Summary:
New financial sanctions briefly tanked the ruble over 12% a week ago. As these sanctions were easily evaded, the Ruble has regained all that it lost already. To hinder the Russian war machine, we must crack down on the machine tool shipments to Russia.
New Sanctions and a Ruble Flash Crash
On Nov 21, the US sanctioned Gazprombank. As that bank was the main conduit for Russian petrol payments from the West, it caused a quick crash in the Russian Ruble.’ The ruble weakened from about 101 Rubles to the dollar on Nov 21 and was over 113 Rubles. More than 10% in 6 days raises a lot of eyebrows. Ukraine supporters were cheering with overblown takes that Russia was ‘out of money’ or ‘collapsing.’ The following tweet was emblematic of the mood:
Yet here on Dec 8. the RUB is back below where it was when the financial sanctions were introduced. The Russian government did not, in fact, run out of money.
In finance like in Newtonian physics, every action has an equal and opposite reaction. Money always tries to find a way to move, amorally, for profit and goods. As Gazprombank was banned from processing payments and converting Rubles to other currencies, the Kremlin issued a decree opening up the ability of the foreign banks still operating in Russia to be able to do so for the first time.1
As a result the Russian ruble collapsed back to below where it was before the new sanctions were announced. This war has shown both the inefficacy of financial (and personal) sanctions to affect the Russian war machine. Sanctions such as these are helpful and needed, but they’re like a sugary appetizer, a delicious part of the meal but needs a hearty main course.
Wartime Economics, What Really Matters?
Extending the mealtime analogy, the ‘main course’ needed to stop the Russian war machine is sanctions on the critical parts needed to run the Russian military industry: machine tools, logistics and key computer technologies (the latter of which are not sanctioned at all). At the start of the full scale invasion, Imports into Russia cratered. This was the most destructive economic action that occurred to Russia since 2022. With sanctions and public pressure at new highs, European manufacturers could no longer send machines and parts to St. Petersburg. Monthly imports collapsed by 90% and importantly, the Russian main battle tank factory was shut down due to lack of parts:
When thinking about a factory, what comes out of the factory is a function of what goes in. And while everyone focuses on raw materials, the critical point of failure is the CNC tools and machine parts needed to make the factory run. Russia does not have a robust domestic industry in machine tools–their factories are entirely dependent on foreign CNC and machine tools. CNC machine tools are large, often multimillion dollar pieces of machinery with significant ongoing costs to keep running. Here’s a picture of a massive Spanish machine tool in a Russian factory:
Picture from Rhodus Intelligence Visit that link if you want to read a great analysis of the Russian military machine’s complete reliance on foreign technology.
What matters most of all is Russia’s ability to keep producing weapons. They can’t shoot barrages of rockets at Kharkiv if they can’t keep making rockets. As seen in the picture above, their ability to produce rockets is entirely dependent on their ability to get foreign machinery.
Unfortunately we are nowhere near serious enough about sanctioning trans-shipments. While Russia remains sanctioned, Europeans companies (as well as some in South Korea and Haas in the US) are sending their machines to new corporate clients in Central Asia, Turkey and the Caucuses. These new clients are simply shell companies that, being in nations without serious sanctions simply ‘resell’ the goods to the military industry in Russia. Robin Brooks, the leading voice tracking trans-shipments has a great chart on this matter (and many informative and depressing tweets):
What Doesn’t Matter:
Wartime Russian economics differ from our Western context that views the S&P500 as the index of national happiness. Russia is not a democracy–citizen’s standard of living does not determine regime stability–instead the stability of its security services and their personnel is what keeps their regime together.
The Czarist Russian regime survived losing half their GDP per capita under Catherine to conquer what is now Ukraine the first time. And she was given the moniker ‘Great’ for her ‘success.’ The current Putin regime does not care if the average Russian is poorer than 5 years ago. It can even benefit the Kremlin if desperate Russians increase the rate they sign up to be slaughtered in Ukraine.
Summary
Financial sanctions are a side note. There is always a way to carry a bag of cash into Russia. Far more effective would be a serious crackdown on the machine tools that run the Russian military machine. The main Russian battle tank factory was shut down before; that its back up and running on mostly Western machines tools demonstrates a massive failure by Western nations to sanction Russia for its war efforts.
Article by Finance. You can find me on Twitter and Bluesky @PerceptionMoney
I’m into naming and shaming bad actors, here's a reminder that Italy’s Unicredit operates in Russia, and Austria’s Raiffeisen wins awards as the best consumer bank in Russia.