Sanctions against Russia may not achieve their aim of forcing Vladimir Putin back to the negotiating table if his forces succeed in achieving their military objective before the country feels the economic pain.
Russia may be enfeebled by years of dependence on commodity exports, yet the Kremlin has fattened itself on the proceeds of last year’s inflationary boom in energy prices. That means it’s now in a prime position to weather reprisals designed to sap his fiscal ability to wage war.
“We will weaken Russia’s economic base and its capacity to modernize, and in addition we will freeze Russian assets in the European Union,” European Commission President Ursula von der Leyen warned on Thursday only hours after Putin launched combat operations.
Waves of increasingly punishing financial sanctions imposed by Western allies may ultimately take too much time to unfold their full effect–valuable time Ukraine may not have.
“President Putin’s decision to escalate the military confrontation into a war suggests a willingness to accept near-term economic pain in favor of securing long-term geopolitical goals,” wrote Mark Haefele, chief investment officer of global wealth management at UBS on Thursday.
Filled its coffers
At first glance, Russia seems like an easy sanctions target given its calcified and uncompetitive economy that lives off exports harvested from the fields or mined out of the ground. Wealth inequality creates deep fissures in its society, vaccination hesitancy is rampant, and life expectancy at birth ranks just 159th in the world.
“Russia continues to face relatively low potential growth, which, unless addressed, will impede the ability of the country to achieve high development goals, raising incomes and living standards,” wrote the World Bank in its latest country report published in December.
Michael Huther, director of the economic think tank IW in Cologne, Germany, argued the manufactured crisis in Ukraine offered Putin the chance to deflect from domestic problems such as its glacial pace of innovation and reliance on foreign imports of electronics, machinery, and other durable goods.
“The path towards commercial independence from commodity exports is a very long one,” he wrote in an op-ed on Wednesday. “Russia is economically far weaker than it itself feels politically and projects militarily.”
But despite its antiquated industry and dilapidated infrastructure, Russia may be better prepared than ever to weather the sanctions, crippling as they might be. First off, the country enjoys vast resources at its disposal, making it the world’s largest exporter of natural gas and wheat.
And it’s likely no coincidence that the military offensive in Ukraine coincides with historically high energy prices, which have filled Russia’s coffers over previous months and given it an economic cushion.
Buffers impervious to bond market vigilantes
While many developed nations remain addicted to foreign capital to finance their consumption, Russia has proved it is more than capable of living within its means. At $82 billion in September, Russia’s current account surplus reached its highest since the global financial crisis, and its fiscal debt sits at just 16% of GDP, paltry compared with the euro area’s 98% figure at the end of the third quarter.
Meanwhile, Russia continued last year to decouple itself financially from the global reserve currency system by accumulating more gold in its central bank vaults than it holds in U.S. dollars. According to the World Gold Council, stores of nearly 2,300 metric tons at the end of November are the fifth largest in the world after the U.S., Germany, Italy, and France.
Putin’s Central Bank of Russia (CBR) also said it was “ready to take all necessary measures to maintain financial stability,” announcing forbearance measures on key balance sheet solvency metrics lasting until October to prop up any credit institutions that may see access to capital via interbank lending markets severed.
According to UBS estimates, the CBR also holds some $640 billion in foreign exchange reserves, and could afford to pause further interventions to prop up the ruble. Furthermore Russia’s sovereign debt is largely impervious to attack from bond market vigilantes thanks to the share of foreign creditors falling below 20%.
Finally the government always has the option to release some of its funds tied up in the National Welfare Fund, which bunkers proceeds from its petroleum industry for a rainy day. Its liquid assets alone equate to no less than 7% of the country’s gross domestic product.
Single out the oligarchs
This puts the Kremlin in an enviable position compared with 2014 during its first land grab when it captured Crimea, Ukraine’s pro-Russian enclave on the Black Sea.
That isn’t to say the icy frost of sanctions won’t put the chill on Russian risk assets. The MOEX benchmark tracking the country’s blue chips had already suffered heavy losses this week before halving in value on Thursday to plumb depths not seen since the start of 2016.
With stock market prices plunging, Bloomberg reported sources as saying Putin has called major shareholders and the leaders of Russia’s biggest companies to the Kremlin to discuss the situation in Ukraine.
Michael Roth, head of the German parliament’s foreign affairs committee, said the best hope for causing pain to Putin will not be making life miserable for the average Russian on the street.
Instead the West needed to expand their campaign against the wealthy benefactors of Putin’s economic system, only a handful of which have been singled out thus far. Prominent individuals like Roman Abramovich have escaped sanctions, and one even enjoys a cushy lifetime appointment to the U.K.’s House of Lords.
“Our sanctions must above all target Putin’s system of oligarchy,” said Roth. “We have to drain the resources from all those millionaires and billionaires that enriched themselves in his shadow and now enjoy privileges like sending their kids to schools in the West, buying luxury flats in Berlin and London, and going on ski holidays to Austria.”
Maybe then Putin can be forced back to the negotiating table.
This story was originally featured on Fortune.com