Front Burner - Russia’s economy in the crosshairs

Episode Date: March 2, 2022

Since Russia invaded Ukraine last Thursday, Western powers have remained steadfast on one point: They will not engage Russia in a hot war to defend Ukraine. Instead, they are piling on an increasingly punishing slate of economic penalties. Today, we’re going to break down some of the key sanctions, and look at their current and potential impacts. First, Giles Gibson, a correspondent for Feature Story News, will give us a view from Moscow, where people are already starting to feel the effects of the penalties. Then, we’ll speak to Ian Talley from the Wall Street Journal about what exactly these sanctions are — and whether they’ll work to limit Russian President Vladimir Putin’s actions.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. Since Russia invaded Ukraine last Thursday, Western powers have remained steadfast on one point. They will not engage Russia in a hot war to defend Ukraine.

The president has no plans to send U.S. military to fight a war in Ukraine against Russia. Instead, we are seeing a punishing slate of economic penalties. The United States, the European Union, the U.K., Canada, and other countries have frozen the Russian central bank's foreign exchange assets. Key Russian banks have also been locked out

of a crucial part of the global financial system called SWIFT. Add those harsh new measures to the previous rounds of sanctions targeting Russian individuals and banks. And the effect has been to toss the ruble off a cliff. The Russian ruble has plunged to a record low, dropping more than 30% against the US dollar. Today, we've got two people for you on

this story. First, a look at what impact this is having right now on people in Russia. And then more detail about just how severe these sanctions are and whether they'll actually work to limit Russian President Vladimir Putin's actions. My first guest is Giles Gibson, a Moscow-based correspondent for Feature Story News. Hi, Giles. Thanks so much for coming on to the podcast. Well, thanks for having me. Since these sanctions started kicking in, how are you seeing the impacts of them play out on the ground in Moscow? I think you're just starting to see a sense of nervousness amongst ordinary Russians as these sanctions start to kick in from the US and from Canada and the UK and their allies. I was actually at a shopping centre right in the centre of Moscow, you know, lots of high end stores,

lots of expensive restaurants. But at the same time, inside that shopping centre, there were 40 or 50 people, I would say, queuing up for an ATM inside a bank, trying to get their hands on cash effectively, because of what they're hearing about this action coming in from the West. I don't have that much money, but I took a little bit, but it is valid. This woman tells me the ATM didn't work for her, but she was able to line up and get cash from the teller. You don't have any cash? This bank does not have cash. So you couldn't get cash out of this bank?

No. And I think that really, for me, encapsulated this change that is going on right in front of our eyes here in Russia. You know, you have the previous version of the Russian economy, you know, open to the world, big foreign brands coming in, opening up these glitzy stores in the heart of Moscow. And then with those people standing

in the queue waiting to get their hands on some cash, you have a sense that they are really bracing themselves for what could be a really, really tough time for many people in the years to come. What are you hearing from Russians right now? Like, what are their biggest fears here? Well, in terms of the Russian government, and what we're hearing from top Russian officials, they are saying, you know, that they have launched this operation, as they call it, they call it a special military operation, not an invasion, to contain aggression from Ukraine, to contain aggression that they're feeling from NATO allies. We've also seen Vladimir Putin himself on state TV here in Russia

talking about how the West is an empire of lies. But there is very, very clearly a growing anti-war sentiment amongst at least some of the Russian population here. I mean, we've heard from independent monitoring groups, it's very difficult to get exact figures here. But I mean, for example, just on Sunday, these independent monitoring groups were saying that more than 2,000 people were detained by the police simply for going out on the streets, holding up placards and trying to protest against this invasion that's been launched by their president. The value of the ruble has plummeted. Is that

having a tangible effect on people's lives yet? Well, I think that's what is driving a lot of people to go to ATMs because they're not only trying to get hold of cash, they're also trying to get hold of foreign currencies such as US dollars because they are, as you say, just watching the value of their currency plunging overnight. Over the weekend, we had a lot of the really tough sanctions being introduced by the US government, the UK government, the European Union. And then when markets opened on Monday, it was just absolutely chaos. You had at one point the Russian ruble plunging by around 30% against the US dollar. I mean, if you were checking the exchange rate on

your phone, as I was doing, you were just watching these numbers spiraling upwards really hour by hour. The people that you're hearing from in Russia, who are they blaming here? The Western countries imposing these sanctions or Vladimir Putin? I think it's really important to note that TV news, that TV is still this really powerful tool here in Russia to shape public opinion, perhaps more so than you'll see in the UK or in Canada or in the US. Many Russians basically get all of their news from watching state-controlled TV. And what they're being told as they sit down after their dinner to watch the nightly newscast is that this

is a special military operation, that Russian forces are bringing peace in eastern Ukraine, that there's not an invasion or any sort of a war. But of course, a lot of younger Russians, they have access to smartphones, they have access to computers, they can see foreign sources of information, and then they are getting very different information. for Russians who are more connected with the West, who read foreign media and who have the cash to do so, then actually a lot of younger Russians are actually starting to think about, you know, do they want to stay in this country? Could they maybe move to a neighboring country and have a better quality of life? Giles, thank you so much for this. Thanks for having me. Now we want to zoom out and take a deeper look at the sanctions and their potential impacts.

