How Russia hedged against US sanctions on the Russian economy?

Russia is likely to respond to the latest round of US sanctions threats as it has in the past, by accelerating his efforts to make the Russian economy more self-sufficient.

During the seven years after Russia’s annexation of Crimea, the Russian government and the Russian central bank reduced the country’s exposure to the dollar, diverted assets outside the United States, and sold a smaller share of its debt to foreigners.

“The Americans say, ‘Be careful, or we can do more,'” said Elena Rybakova, deputy chief economist at the Washington-based Institute of International Finance.

“But Russia will continue on the path toward economic self-sufficiency”.

The administration of US President Joe Biden continues to threaten to impose sanctions on Russia even after a comprehensive round of sanctions imposed last week.

On Sunday, the United States warned of “consequences” if opposition activist Alexei Navalny died in prison.

Last year, Russia’s $ 581 billion share of gold in Russia’s international reserves jumped above the dollar’s ​​share for the first time ever after a multi-year campaign to reduce exposure to US assets.

This precious metal accounted for 24% of the central bank’s stock at the end of September 2020, the last date for which the relevant accounts are available.

The share of dollar assets reached 22%, which is a decrease of more than 40% from 2018.

This trend is also evident in the share of Russia’s international reserves held in the United States, which fell to just under 7% at the end of September, down from about 30% before the annexation of Crimea.

Most of this shift occurred in the second quarter of 2018, after sanctions imposed on aluminum giant United Co. Rusal revealed how vulnerable Russia was to sanctions.

Russia’s resilience in the face of successive waves of sanctions provides a false sense of security.

With the US running out of options, the next round may be more disruptive, and the measures currently in place are hampering trade and investment.

Of course, there is a lot that Russia can do without completely isolating itself from the global economy.

But officials in Washington are also constrained by the fact that if they go too far (as they did with the Rusal sanctions that were later lifted), they risk sending tremors across global markets.

Building on Putin’s pledge to “de-link the dollar” in trade, Russia has been slowly reducing the use of the green currency in its exports with the European Union, China and India.

The euro has nearly overtaken the dollar in Russia’s trade with the European Union, and has already overtaken it in exports to China.

Meanwhile, about two-thirds of Russian exports to India are paid in Russian rubles.

Last week’s sanctions included a ban on bond purchases in the primary market, so the next big targets could be secondary market debt and access by Russian banks to the money messaging system used in most international money transfers.

For its part, Russia is already looking for alternatives to the system, known as “SWIFT”, to make itself less vulnerable, although its attempts so far have not yielded significant results.

One of the reasons the Finance Ministry was not concerned about the recent sanction measure on government debt is that Russia has in any case been selling mostly to local banks at its weekly auctions.

Borrowing has intensified during the pandemic despite weak foreign demand, which has increased the overall size of the market and reduced the share of foreigners.

US banks can still buy new debt in the secondary market after the sanctions went into effect in mid-June.

Fitch Ratings said in a research note published late on Friday that Russia is “in a good position” regarding near-term market turmoil because it has high cash reserves and strong domestic bank demand.