Russian President Vladimir Putin is likely to respond to the latest round of U.S. sanctions threats as he aims to make the country’s economy more self-sufficient.
In the seven years since Russia’s annexation of Crimea, Putin’s government and the Central Bank have stripped back the country’s exposure to dollars.
It also shifted assets out of the U.S. and sold a smaller share of its debt to foreigners.
“The Americans are saying: be careful, or we could do more, but Russia is just going to continue down the path toward economic autarky,” said Elina Ribakova, Deputy Chief Economist at the Institute of International Finance in Washington.
The administration of U.S. President Joe Biden is keeping the threat of sanctions hanging over Russia. This is even after a sweeping round of penalties imposed last week.
On Sunday, the U.S. warned of “consequences” if jailed opposition activist Alexey Navalny dies in prison.
The share of gold in Russia’s $581 billion international reserves jumped above dollars for the first time on record last year. This is following a multi-year drive to reduce exposure to U.S. assets.
The precious metal made up 24% of the Central Bank’s stockpile as of the end of September 2020.
This is the latest date for which the breakdown is available.
The share of dollar assets was 22%, down from more than 40% in 2018. That trend also shows up in the share of Russia’s international reserves held in the U.S.—which plummeted to just under 7% by the end of September and down from about 30% before the Crimea annexation.
Most of the shift happened in the second quarter of 2018, just after sanctions on aluminum giant United Co. Rusal revealed how vulnerable Russia was to sanctions.
Economists Weigh In
Russia’s resilience to successive waves of sanctions provides a false sense of security. With the U.S. running out of options, the next round could be more disruptive, and the measures already in place are holding back trade and investment.
Of course, there’s only so much that Russia can do without cutting itself off entirely from the global economy. But officials in Washington are also restrained by the fact that they risk sending tremors through global markets if they go too far.
Acting on a pledge by Putin to “de-dollarize” trade, Russia has been slowly cutting back on using the greenback in its exports with the European Union, China, and India.
The euro has almost overtaken the dollar in Russia’s trade with the EU and has already surpassed exports to China. This is about two-thirds of Russia’s exports to India (paid for in rubles).
Last week’s penalties included a ban on purchases of bonds on the primary market. The next big target could be secondary-market debt.
Also, Russian banks’ access to the financial messaging system used for most international money transfers, which Russia is already looking for alternatives.
Also known as SWIFT, it makes itself less vulnerable even though the attempts so far haven’t led to much.
The Finance Ministry wasn’t too concerned about the latest sanctions measure on government debt because Russia has mostly been selling to local banks at its weekly auctions.
Borrowing was ramped up during the pandemic even though foreign demand was weak. This increased the overall size of the market and pushed down the share of foreigners.