For that, I'm joined by Ian Talley. He's a reporter for The Wall Street Journal, where he writes about sanctions, terror financing, and more. He's based in Washington, D.C. Hi, Ian. Thank you very much for being here. A pleasure. Thanks for inviting me. So I wonder if we could start by putting this all into context. Broadly, how big a deal are these sanctions? previous administrations, including from the other opposition, who say these are, in fact, unprecedented, not only because of the combination of sanctions that are being used and the amount of sanctions that are being levied in such a short amount of time, but also because

of the size of Russia's economy. You're talking about $1.7 trillion in gross domestic product. And the sanctions are targeting the heart of Russia's economy in the sense of the financial sector. And without the financial sector, there's not much that can happen. I just want to walk through what some of the major new sanctions actually are. So last week, Western countries, including the US, the EU, the UK, Canada, and others, they announced initial rounds of sanctions, and they were mainly focused on Russian individuals and some Russian banks. These sanctions are wide-reaching.

They will impose severe costs on complicit Russian elites, and they will limit President Putin's ability to continue funding this unjustified invasion. But then, over the weekend, they introduced way harsher measures, right? So I want to break down the big ones here, starting with Russia's access to the SWIFT financial network. I am confirming Canada's support to remove Russia from the SWIFT payment system, a critical part of the global banking system. We've made it clear. And before we get into the sanctions here, could you just explain to me what SWIFT is? Sure. SWIFT is the internet line, if you will, for financial transactions. It allows for an individual, a person, a shop, a business, banks, everybody to move money between one bank and another.

It's kind of like a money app on your phone. The app itself doesn't give you any money. It's not that the company isn't giving you any money. But what it does do is connect you to the people you want to get money from and pay money to. So being connected allows any bank to transact with any other bank that's connected to the system. There's something like 11,000 financial institutions around the world that are all connected together

through this infrastructure. Okay. Okay. Okay. So then what sanctions is Russia facing in regards to Swift? So being disconnected from Swift means you can't pay. There are no transactions that can happen between your bank and any other bank on SWIFT. And since most of the world, most of the world banks use SWIFT and primarily SWIFT as their, as their, the medium through which they conduct their transactions being cut off from it, cuts the bank completely off and all their clients off from being able to do business at all. I will now propose to EU leaders the following measures.

First, we commit to ensuring that a certain number of Russian banks are removed from SWIFT. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally. You're cutting off the central pipeline for all monetary transactions. I do understand that the swift sanctions against Russia, there are some carve-outs and exemptions there, right? So when the U.S. and its allies started sanctioning the banks last week, hitting roughly 80% of the Russian banking sector's assets, they included in their sanctions exemptions that would allow any payments for energy. And then when they hit the central bank yesterday, they also allowed payments for energy. The way they're taking that into consideration when they hit SWIFT,

taking these Russian banks off SWIFT, is to target those banks that do fewer energy transactions. And I want to come right back to the sanctions targeting the central bank, but why these carve outs or exemptions around energy payments? Russia is one of the world's largest oil and natural gas exporters. And the global economy relies on those that supply. And Europe is I think, relies on 40% of its natural gas supply from Russia. That's natural gas that heats homes, that heats businesses, that powers much of the continent's electricity. And those exports have a direct impact on oil prices as well, natural gas prices, which is why we've seen oil prices jump to a hundred dollars a barrel and economists are warning it could go higher. So when you sanction a target, you want to prevent collateral damage.

You want to prevent the impact hurting those who are levying the sanctions. And so if you cut all of these banks off and didn't allow transactions for energy, it would also cut off the energy exports. One reason that's been somewhat overlooked is most of the largest share of Russia's income is from energy, right? If they're exporting so much and the more you constrain those exports, the higher the prices go, the more income they can receive for them. So it also prevents President Putin benefiting from these sanctions as oil prices go higher. Interesting. I absolutely had not thought of that. That's the first order effect, right? Energy prices are core to the price inflation for everything, construction, groceries, because things have to be delivered, the fuels for

transporting things between states and countries across the sea. So that has a direct effect for everybody in the global economy. I'm going to go. organization, empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together.

