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Russia’s capital controls aren’t what they seem

Russia has defied predictions that the rouble would turn to rubble. Credit: Getty

November 1, 2023 - 7:00am

Just when we thought we had heard the last of the sanctions designed to collapse the Russian economy, they get a new lease of life. The Kremlin has announced that it will make it more difficult for foreign companies to move their money from Russia. Moscow says that this is to ensure that the value of the national currency, the rouble, remains stable. But it seems more likely that the Russian government is playing games with companies whose assets are trapped in the country.

Back when economic sanctions were imposed on Russia in the wake of its invasion of Ukraine, President Joe Biden famously stated that they would “turn the rouble to rubble”. Nothing of the sort happened. After a brief dip, the currency rebounded as energy prices soared and Russia’s exports increased enormously. Anyone who has ever modelled the rouble knows that it moves in line with the international oil price. 

After this rally, those promoting the sanctions largely turned their attention elsewhere, such as towards the idea of a price cap on oil — an idea that was implemented and has also failed. But then, in August, the rouble started to decline against the dollar. Once again, the sanctions advocates found themselves back in the saddle, with headline after headline telling us about the imminent collapse of the Russian economy. 

Yet the reality was that the rouble was once again simply moving with global energy prices: the price of oil had softened somewhat, and the Russian currency was simply moving back to its equilibrium. “Wishcasting”, as investors call it, ruled the day — and the newspapers were eager to jump on board the latest sanctions mania.

In fairness to those who got caught up in the second round of the frenzy, there was something of a panic in Russia itself. Russian lawmakers made bold speeches, pressuring the central bank to ratchet up interest rates and defend the rouble which they saw as being under threat. This mania was born from Russia’s grim experiences of rouble collapse and hyperinflation that occurred after the government default and financial crisis of 1998. 

Russia’s central bank responded, likely in the knowledge that the political ramifications of underreacting would be far worse than the consequences of overreacting. But there was probably no need. The oil price soon stabilised, and then even firmed up on the announcement by the Russians and the Saudis that they wanted to restrict production to push the price towards $100 a barrel. 

So, why is the Russian government, with nearly three months of a stable rouble behind it, putting in place partial capital controls? It seems likely that it has long since realised that the rouble bears were wrong, but the issue remains live politically. On this reading, Moscow is using the embers of the rouble crash mania that took hold at the end of the summer to simply punish Western companies and make it difficult for them to repatriate their profits.

Meanwhile, the Irish Times published an article at the weekend which received far too little attention. The piece quotes a high-ranking civil servant, who claims that the sanctions used to prevent Russian cash from flowing into Irish funds were “unenforceable”. Since Ireland adheres to EU-wide financial regulations, this would suggest that Russian cash has been making its way through the European financial system since sanctions were imposed. 

There have been rumours of this bouncing around financial markets for some time, considering how hard it is to prevent capital flows by people able to cover their financial footprints. Cash tends to find a way — much like Russian crude oil on the global markets.

Perhaps the sanctions pumpers and the rouble bears will get one last shot at the reins as Russia imposes partial capital controls. But after nearly two years of getting just about everything wrong, it is likely to be their last ride.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Sayantani Gupta
Sayantani Gupta
8 months ago

The reason being that for much of the global South it simply isn’t good economics to cut themselves off from Russian oil or primary commodities like fertilizers, minerals etc
Bad economics will certainly lead to major socio- economic unrest and political turbulence in developing countries.
So they will find a way to beat the sanctions.
“It’s the economy, s…..”!
I like this writer for his sane and level- headed analysis, and his conclusion affirms that the era of global finance may just be getting more diverse than most Western analysts would seek to acknowledge.

Last edited 8 months ago by Sayantani Gupta
Billy Bob
Billy Bob
8 months ago

No mention in the article of Russia having to increase its cash rate to 15% as a result of inflation largely caused by the sanctions then? High oil prices have allowed the Russian economy to be more resilient than it otherwise would have been but they’ll struggle to keep funding the conflict at current levels with the sanctions in place