On the back of exploding energy prices, inflation is now projected to reach a whopping 7.5% in Europe. Meanwhile, the Russian Ruble is almost back up to where is was before wave after wave of sanctions hit the its economy.

So, does that mean that Russia is turning the tide of the economic war?

Well, that is actually pretty hard to tell isn’t it?

I mean for the war in Ukraine you have these handy maps, right? Showing territory lost and regained.

But, who is actually winning the economic war?

Well, as of now, there are two camps. America and its European, and Asian Allies. Let’s call them them team West.

And on the other side we have Russia and Belarus.

Since Belarus is so small, lets just call them team Russia.

Ukraine is missing from this overview because, in all honesty, they are not in a position to fight an economics war. They are too busy fighting an actual war.

Now, about the sanctions.

Or as Putin Would say: “special economic operations.”

There are actually a lot of different types of sanctions.

To make sense of all of this, I will use five different sanction categories:

  1. sanctions imposed on individuals or individual companies, so called-smart sanctions
  2. financial sanctions: targeted at banks or even the central bank
  3. trade sanctions: that limit either exports or imports
  4. travel restrictions
  5. and, finally, because these are crucial in this conflict, energy sanctions

What’s more, I’ve identified four different defensive measures that, for now, have mainly been employed by Russia.

These are

  1. a war chest of foreign exchange reserves
  2. capital controls
  3. interest rate increases,
  4. and forced currency conversion.

Finally, when it comes to winning the economic war, I am going to treat it as damaging the economy of the other side. Specifically, I will asses the impact on GDP, inflation, and the countries elite or oligarchs.

So, let’s use these categories to go through what sanctions and defensive measures have been deployed so far. Then, we can determine who is REALLY winning this economic war.

Round 1 Shots fired

Okay, first of all, the economic war between team West and team Russia did not start this year. It started in 2014 when Russia invaded the Crimea region of Ukraine. In response, Australia, Canada, the European Union, United Kingdom, and the United States imposed ‘smart sanctions’ <Einstein>.

Smart sanctions were called ‘smart’ because they targeted the individuals and companies surrounding the Putin regime and instead of ordinary Russians.

And at that purpose they were pretty effect.

In fact, economists found that, on average, targeted firms lost about one-third of their operating revenue. What’s more, they lost over one-half of their value, and about one-third of their employees relative to their non-sanctioned peers.

To counter, in 2014, Russia deployed some pretty smart ‘dumb’ sanctions.

Dumb in the sense that these sanctions didn’t target individual companies like the West’s ‘smart sanctions’

But, Russia’s sanctions were actually pretty smart from an economic perspective.

You see, these sanctions targeted trade with Europe in a way that made Russia’s economy stronger. They did so by targeting the West’s agriculture and food sectors. And economists estimated that Russian exports were hardly affected, Western foodstuff exports to Russia dropped by roughly 1.3 Billion dollars. So, without foreign competition, Russia’s agricultural sector thrived.

Now to me, this really shows how important it is too look at sanctions in detail and also anticipate the counter-sanctions that your adversary imposes back on you.

What’s more, sanctions may motivate your adversary to employ defensive measures. In this case, the 2014 sanctions prompted Russia to invest its oil and gas revenues in foreign exchange reserves rather than its own economy.

This is turn, made Russia more resilient to future sanctions.

But, along with a collapse in oil prices, this likely caused the Ruble to drop significantly. This in turn brought about a significant spike in inflation. It also means that, while smart-sanctions didn’t hit the Russian economy directly, they indirectly had a significant impact on Russia’s economy.

At the same time, Western economies were also hit as they lost a big export market in the agricultural sector.

Round 2: Minor Escalation

“In a televised adress by president Putin, he said that he had signed a decree recognizing two breakaway regions of Ukraine and insisted that history was on his side.”

In response, Western nations such as the United States and United Kingdom immediately increased their list of sanctioned individuals.

On top of that, they cut off two major Russian banks from their financial systems and froze some of their assets.

Right after, Japan, and Australia follow suit.

However, in line with my first video on the subject, Russia’s war chest of foreign reserves was sufficiently filled to shield the Ruble from these types of financial sanctions.

And because oil prices remained relatively stable, the impact on both economies is rather limited.

But, then something happened which neither me nor Europe’s politicians had expected.

Round 3: You Wanted War?

The economic response in the West starts out slow.

First, Western powers respond by extending existing sanctions to Belarus, which facilitated the invasion. After that, they forbid exports of strategic technology such as semiconductors.

But, the first true escalation, comes from the United Kingdom which moves to ban Russian Aeroflot planes from flying over UK airspace. This move is later also adopted by other allied nations and extended to all Russian airplanes. What’s more, this foreshadowed the exclusion of Russia’s airlines from the global airplane leasing and maintenance market. The Russians later responded by shutting off its airspace as well and confiscating any leased airplanes still in the country.

But who was hit hardest by this first skirmish in the airline industry?

Russia. Sure, it hurts Western aircraft leasing companies and airlines. But, it is a potentially catastrophic blow for Russia’s airline industry.

The reason why similar sanctions hit Russia harder than team West is that Russia’s economy is simply much smaller. and therefore more dependent on the Western economies than the other way around.

Both the waves of sanctions were far from over.

Next, both South Korea and Taiwan also restrict the export of semiconductors to Russia. This now means that means that Russia’s economy is basically shut out of this crucial sector which will be a big hit to Russian supply chains.

Now, if there is one thing that the pandemic made clear it is that semiconductors are absolutely crucial for almost everything and with Russia being stut out of this crucial sector. This is surely a big hit to its economy.

