Russia-Ukraine War: Experts Predict "Collapse" in Russian Economy Amid Ukraine Invasion, Massive Sanctions

Western sanctions are wreaking havoc on Russia, far more so than some experts predicted.

Before the conflict, much was made of Russia's $643 billion in foreign exchange reserves. The idea was that having a cache would help the government avoid sanctions.

However, commercial and central banks in the United States and its allies control nearly half of that money. As a result, Russia will have a tough time gaining access to the cache, according to NY Times.

Russian Economy Reels From Sanctions

"The sanctions will make their mark on the Russian economy, which now seems destined for a serious recession," according to a report by J.P. Morgan's economists led by Bruce Kasman. They forecast an 11 percent drop in GDP from peak to trough, akin to the economy's predicament during the 1998 debt crisis. SWIFT (the Society for Worldwide Interbank Financial Telecommunication) is the worldwide payment messaging system.

In recent years, Russia has been striving to "sanction proof" itself by limiting its financial links with the West, especially its reliance on the US dollar and other shared reserve currencies. As a bulwark against rough times, it built up a large store of foreign exchange reserves in order to maintain the value of its currency.

It also switched its investments away from French, American, and German assets and toward Chinese, Japanese, and gold assets. In a February report, the Institute of International Finance stated that its firms worked to "minimize the exposure to risks associated to a lack of US dollar access."

Although the United Nations recognizes around 180 currencies, "the truth is that most worldwide payments are still intermediated through a Western currency-dominated financial system," according to Eswar Prasad, a Cornell University professor of international trade policy.

The Russian economy is suffering "serious blows" as a result of the isolation brought on by economic sanctions, according to the Kremlin. The country's financial system is in shambles, as global energy and technology companies flee the country in protest of the invasion by Ukraine.

The Russian currency hit an all-time low of 32 percent, causing the central bank to raise interest rates from 9.5 percent to 20 percent, while equities of Russian enterprises listed outside suffered significant losses. "Russia's economy is suffering heavy blows," said Kremlin spokesperson Dmitry Peskov, as per Entrepreneur. However, there is a margin of safety, there is possibility, there are plans in place, and work is being done."

Russia's Assets Are Frozen

Sberbank Rossii PAO (MCX:SBER) depositors in Europe hurried to empty their accounts as the Russian banking giant was slammed by economic sanctions. Later, the European Central Bank issued a warning that Sberbank was on the verge of failing.

According to French officials, Russia's assets have been frozen worth $1 trillion, accounting for about half of the country's military budget. Experts agree that Russia's financial condition will deteriorate in the next few days, increasing the country's isolation from key global markets.

The country's latest severe financial crisis occurred in 2014 when oil prices plummeted as a result of Western sanctions implemented before and after Russia invaded the Crimean Peninsula from Ukraine. In anticipation of rising demand, Russia's central bank announced last week that it will increase cash supply to ATMs.

Meanwhile, to avoid a worsening of the issue, certain bank branches may close or the government may declare a bank holiday. The US Treasury Department imposed further penalties on "important sources of Russia's wealth," including the immobilization of any Russian central bank assets in the US or held by Americans.

The Treasury Department also sanctioned the Russian Direct Investment Fund, a $10 billion Russian sovereign wealth fund, and its CEO, Kirill Dmitriev, a Putin supporter.

Increased sanctions may affect "hundreds of billions of dollars" in Russian funding, according to the Biden administration. Officials from the Biden administration indicated that Germany, France, the United Kingdom, Italy, Japan, the European Union, and others will join the US in attacking Russia's central bank, as per NBC News.