Fast decline in foreign exchange reserves forces Putin to change his strategy

Fast decline in foreign exchange reserves forces Putin to change his strategy, increasing chances for Ukraine’s victory, Russia’s liberation, and Western triumph

Since Putin launched a new stage of the Russian-Ukrainian war on February 24, 2022, Russia’s foreign exchange reserves have declined by $102.5 billion.

The monthly rate of decline over last seven and half months of war amounted to $13.7 billion on average. It is close to the author’s estimate of Russia’s current average monthly military spending – (about $500 million a day, or $15 billion a month).

For the first time in this war, Russian reserves declined at double-digit rates for five weeks in a row. As of September 30, 2022, officially reported Russia’s forex reserves have decreased by almost 16%.

However, even this speedy rate of reserve reduction understates the dramatic nature of Russia’s international reserves position. The sanctions imposed by the U.S., EU, and other countries have frozen the Russian central bank currency reserves within their jurisdictions, leaving the remainder less liquid.

As of February 18, 2022, the last Central Bank of Russia (CBR) reporting date prior to the Kremlin’s full-scale invasion into Ukraine, official Russia’s international reserves amounted to $643.2 billion. According to Russia’s Minister of Finance Anton Siluanov and the head of the Russia’s Central Bank Elvira Nabiullina, the Western sanctions have blocked Russian reserves amounting to $300 billion.

Therefore, at the end of February, the fully liquid part of Russia’s foreign exchange reserves likely fell close to $343 billion. Considering the decline of official reserves by $102.5 billion over last seven and half months, the size of the still liquid part of the Russian international reserves as of September 30 is probably close to $240 billion.

If this simple calculation is correct, the decline of the still liquid part of Russian international reserves since February 18 was not 16%, as it was officially reported, but closer to 30%.

If Putin had a chance to wage his barbaric aggression against Ukraine with unfrozen forex reserves, that stood at $643.2 billion on February 18, their average monthly rate of decline at $13.7 billion would allow him to continue his war for approximately 47 months, or almost 4 years.

Since $300 billion of the reserves have been frozen, the remaining still liquid part of reserves last February was enough to wage war for only 25 months, or slightly more than two years.

Additional decline in reserves over the last seven and half months brought the still liquid part of Russia’s reserves at the end of September 2022 to around $240 billion, which is enough to fuel war for roughly 18 months.

Taking into account that the part of Russia’s official reserves denominated in Special Drawing Rights (SDR) as well as those placed at the Russia’s position at the IMF cannot be used freely under current geopolitical circumstances and due to the Western sanctions imposed on operations with the Russian gold, the actual size of the still liquid part of forex reserves is even smaller, and the possible duration of the current war is even shorter.

No political regime can exist with zero international reserves. The decline of Russia’s forex reserves over the last seven and a half months suggests that realistically, Putin could continue his war for no more than a year.

But if the rate of decline of forex reserves increases – due, for example, to decline in Russia’s export earnings, or to import growth, or to higher budget spending, or to new international sanctions imposed on aggressor, or to combination of some or all those factors, the reserves will be exhausted even earlier than in a year.

It appears that the rapid decline in Russia’s liquid international reserves (along with rising Kremlin military losses on the battlefield and its growing international isolation) has prompted Putin to radically rethink his previously held strategy for the current war of attrition, and to launch a massive campaign for negotiations with which he is dreaming to reach Russian-Western and Russian-Ukrainian settlements on conditions favorable to him.

If the West does not blink and withstands the Kremlin’s psychological warfare with more aid to Ukraine and more tough sanctions against the aggressor, there is a realistic chance to see a Ukrainian victory and Western triumph, resulting in Russia’s liberation from Putin’s criminal and aggressive regime.