Markets bet a Western sell-out on Mr Putin’s terms is the most likely outcome
Russia has amassed foreign exchange reserves of $635bn, the fifth highest in the world and rising. It has a national debt of 18pc of GDP, the sixth lowest in the world, and falling.
The country has cleaned up the banking system and has a well-run floating currency that lets the economy roll with the punches.
It has a budget surplus and does not rely on foreign investors to cover government spending. It has slashed its dependency on oil state revenues. The fiscal break-even cost of a barrel of oil fell to $52 last year, down from $115 before the invasion of Crimea in 2014.
It is the paradox of Vladimir Putin’s tenure that he runs one of the most orthodox policy regimes on the planet. “The macroeconomic team at the central bank and the treasury are exemplary,” said Christpher Granville from TS Lombard.
Mr Putin’s tight ship is a striking contrast to the prodigal socio-economic systems of the West, where money rains from helicopters and fiscal dominance prevails. “He is extremely conservative and rails against the dangers of debt,” said Chris Weafer from Macro-Advisory in Moscow.
The commodity boom is adding an extra $10bn a month to Kremlin coffers from oil and gas. It is being squirrelled away in the National Wellbeing Fund.
This rainy day reserve can be tapped as needed to cover social spending: pensions, child care, fertility bonuses for families, and mortgage subsidies for first-time buyers – components of Mr Putin’s levelling-up strategy for the 2020s.
The Kremlin could sever all gas flows to Europe – 41pc of the EU’s supply – for two years or more without running into serious financial buffers.
The West talks of “devastating” sanctions if Mr Putin invades Ukraine. Tuesday is the turn of German Chancellor Olaf Scholz to repeat the warnings in Moscow, meekly in his case. There is theatre to this ritual, at best wishful thinking, at times masking economic self-interest.
The harsher truth was summed up by Russia’s ambassador to Sweden. “Excuse my language, but we couldn’t give a shit about western sanctions,” he told the Aftonbladet newspaper.
Washington says it will inflict much harsher punishment than in 2014, starting at the top of the escalation ladder. The Kremlin may already have calculated – accurately in my view – that the impact will in fact be less.
Post-Crimean sanctions coincided with a secular commodity bust, the main reason why Russian real disposable incomes were to slide by 12pc. This time they coincide with a secular commodity boom.
Russia today has a semi-autarkic economy, and its chief trade partner is China. The copious document signed by Mr Putin and Xi Jinping at the Beijing Winter Olympics – Entering a New Global Era – establishes a de facto authoritarian alliance.
We should take the rhetoric with a pinch of salt. They remain two scorpions in a bottle, as amorous as Ribbentrop-Molotov lovers. But right now China has Russia’s back against the West, and this renders it impossible to enforce meaningful sanctions.
The Kremlin knows that Europe has vetoed the expulsion of Russia from the SWIFT network of international payments. “The West has to do something to save face but we expect nothing more than sanctions on two or three large Russian banks.
That would be disruptive but Russians are used to this. The only sanctions that would have any real impact is to try to kick Russia out of the global financial system altogether,” said Mr Granville.
“Obviously Russia would grow faster if it were integrated into Western supply chains but in a sense the damage has already happened since Crimea. Further measures would be more of the same,” he said.
It is clear that there will be no blockade of Russia’s energy nexus. Germany’s gas dependence is so total that Mr Scholz still cannot bring himself to state unequivocally that the Nord Stream 2 pipeline should be shelved after a full-blown invasion.
Whatever is done requires the unanimity of all 27 states and will therefore gravitate to the lowest common denominator.
“Europe can’t do without Russian energy, and it has nowhere else to turn. This is not just about gas: there are oil pipelines, as well as 2.5m barrels a day of refined products like aviation fuel and diesel,” said Macro-Advisory’s Mr Weafer.
Deliveries of liquefied natural gas, mostly from the US, have slowed the depletion rate of Europe’s gas reserves over the last month, with the help of mild weather.
But they are uncomfortably low – Austria (19pc), The Netherlands (24pc), France (28pc) – and global LNG capacity is stretched to the limits. A total Kremlin cut-off would bring Europe to its knees within weeks.
For the full article in pdf, please click here: