March 9, 2022 MEMRI Daily Brief No. 367

After Ten Years Of Anemic Economic Growth, Russia Faces A Deep Crisis Without Credible Means For Countering It

March 9, 2022 | By Dr. Vladislav L. Inozemtsev*
Russia | MEMRI Daily Brief No. 367

On February 24, 2022, Russian President Vladimir Putin ordered the Russian troops to start an assault on Ukraine, and the conflict has become the most significant war in Europe since 1945. Immediately after the invasion, Western nations responded by imposing severe economic sanctions on Russia. As of March 7, 2022, Russia has lost its air connections with both Europe and North America, its major banks have been cut off from U.S. dollar transactions, more than 20 Russian companies have been added to the sanction lists, some assets of wealthy Russians in Europe have been frozen, and more than 300 multinationals have terminated or suspended their businesses in the country. The ruble has lost 45% of its value, and stock prices have plunged by at least 80%at LSE while the main market in Moscow remains closed. Putin has become the fourth sitting head of state under broad Western sanctions after North Korean leader Kim Jong-un, Syrian President Bashar al-Assad and Belarus President Alexander Lukashenka.

The sanctions imposed on Russia appear much broader than any others ever imposed on a European country, and one of the most unexpected moves was the freezing of the Central Bank of Russia’s hard currency reserves. Similar measures were taken only against Libya in 2011, against Iran in 2012, against Venezuela in 2019 and against Afghanistan in 2021 (though these cases are hard to compare to Russia, since when these restrictions were imposed, Russia possessed the world’s fourth largest reserves, valuated at $643.2 billion). Though not clear, it might be assumed that the Bank of Russia remains in control its Chinese yuan assets (by far the largest among world’s central banks, amounting to $90 billion,[1] or roughly one third of all yuan-denominated assets held by central banks all over the world),[2] of its 2300 tons (74 million ounces) of gold worth $146 billion,[3] and of USD and Euro cash estimated at $32-34 billion. Even this money looks quite sufficient for covering all the Russian government’s debts (19.7 trillion rubles, or less than $160 billion), but it’s necessary to take a deeper look at Russia’s financial architecture to understand the possible consequences of the “attack.”

Central Bank of Russia (Source: Kuba/Wikimedia Commons)

The Central Bank Of Russia Has Been Conducting An Ultraconservative Investment Strategy

The effects of the Bank of Russia’s assets freeze are of utmost importance, since the Central Bank of Russia acts not so much as a lender of last resort but rather as a savings institution amassing hard currency reserves. Since 1998 (soon after the “Asian” financial crisis, when Russia went through a massive default caused by a Ponzi scheme created by the government that borrowed rubles at up to 150 percent per annum while securing the stable ruble/dollar exchange rate), the Bank of Russia has been preoccupied with building up a “safety net” that would prevent the national currency from sharp devaluation. The government, on its part, made its best to repay huge foreign debts that Russia inherited from the Soviet Union, and succeeded in doing so by 2006 when Russian government’s foreign obligations reached a historic low at $52 billion.[4] These were formidable achievements, and Russian President Vladimir Putin declared in 2003 that he requested the Russian ruble to become a fully convertible [5] and even a global reserve currency.

It is interesting to compare the Central Bank of Russia to the Federal Reserve. By the end of 2020, the Bank of Russia’s balance sheet stood at 50.27 trillion rubles (or 47.1 percent of Russia’s GDP), [6] which was even larger than the Federal Reserve’s 7.36 trillion dollars (or 34.3 percent of the GDP of the United States).[7] The Bank of Russia’s assets were almost entirely concentrated in gold and hard currency reserves (those were accounted for a staggering 81.3 percent of the total, while government’s bonds accounted for only a mere 0.6 percent), while  in the case of Federal Reserve gold and other reserve holdings stay as low as 0.35 percent, and investments into Treasuries ballooned to 64.5 percent of the balance sheet as the result of the pandemic. [8] The Central Bank of Russia acted as a kind of a coin box for the government, while all the Western central banks contributed to the economic growth of their countries.

The Central Bank of Russia conducted an ultraconservative investment strategy for years, putting its money almost exclusively in AAA bonds even while the yields turned negative (I would mention that the Central Bank of Switzerland, another central bank obsessed with piling up reserves, diversified significantly into high-growth dollar-denominate securities in recent years, witnessing growth of its assets). Considering that both the U.S. and the EU embarked on a soft and inflation-provoking monetary policy, the Central Bank of Russia became busy in importing global inflation to Russia that added to country’s domestic price increases caused by additional taxes and regulation imposed by the government, not to say by rising tariffs of state-owned monopolies. Nevertheless, the Russian financiers remained sure that ruble inflation might be combatted by interest rates hikes and rest­rictive policies aimed on diverting savings from consumer spending to bank deposits. In response to the current crisis, the Central Bank has raised the key rate from 9.5 to 20 percent,[9] imposed 12 percent surcharge for buying hard currency at the Moscow interbank exchange and, [10] instead of supplying banks with additional liquidity, opted for imposing capital controls through preventing foreign investors from selling their ruble-denominated bonds and restricting trans-border money transfers. [11] The Central Bank also ruled that deposits opened in hard currencies by private individuals might be paid off only partially (in an amount not exceeding 10 thousand USD), while the rest would be repaid in rubles (whatever the difference may be). Moreover, the purchase of cash dollars by the public is now outlawed till September 9, 2022, while banks are allowed only to purchase hard currency from Russian and foreign residents.

In 2021, The Russian Banking System Reported The Highest Profits Ever

A full-scale financial crisis may evolve in current weeks for the following reasons:

1. Even though the Bank of Russia allowed financial institutions for the coming six months to use in their balance sheets the securities prices fixed as for February 22,[12] in order not to reflect massive losses, it did nothing to provide them with the liquidity they have lost (the government promised to pour 1 trillion rubles into the already dead stock market as it will reopen, [13] presumably mid next week – but I should remind that the total capitalization of the Russian companies stood at around 60 trillion rubles just two months ago,[14] and the intervention planned might be ignored by the markets).

2. The Bank of Russia allowed banks to break some crucial ratios as, e.g., the risk on a single borrower, or the ratio of liquid funds to the overall amount of assets, but once again it has nothing to do with additional funds provided to the banking sector.

3. It should be noted that in 2021 the Russian banking system reported the highest profits ever. [15] The amount of loans provided reached record levels, and the rates went down making people able to get mortgages at 6.5 percent per annum. Now the government requests that all the existing conditions of the loans to stay unchanged while the Central Bank is ready to provide additional funds at 20 percent and advises the banks to raise their deposit rates to same level or even higher.

4. It shouldn’t be forgotten that the Russian citizens have dollar or euro deposits that equal to $80 billion, and the banks may be unable to refund them if the current trend to take money out continues (many banks already responded by increasing rates for dollar-denominated deposits to 10 percent per annum, [16] but it seems it doesn’t help). The banking system now needs at least 10 trillion rubles of cheap funds, and there is not a single sign the Bank of Russia may provide it.

The Central Bank Of Russia Has Enough Reserves In Chinese Currency

Stating that the Central Bank of Russia lost reserves due to Western sanctions is grossly exaggerated. The Bank can try to reduce the panic by offering its gold bullions to the public as dollars become rare (and it already made a step in this direction abandoning the VAT for buying gold bars by private persons). [17] The Bank has enough reserves in Chinese currency to finance critical imports, and it tries to ease the pressure on the ruble by requiring the exporters to sell 80 percent of their export proceeds for the national currency at the Moscow exchange.[18] Moreover, the ruble/dollar rate is important, but not so crucial as the domestic banking system’s survival. Inflation in Russia will exceed 30 percent this year whatever the Central Bank may do. Yet, what’s more important is whether the people would be able to get new mortgages to sustain the construction market, or consumer loans for preserving their living standards, or seeing their salaries rising that requires having additional loans available for the corporate sector. Nothing of this, I would say, looks a realistic option today, as the Bank of Russia seemingly has no idea what the QE strategy in the current world looks like. Russia’s economy survived the coronavirus challenges quite well, but now the circumstances have changed.

Launching his assault on Ukraine, Putin believed Russia possesses a strong and vibrant economy – and he was partly right since it proved itself stable in different challenging situations. However, what becomes obvious now is that Russia’s economic strategies are not only outdated, but evolve in a direction opposite to the one adopted by the Western financial authorities. Since 2008, the U.S. started to care less about trade balances, public debt, or the Federal Reserve’s balance sheet, promoting a very soft monetary policy. The Russian authorities tried to do the same, but in their own fashion: in 2009, they mobilized about half of their reserves for galvanizing the economy and increasing people’s revenues (Russia was at the time the only one G20 economy that recorded growth in personal disposable incomes). [19] But then the paths diverged: the Western nations responded to the COVID-19 crisis by unprecedented quantitative easing while the Russian government provided less that 1.5 percent of the country’s GDP for supporting its economy. The more “liberal” the Westerners became, the more “conservative” the Russians appeared. So far, this strategy has paid off, because businesses were operating in a market-driven and competitive environment with stable exchange rates and open borders. But now, almost everything has changed, and the Russian financial authorities that claimed for years they did their best to decouple from both the dollar and global financial trends have found themselves unable to provide additional liquidity without causing triple-digit inflation.


The Bank of Russia did a lot for developing the money transfer businesses in Russia. It introduced its own “Mir” (meaning both “world” and “peace” in Russian) debit cards that now are accepted not only in Russia but in many post-Soviet nations as well as in Turkey, Serbia, and Vietnam, which do not rely on the SWIFT clearing system.[20] The Bank of Russia also invented the so called “instant payments network,” which allows clients of Russian banks to transfer funds without any commission to any other client of any other Russian bank by using only the customer’s mobile phone number.[21] Internet banking provided by Russian banks is the world’s best and cheapest. Yet, at the same time, the Bank of Russia remained caught by 1990s money supply dogmas that look completely outdated. The authorities have talked a lot about making the ruble one of the renowned reserved currencies, but have done nothing that might facilitate this process. Putin’s intention to make the ruble a convertible currency was forgotten, as he became preoccupied with his geopolitical dreams and lost any interest in Russia’s economic development. So now, after almost ten years of anemic economic growth, Russia faces a deep crisis without credible means for countering it. When and how the trend will be reversed, no one can predict these days…


* Dr. Vladislav L. Inozemtsev is a special advisor to the MEMRI Russian Media Studies Project.


[1], February 27, 2022.


[3], January 20, 2022.

[4], August 21, 2017.

[5], May 16, 2003.

[6], 2020;


[8], 2020;;


[10], March 4, 2022.

[11], March 2, 2022;, February 28, 2022.

[12], February 22, 2022.

[13], March 1, 2022.


[15], January 28, 2022.


[17], March 2, 2022.

[18], February 28, 2022.

[19], December 30, 2009.



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