But, this is not where the escalation of sanctions stops.

Remember that big war chest that some analysts were confident would shield Russia from sanctions?

On the 26th of February the US, EU, UK and Canada announced that

“We will stop Putin from using his war chest”

Two days later, both the EU and US would indeed prohibit any transactions with the Russian central bank except for…..

and this important

energy transactions.

On top of that, Western powers removed some Russian banks from the SWIFT messaging system,

again, with the exception of energy related transactions.

This is a really big exemption because energy accounted for roughly half of Russia’s exports in 2020.

Then, on February 27th, the next escalation happens.

At that date the corporate exodus from Russia begins. First, BP announces that it will stop cooperating with Russian oil company Rosneft. Similar announcements are then made by McDonalds, ShellExxonMobilAppleGoogleMicrosoftFord, and dozens of other multinational companies.

This is pretty special because it wasn’t part of the sanctions package of Western governments.

Instead, it was a pre-emptive move by firms who do this because they are so concerned with the people of Ukraine…..

Or… because they know this might help them avoid big fines and penalties in the future….

For Russia this means GDP takes another big hit. After all, many Russians that worked at these companies will lose their jobs. What’s more, the contractors that depended them will also loose their source of income, firing more Russian workers, and so forth.

Sure, the hole in Russia’s economy might be partially filled by Russian and Chinese entrepreneurs. But, that will take time and in the meantime the damage will be pretty big.

Now, of course, Western Oligarchs that own these companies, also took a pretty big financial hit by leaving Russia.

<Tim Cook —> tells Siri he is sad>

But, from this point, it is not just corporations that started leaving Russia. It was also money. You see, expecting massive inflation, Russians started selling their Rubles for foreign currency, causing the Ruble to lose almost a third of its value.

This causes a massive inflationary problem for Russia. A fall in the Ruble causes inflation because it increases the price of crucial imports such as machines, chemical product, and cars.

However, because at this point at this point energy prices were starting to skyrocket, the economies in team West also started to face major inflationary consequences .

And that is before Russia started really fighting back.

Round 4: Ruble Strikes Back

February 28th, having a frozen war chest and a crashing currency, Russia sees no other option than to imposes strict capital controls on its own citizens.

What this means in practice is that Russians are **prohibited from transferring currency abroad for anything other than for crucial imports.

What is more the Russian central bank raises its interest rate to 20% to attract foreign investors.

On top of that, Russian orders energy exporters to convert 80 per cent of their foreign-currency receipts into roubles.

effectively increasing the demand for Rubles

What this means is that the Ruble is no longer a market-based currency. IN OTHER WORDS WHILE YOU CAN STILL BUY RUBLES IT IS REALLY DIFFICULT TO SELL RUBLES. mainly because a major part of Ruble supply, Russians who want to move their money out of the country, has been blocked.

At the same time, it is important to remember that Russia is a trade surplus country. This means that Russian gas, oil and commodities exports are worth more than its machinery, car, and medicine imports.

Economists also call these types of countries, creditor countries because on average they accumulate foreign currency by selling more than they buy.

Now, you can probably see that this is a great position from which you can defend the value of your currency.

Sure, your trade earnings can be offset by Russians trying to get their money out of the country… but this was blocked and this means that there is now more Ruble demand than Ruble supply.

This is how the Russian central bank was able to “save” the Ruble even though its war chest was frozen.

Saving the Ruble stopped a major source of inflation and the immanent collapse of the Russian economy.

For now….

Because you shouldn’t forget that the central bank also raised interest rates to a whopping 20%. This will surely have a big negative income on the long-term growth of the Russian economy.

Still, they had no choice and these actions by the Russian central bank effectively means that the economic war is currently in a stalemate.

Sure, there were many more headline grabbing sanctions and counter-measures after this such as Russia blocking Facebook, Switzerland, and Singapore joining team West, Russia banning the exports of crucial commodities and raw materials, the West blocking exports of luxury goods and Russia subsequently doing this:

“Millions worth of Audemars Piguet watches were confiscated in Russia”

But, from a macroeconomic perspective, this all is just noise.

No, the real the only real escalations that happened in March were that countries like the US, UK, and Lithuania started banning energy imports from Russia.

This is the stuff that could really cripple Russia Economy…. If it was done by countries that actually import a lot of oil and gas from Russia.

In other words, if the entire European union, South Korea, and Japan did it.

Closing thoughts

So, who is really winning the economic war?

In which, as you can clearly see there are only losers.

But, as you can also see, the West is still ahead. And, let’s be realistic, because Western economies are so much bigger, Russia cannot win unless it is joined by other major economies such as China.

What’s more, until major Western energy importers ban Russian energy, the Ruble will likely remain where it is. At a stable level, but heavily restricted in its use.

And, let’s be clear, saving a currency helps but is not enough to save an economy.

The export bans are starving Russia’s economy from crucial components and skilled Russian are leaving the country in droves. As a consequence, Russia’s economy is expected to contract by roughly 10-15%. What is more, both Russia and the West will likely suffer from high inflation for the foreseeable future thanks to rising food and energy prices.

Now, most economists agree that for a next escalation of the economic war, America’s allies need to ban Russian energy imports.

This might actually happen. Since, as of April the 5th, Europe announced that it is considering banning Russian coal and oil.

If that happens, I might need to make an update video.

But, until then, consider checking out this video about the long-term prospects of Russia’s economy or this video where I discuss the potential impacts on the global word order with ex-FT journalist Izabella Kaminska.