Russia and Ukraine: a fast worsening tragedy

Putin and us: from bad to worse, danger!

Victor Angelo

 

We are now in a new, much more dangerous stage of the crisis started by Vladimir Putin about a week ago. The sanctions adopted by the EU countries and their allies, the placing on alert of the Russian nuclear deterrent forces, the entry of Belarus into the confrontation by abolishing its nuclear neutrality, and above all the large-scale expansion of military aggression against Ukraine, including the attack on civilian targets, all lead to a worsening of the tension between Putin and our part of the world.

The moment demands maximum prudence. Military aid to Ukraine, for example, should be provided without grandiloquent declarations. We must help, but without adding fuel to the fire of rhetoric, without giving the enemy the opportunity to use our words to justify themselves to their public opinion and to escalate further. This is my message to Ursula von der Leyen and the other European leaders.  

The time also demands absolute firmness in applying the economic and financial sanctions that were decided this weekend. 

The SWIFT issue is particularly important. Even without including Russian gas and oil. The lessons I draw from recent past cases - North Korea, Venezuela, and Iran - reveal that a large part of the sanctioned country's foreign trade is suspended. The impact on GDP and the day-to-day running of the economy is enormous. The international payment system ceases to function, and alternatives are few and far between. Trade, which today sustains the standard of living of citizens, is drastically reduced.  

This is how it will happen now. Russia recently set up a system independent from SWIFT, but the number of banks involved is no more than a couple of dozen. And those banks, when faced with the exclusionary measures now decided upon, will certainly hesitate about transactions with Russia, for fear of the associated penalties and restrictions. The safest thing, in business terms, is to stop having banking relations with the Russian system.

Even more important is the decision to block many of the operations of the Central Bank of Russia. Putin was counting on the $630 billion that this bank has as reserves in foreign currency and gold bullion. The problem is that a good part of these reserves - at least 50% of the total - is deposited in other central banks, in countries that have now adopted the sanctions regime. In Japan, Germany, France, the US, the UK, Austria. Access to these deposits is frozen. 

In addition to these reserves, the Central Bank of Russia holds gold bars in its vaults to the tune of 3300 tonnes. It may try to sell a good part of them. But with the sanctions in place, the buyers, even if they are Chinese, will face a great risk when they later try to market this gold. So they will only buy the bars if Russia offers a discount from the current market value, a discount that could be around 30% or more. Thus, what would be worth around 190 billion US dollars under present conditions could, at most, raise 130 billion US dollars. 

These sanctions will lead to a continued devaluation of the national currency, the rouble, which has already lost about 30% against the dollar. They will also destabilise the operation of the country's commercial banks. We are entering into what I would call the "Venezuelisation" of the Russian financial system. Now, this has huge political costs. The European narrative must be able to explain to the Russian population what is behind all this: Vladimir Putin's irresponsible and criminal policy. 

The sanctions are already contributing to the country's international isolation. Dictators don't like to be pushed to the wall and don't like dead ends. This explains the new level of brutality in the offensive against Ukraine. Putin needs a military victory without further delay, even at the cost of war crimes. He thinks that from then on, he will be able to negotiate more forcefully with the Europeans and the Americans. We must tell him that he is utterly mistaken. 

(Automatic translation of the opinion piece I published in the Diário de Notícias, the old and prestigious Lisbon newspaper. Edition dated 2 March 2022)