Since 2014, when the United States and its Western allies imposed sanctions on Moscow following the annexation of Crimea and the downing of Malaysian Airlines Flight 17, the Russian president has been trying to build an economy that can withstand much harsher penalties.

Fear of what sanctions could do sent Russian stocks tumbling 33% on Thursday. They have since recouped some of those losses, but the ruble continues to trade at historic lows against the dollar and euro.

Russia’s $1.5 trillion economy is the 11th largest in the world, just behind South Korea. Since 2014, its gross domestic product has barely increased and its population has become impoverished. The value of the ruble also fell, reducing the value of the Russian economy by $800 billion.

During the same period, Moscow attempted to wean its oil-dependent economy from the dollar, limit government spending and hoard foreign currency.

Putin’s economic planners sought to boost domestic production of certain goods by blocking equivalent products from abroad. Moscow has meanwhile amassed a war chest of $630 billion in international reserves – a huge sum compared to most other countries.

David Lubin, an economist at Citi and an associate fellow at Chatham House, said “the fortress economy” requires the creation of large reserves of foreign currency that can be spent if sanctions hit.

“Russia has assiduously followed this pattern,” he wrote recently.

Some of these reserves are already deployed. Russia’s central bank said on Thursday it was intervening in currency markets to support the ruble. And on Friday, it said it was increasing the supply of bills at ATMs to meet increased demand for cash. Russian state news agency TASS reported that several banks had seen an increase in withdrawals since the invasion of Ukraine, including of foreign currencies.

While building up a war chest, Putin’s austere strategy has also limited economic growth, investment and productivity, and prioritized state-owned enterprises over private ones. Incomes of ordinary Russians have regressed to levels last seen in the early 2010s, and new foreign direct investment is minimal. Russia has also failed to diversify away from oil and gas, leaving it heavily exposed to fluctuations in global commodity prices.

Take the “Fortress”

Less than 24 hours after Russian troops attacked Ukraine from the north, south and east, US President Joe Biden unveiled sweeping sanctions designed to hurt Russia’s economy and make Putin an ‘outcast’. ” international.

The US sanctions target Russia’s two largest financial institutions, Sberbank and VTB, and prevent them from processing payments through the US financial system. Russian state-owned companies will not be allowed to raise capital in US markets. The sanctions cover almost 80% of banking assets in Russia.

The United States is also trying to hinder Russian military and industrial companies by preventing them from purchasing critical technologies such as advanced computer chips.

The European Union, the United Kingdom, Japan, Australia and other countries have announced their own sanctions against Russian companies and individuals, a coordinated action unprecedented in scope and potential economic impact. US, UK and European officials went further on Friday and sanctioned Putin himself.

“I don’t think we’ve seen anything like this, and it’s much, much tougher than the 2014 sanctions,” said Iikka Korhonen, director of the Bank of Finland’s Institute for Emerging Economies and expert in Russian banking and financial systems. .

Yet Russia has prepared its economy for this moment. And with world oil prices of $100 a barrel producing huge revenues for the state, Moscow can guarantee the payment of salaries and pensions.

“They can hold their own for a while,” Korhonen said. “But the longer it lasts, that means the growth will be slower.”

More penalties?

The United States and the European Union have so far avoided targeting Russia’s huge oil and natural gas exports, and the coalition has been unable to reach a consensus on whether to cut off Moscow. of SWIFT, a highly secure messaging network that connects thousands of financial institutions around the world.

Some experts have argued that these measures must be considered now in order to deter Putin from further attacks. Ukraine has called for Russia to be removed from SWIFT, a call supported by Lithuania, Estonia, Latvia and the UK but resisted by other European countries, including Germany.

Both measures could come with significant economic backlash for the West. Natural gas prices are extremely high in Europe, and cutting off supplies from Russia could push them up. Reducing Russian crude exports would similarly increase oil and gasoline prices.

But with Russian troops advancing on the capital Kiev, it’s a price some say the West should be prepared to pay.

“We don’t have five years to slowly degrade the Russian economy. We have to do it now,” said Tyler Kustra, assistant professor of politics and international relations at the University of Nottingham in England.

— Nathan Hodge and Vasco Cotovio contributed reporting.