To listen to this podcast, just search for Money for Couples. Okay, so now let's come back to the sanctions targeting Russia's central bank, which controls the country's money supply. And you hear people talking about this being a really big deal, like a much bigger deal than the SWIFT sanctions. And I wonder if you could explain why to me. Yeah, so the central bank is the regulator of, if you will, the economy. It has its foot on the gas pedal and brake for how much money flows into the economy, which has a direct effect on economic growth. And one lever it uses is its exchange rate reserves. Normally,

in this type of environment, when it's facing some sort of financial risk of a financial crisis, is it sells the dollars, euros, yen, and other major foreign currencies to help support the ruble, prevent it from falling. So Russia has produced excellent chess players in the past. And I gather that President Putin thought himself a good chess player and so moved his financial pieces in the years ahead of this attack to defend his country against potential sanctions. So over the last couple of years, he's built that piggy bank up by several hundred billion dollars, and that was to defend against sanctions. Well, what the sanctions against the central bank do is they froze all the reserves, those foreign currencies that the central bank held around the globe. And it banned the trade of those currencies.

So it couldn't use that tool to stop the ruble from falling. ruble from falling. Basically, the U.S. and its allies moved its chess piece to take that piece away. So Putin doesn't have the ability to defend against sanctions that he thought he did. Okay. The obvious next question is how big of an impact these sanctions could potentially have on the lives of regular Russians. The Moscow Stock Exchange has lost half of its value. I mean, half of its value over the last four months. And again, as a ruble, I said, has lost a third of its value. So I think if you were a pensioner in Russia and you're barely able to put money on the table, pay your heating bill, and send your grandchildren 20 bucks worth of rubles for their birthday, you may not be able to, you're going to have to go without milk or go without sending money to

your children. And that's just on an individual or corporate basis or on a banking, if you're a banker, you decide not to do that investment. You're not going to lend to others. Or if you're a banker, you decide not to do that investment. You're not going to lend to others. Or if you're the Russian government, you're going to have to decide whether you invest in state pensions and unemployment, paying unemployment as unemployment rises, or paying to shoot missiles at civilians in Ukraine. Sanctions against Russia and people, specifically people in Russia, are not new, right? Like, have sanctions been successful in forcing Putin's hand in the past? Because both he and those around him have been hit before.

Yeah, I think it's, it's that question, do sanctions work? And have they worked on Russia? The question, the easy answer is, is, well, did it do what we wanted the top line goal? Did it force President Putin or whomever the target was to reverse course and stop doing what they're doing? Often that top line goal is not immediately apparent. No, they don't appear to. Like in 2014... Today, I'm announcing a series of measures that will continue to increase the costs on Russia

and on those responsible for what is happening in Ukraine. First... You know, he didn't all of a sudden say, okay, I'm leaving Crimea. but there are other goals when you apply sanctions, right? You increase the cost. So that means that for few, that changes the calculus about what sort of actions you take. It disrupts the flow and it creates a sort of, there's a public censure. The embarrassment on the public stage makes you think twice about doing the actions that you're thinking about. And then there is the question about, well, what would have happened that didn't happen as a result of the sanctions? And that's a very difficult one to answer. What know, what didn't happen over the last week, right? Did Putin not use certain strategies? Did Putin decide not to use certain weapons? The question about, you know, how much it has restrained the behavior or his intended plans or changed the plan, we don't know. And sometimes it's, you know, sanctions can take a long time

to work. I mean, it took many years of sanctions against South Africa to achieve an end to apartheid. So, you know, there are lots of different ways to think about this. It's not just sort of binary, did he stop, did he pull out or not? Does that make sense? Yeah. Yeah. And considering the suite of these sanctions, like how long, I realize you don't have a crystal ball here, but we've talked about the pain likely to be inflicted on Russian people and that they're likely going to be very angry about this. So how long do you think conceivably he could weather this? If I could answer that, I would love to tell you, but I can't. I can say, give you some context to sort of understand that answer. So there are questions about whether Putin cares about the impacts on his people.

I think what we can say is that he cares about the political ramifications, because that is potentially a threat to his 25-year hold on power as either prime minister or president of the country. And he cares about his and Russia's status in the world. So there is some effect. Now, how long will it take to what's going to be enough pain, political pain for it to either reverse course or for someone or a group in Russia to sort of help make that decision for him? I don't know. I do know that if you look at the major regimes that we've targeted over the last couple of decades, Iran, North Korea, and Venezuela, the dictators there have remained in power because, a man and the analysts say, their actions suggest that they care far more about their power and their status than they do about the pain and suffering of the people,

which is generally where the most pain is felt? So if you don't care about the pain of your people, then it could go on indefinitely. All right. Ian, thank you so much for this. This is so fascinating. And I feel like I have a much better handle on this right now. So thank you.

My pleasure. Thanks for inviting me. invited. All right, that is all for today. Thanks so much for listening to FrontBurner. We'll talk to you tomorrow.