Commentary on Political Economy

Tuesday 1 March 2022


Putin’s errors over Ukraine could herald big change for global finance

The inventor of the Brics acronym says sanctions against Russia have exposed nations’ dependence on the western economic system

People queue outside a branch of Russian state-owned bank Sberbank to withdraw their savings and close their accounts in Prague
Leading western nations have removed key Russian banks from the Swift network behind the global financial system. Photograph: Michal Čížek/AFP/Getty Images

During the brief heyday of Russia as a “Bric”, the acronym I dreamed up in 2001 to describe the possible future largest emerging economies in the world – Brazil, Russia, India and China – I would go to Russia reasonably frequently.

In 2008, I was asked by the organisers to give a special presentation on where Russia’s economy might be, by 2020, to the St Petersburg Summit, Russia’s own version of Davos. To my slight embarrassment, I hadn’t really appreciated that they would be quite irritated if I didn’t suggest that Russia was likely to be in the top five largest economies of the world by 2020, which I did realise afterwards, when my presentation and comments caused a bit of stir in the post-event coffee areas and media.

Essentially I suggested that given Russia’s challenging demographics, and that crude oil prices were unlikely to continue the one-way rise that had characterised the decade to date, Russia’s potential growth rate was probably not much more than 2%. And if they really wanted to have the powerful economic growth that had been experienced in (those) recent years, they needed to undertake significant reforms to boost productivity.

The reaction to my presentation among officialdom was my first real suspicion that Russia might have challenges ahead, which of course, was without realising the scale of chaos that was about to unfold in the global financial system and the subsequent economic collapse around much of the world. That set of circumstances contributed to a major multi-year peaking in oil prices, and much of what happened since, which for Russia, has been persistent economic disappointment.

I have no great expertise at geopolitics but I have broadly assumed in the past decade or so that Vladimir Putin had decided that his huge domestic popularity would decline because he couldn’t achieve the growth that had taken place pre-crisis. Nor could he really reform, because much of his personal financial benefit and those of some close to him depended on the status quo, so he had to shift to another platform, which was loosely based around the idea of making Russia great.

During those years, I got to know several senior technocrats in the policy world, primarily from the central bank and finance ministry, and leading economic influencers, and I was often struck by how widely the belief was about Putin’s excellence as a strategist.

I had for some years been expecting some great era of big reforms to be unleashed due to these views but alas, they never came, and instead, this game of playing on his perception of western weakness dominated his apparent strategic thinking.

Well, after the weekend just passed, and the western financial sanctions announced, it seems to me that Putin isn’t such a great strategist after all.

I don’t know where the idea of freezing the central bank’s foreign exchange reserves originated, but whoever thought of it has come up with a cracker, alongside the bold move by leading western nations to agree to remove key Russian banks from the Swift plumbing network of the financial system.

In one fell swoop, that announcement has essentially eradicated the relevance of Russia’s massive official foreign exchange reserves, and with it, sowed the seeds for big problems for the Russian economy. I had been thinking throughout recent weeks: how can a country that is no longer in the top 10 largest of the world’s economy (barely 2% of global GDP now) have such apparent military importance around the world? After the further collapse of the currency, the ability of Russia to remain anywhere near as important globally is starting to rapidly fade. Based on the exchange rate on Monday, Russia could at the end of 2022 rank no higher than 15th.

While the background to recent awful events had included a picture of increasing closeness between Beijing and Moscow, I suspect the Chinese leadership might be scathing about what Putin has provoked as a response from the west. Now any country thinking of using its supposed military might to pick on a small neighbour to the dislike of the western democratic alliance will have to calculate the consequences for their own central bank being frozen out of the system, and with it, economic warfare being used in such speedy form as a much more powerful form of influence.

Of course, there are many other aspects that go along in parallel, not least the remarkable shift in German policy on its own defence spending, its decision to pay for some weapons for Ukraine, and, of course, its sudden opposition to the previously agreed deal for a pipeline for more Russian gas. And with this, there has been a much more joined-up and robust EU policy response.

It is now likely the case that some thinkers around the large emerging economies will have to, once again, rethink their happy dependency on the western-dominated financial system, and it is not impossible that current events sow the seeds for a big reform of the global financial system. There is no way that is going to happen unless such countries, China included, shift their approach to the use of their currency, and with it, many aspects of their economic and related systems. As for Russia, some huge reflection on its leadership must surely soon occur.

 Jim O’Neill is a former chairman of Goldman Sachs Asset Management, a former UK Treasury minister and a senior adviser to Chatham House

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