Implosion

The commercial and financial sanctions imposed by the US-led alliance on Russia is finally starting to bite.

This past week, long lines of anxious depositors formed outside banks across Russia. People were trying to withdraw their dollar and euro savings. The banks did not have enough of the currencies on hand. This could result in panic and force a run on Russian banks.

The past few days, the shares of Russian banks fell drastically. The quoted exchange rates for the Russian ruble varied widely from bank to bank. In many instances, the dollar that used to trade at about 90 rubles shot up to 200.

The most proximate cause for the currency volatility is the restriction imposed by the US on the Moscow Exchange (MOEX), Russia’s leading financial marketplace. The exchange could not, from this week, arrange settlements in either dollar or euro. Companies needing foreign currency will have to work out individual arrangements with their banks. This will drastically slow settlement of foreign currency obligations.

At the moment, it is nearly impossible to source dollars or euros in Russia. This bottles up whatever trade is still being conducted with the rest of the world.

The object of the financial sanctions is to stifle the flow of hard currencies that will help Russia finance its war against Ukraine. We know that despite the trade sanctions imposed on Russia, the aggressor nation still manages to export large amounts of natural resources and agricultural products through friendly third parties such as China, India and Iran.

Russia is particularly vulnerable to this latest sanction. Most of Russia’s citizens, wary over the volatility of the ruble, held their life savings in dollar or euro accounts. The supply of these hard currencies among Russia’s banks is insufficient to cover the demand for them among Russia savers. The banks were forced to close down servicing of withdrawals from their clients. Imagine the public anxiety this causes.

Given the new difficulty of settling obligations in hard currencies, western companies still doing business in Russia despite the sanctions will probably wind down their transactions. High technology components needed for Russia’s armaments will be doubly difficult to procure. This is the point of the sanctions.

Life will be immensely more difficult for the Russian consumer. Many of the goods sourced using hard currencies will become unavailable. The apparent collapse in the exchange rate of the ruble will cause prices to spike. Russia produces little of the items consumer’s demand.

Given the scarcity of supplies of hard currency and more complicated settlement procedures, the stocks of the biggest Russian banks collapsed in the country’s stock exchange. If the banking system proves vulnerable, the entire economy will be in dire straits.

Russian soldiers captured by Ukrainian troops very often complain of severe shortages of food and water at the front. Many of the prisoners of war say their units are starving while being forced, literally at gunpoint, to mount costly tactical offensives.

Russia has a premodern logistics system for its large military organization. The existing logistical system will come under more intense pressure if domestic manufacturers could not keep production levels going. Life will become more miserable for the troops as much as the consumers.

At this point, it is clear there is no way Russia could sweep to victory in Ukraine. The old superpower has been humbled on the battlefield by a smaller army that is more nimble and adjusts to new battle technologies more quickly.

Shortly after Russia invaded Ukraine, they belatedly realized the importance of drones in modern warfare. Having little means to build drones themselves, they turned to Iran to supply them with drones. The Iranian drones, however, proved too slow and easy to intercept. Meanwhile, the Ukrainians were using hundreds of thousands of smaller drones to attack Russian armor and troops using improvised explosives – to great effect.

As the war dragged on, Russia faced shortages of artillery shells to fire at the Ukrainians. They began importing a lot of shells from North Korea. The quality of these shells turned out to be uneven. Many were duds. Those that actually fired ended up damaging Russian cannons.

Russia turned to China for military supplies. The Chinese were anxious not to be seen arming Russia. Instead, Beijing delivered dual use equipment. This created the spectacle of Russian troops assaulting Ukrainian positions using motorcycles and what resembled golf carts. Without any armor at all, these conveyances were easily destroyed by Ukrainian smart artillery.

Modern warfare is ultimately a test of the protagonist’s industrial capacity. At the moment, Russia is losing vastly more armaments than they can produce. Fortunately for the Kremlin, Russia has been storing old equipment rather than disposing of them. This is why we are now treated to the spectacle of old Russian tanks and trucks rambling to the front – even if they are next to useless in the heat of battle.

Over the longer term, however, Russia will run short even of vintage military equipment. With strong international support behind Ukraine, there is almost no possibility Russian forces can overwhelm their neighbors – short of introducing tactical nuclear weapons into the theater of war. Use of tactical nuclear weapons, however, will provoke strong counter-action from the Europeans and the Americans.

At the rate things are going, Moscow will be hard-pressed to keep up the morale of their citizens and their troops. Vladimir Putin will need much more to keep his people contented and keep his troops engaged.