On january 29th The Economist wrote that Russia would survive the economic consequences of a war with Ukraine, at least in the short term. Its central bank held $600bn in currency reserves, we noted, “more than enough to weather sanctions”. That now looks much less certain. On February 26th, two days after Vladimir Putin, Russia’s president, went to war, Western governments imposed severe measures on Russia. Most painfully, they are cutting off the central bank’s access to that stash of reserves. That will make it harder for the central bank to support the rouble, to offer foreign-currency liquidity to Russian banks under sanctions themselves and to make or receive foreign-currency payments for Russian companies.

Over the past five years Mr Putin had moved to insulate the Russian economy against sanctions. As well as building up reserves, he had partly “de-dollarised” them (see chart) by increasing holdings of other currencies. Dollars were sold in favour of the yuan and euro. Moving assets from the sanction-happy America to China, its ally, and to Europe, which depended on it for energy, was one of the main building blocks of Mr Putin’s “fortress economy”.

But as well as America, Britain, Canada, the EU, Japan and Switzerland have also agreed to squeeze Russia’s access to its reserves. In June 2021 around 7% of Russia’s foreign currency was stored in America, 12% in France, 10% in Germany and 10% in Japan. Assuming the same proportions now, around $400bn of Mr Putin’s war chest could be subject to sanctions. (Stopping access to the $300bn held in securities will also require the co-operation of financial intermediaries.)

So far, China has said it will continue trading with Russia as normal. This means around $87bn of currency reserves are still at Russia’s disposal. But the yuan may be of little use to its faltering economy. Russia remains heavily dependent on commodities, and trade usually rides on the greenback. For the same reason, its $137bn-worth of gold reserves, held in Russian banks, will also be harder to shift. Mr Putin's fortress is crumbling. ■

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