Of banks, tanks and gold: Will Russia be deterred by economic sanctions over Ukraine?

As the Russian convoys marched closer and closer to Ukraine’s capital Kyiv, the United States and its European allies responded through sanctions including closing airspaces and banning oil imports.This hardly came as a surprise given that Russia has been on the receiving end of such sanctions for years.This is a classic case of economic warfare wherein the United States and its allies have weaponized the financial and payment system with the aim of delivering a solid blow to the Russian economy by barring them from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system.Fighting battles on parallel fronts –  military and economy – is the key to winning wars/conflicts. Traditionally, Russia is military assertive. Thus, the sanctions strategy becomes a significant component of economic warfare taken up against Russia by the United States and the Allies.However, these sanctions have been imposed only on ‘certain’ banks in the system. The list did not include Sberbank or Gazprombank, two of Russia’s largest banks by assets as Europe’s continued reliance on Russia on energy.This is no small part due to Russia being the biggest supplier of natural gas to Europe (accounting for 40 per cent of Europe’s natural gas requirements)Russia is followed by Norway, which supplies about 22 per cent of Europe’s gas needs; Algeria and Azerbaijan supply under 20 per cent and 10 per cent, respectively.Have economic sanctions caught Russia off-guard?No, Moscow had prepared for such measures after learning lessons from the aftermath of annexing Crimea in 2014.While the impact of removing from SWIFT can largely affect critical spaces, Moscow has been working to reduce its dependency on SWIFT and US for a long time.Let’s examine how:

1. In 2014, the Central Bank of Russia launched its system for the transmission of financial messages (SPFS) in an attempt to mitigate any potential SWIFT fall-out. Earlier, Iran had been put under such sanctions, yet they continued on their nuclear power plan.
2. After the removal of Tehran from SWIFT in 2019, Russia and Iran began talks regarding setting up an inter-state banking system, which would allow Russia and Iran an alternative to SWIFT. Limited information has been shared with the public regarding the arrangement, but it seems Iran, China, and Venezuela have had little success exploring such an arrangement.
3. While few Russian banks have been targeted through this sanction, there is the possibility of the development of bilateral economic systems; China and Russia have mechanisms albeit in development namely the CIPS (China) and SPFS (Russia) that can emerge as a regional alternative.

 Why is Russia hedging towards gold? The dollar's role as international currency began in 1944. Europe was ravaged by war. A new arrangement to replace the gold standard due to its volatility and fixing an exchange rate between governments was needed.Moreover, with the recession looming, people in England were selling off their paper money for gold. That led to the Bank of England facing the danger of running out of gold (then the global standard for the monetary system).The dollar, since replacing the gold standard as the world reserve currency in the 1970s, has been the bedrock of international finance. Half the international trade today is done in dollars, and half of all global bonds and loans must be paid back in dollars.  Nearly 90 per cent of all currency trades involve the dollar.Going off the gold standard gave the government new tools to steer the economy. If the government isn't tied to gold, it can adjust its amount of money in the economy. It can also adjust interest rates. With the banning of the financial messaging system, the ability to make transactions still remains. Therefore, Moscow's hedging of gold against the financial sanctions becomes an attractive avenue since adversaries cannot seize gold in the State vault (except during a full-blown military invasion).Besides, Russia still sells oil.If any sign emerges that the Central Bank of Russia is liquidating gold, it would indicate a weak economy. Thus Moscow passed a law that exempted individuals from taxes on purchasing gold. This measure aims to provide support to Russian citizens amidst the depreciating value of the rubble due to Western sanctions.Moreover, as one knows, gold is an asset. Case in point – Venezuela brought their 160 tonnes of gold back from the European Banks. That gold, along with oil, is helping the Venezuelan government hold power since the crippling sanctions imposed in 2014.Hence the Russian hedge is on hold.Besides sales in shadow markets, physical gold can also be used to pay for goods or services directly. For example, in 2020, Iran accepted gold as payment for helping Venezuela to repair its broken-down gas refineries. Russia may have also accepted gold as payment for Venezuelan debts under a 2017 rescheduling deal with Moscow.What can we learn about Russia from Venezuela's example? If the Ukraine crisis drags on and Western sanctions continue to mount, gold could become a vital lifeline for Russia. Putin may copy Maduro's strategy of secretly selling silver to raise funds. The funds may then be used to resupply Russian troops on the front lines or pay import purchases, reducing the expenses imposed on the Russian people by sanctions.Potential implicationsThe United States has decided to freeze Russia’s gold stockpiles, a total of $630 billion in dollars and euros, denying Moscow access to its foreign currency reserves. Nations have been warned that reserve stockpiles will not be available to them in the event of a political crisis. A similar situation played out when the Biden administration confiscated Afghanistan's currency holdings and stopped the Taliban from obtaining $7 billion in central bank accounts.Which leaves us with these questions: Will nations no longer use the option of storing gold abroad? Are there any other options that nations can explore for safety, liquidity and return of such order?Recall the words of French finance minister Valery Giscard D’Estaing, who lashed out against this shift from gold to the dollar, calling it “the exorbitant privilege” of the US.Can India, which previously dealt with Iran when it came to purchasing crude oil, work out a similar deal without any exposure from a dollar settlement?Maybe when the dust settles, New Delhi should prepare to look for alternatives. With Nepal accepting India's UPI System, maybe now is the time to make choices to secure the future of our coming generations. Yuvraj Pokharna is an educationist and social activist from Surat, and, Arpan Chakravarty is Honorary Assistant Director Strategy at Alexis Group. Views expressed are personal.Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.