russia have affected negatively the domestic foreign exchange market.

Secondly, even though Russia has a huge amount of gold reserves worth $127bn and renminbi reserves worth $70bn, it cannot use them to maintain the stability of the domestic foreign market.

Thirdly, Russia has now faced an unexpected issue, devaluing the ruble. This will clearly affect consumer inflation and affect lower growth in production. This situation is also happening in Sri Lanka now. The devaluing of the Rupee causes higher inflation and is costlier for importing essential items, which directly affects the economic and political stability of the country. Increasing inflation and interest rates in Russia would hurt more ordinary Russian people while decreasing their living standards.

In conclusion, Ukraine’s invasion and the overwhelming economic pressure from the west is not a surprise for Russia and it is well planned for such a situation. However, there is doubt about the effectiveness of the sanctions because it takes some time to feel the consequences of the sanctions. On the other hand, many experts believe that Putin’s preparation is just a cushion for the disastrous consequences of the Ukraine war and it is not sufficient for the tough time ahead for Russia. It is possible that the Russian economy will be narrowed down as well as the living standards of the people. But it is too early to calculate it in numbers.