When will Putin’s army run out of money? Not fast enough to save Ukraine.

March 3, 2022, 5:58 PM UTC

When will Russia run out of cold, hard cash funding its war in Ukraine?

That’s the $300 billion question a lot of people are asking after the U.S., European Union, and other allied nations slammed harsh economic sanctions on the country in response to its decision to invade Ukraine.

Sanctions are already devastating the country economically. The ruble has taken a beating, losing 50% of its value on Monday after the sanctions were announced over the weekend. The currency has continued to slump over the past several days, at one point dropping an additional 8% on Wednesday. Before the crisis began, the Bank of Russia said its reserves were sufficient to cover 20 months’ worth of imports. That figure is likely to be 10 months now.

But Russia can likely still tap around $300 billion in foreign currency and gold reserves after the U.S. and various other governments said they would cut off the Bank of Russia’s ability to access foreign exchange reserves held in their territories. That includes some $132 billion in gold that it holds in the Bank of Russia’s own vaults, as well as foreign currency that it holds domestically or holds abroad in countries like China, that have not agreed to enforce sanctions against Russia. 

Russia spent about $62 billion on its military in total in 2021, and the invasion of Ukraine may send that figure soaring. One estimate, from the Ukrainian-based Centre for Economic Recovery, a think tank close to Ukraine’s government, has estimated that first five days of the war may have cost Russia as much as $7 billion in direct military costs. Still, most of Russia’s military equipment is produced domestically using domestic raw materials, so Putin may be able to get away with covering those costs with inflated rubles.

Russia may be seriously hurt from sanctions, but it will not run out of cash fast enough to save Ukraine, Kenneth Rogoff, an economics professor at Harvard University and former International Monetary Fund and U.S. Federal Reserve official, told Fortune

“It doesn’t feel like that’s very realistic to hope for,” he said. But he added that doesn’t mean the sanctions won’t have a political effect. “What’s very possible is they hit a point where the pain starts getting more difficult for Putin to manage, even though he has absolute power.”

Russia’s moves to stop financial free fall

The Russian economy might be taking some serious hits, but Moscow still has tools at its disposal to keep its hard currency reserves from being completely exhausted. 

Earlier this week, it ordered major commodity exporters and energy companies to sell 80% of their own foreign currency holdings, in the hopes that this would help support the ruble without the Bank of Russia having to spend down its own reserves. It has also barred foreign investors from selling securities and taking money out of the country, which should also lessen the burn rate of those reserves.

The country has temporarily stopped paying interest to foreign investors on its $29 billion in ruble-denominated government debt. While those skipped coupon payments put the country into “technical default,” it doesn’t mean the country is actually insolvent. Quite the opposite: The missed payments allow it to use currency for other things—like a war—and they hurt foreign creditors. 

What about oil and gas?   

The biggest unknown now is what happens to Russian exports, especially oil and natural gas. 

The country earned about $63 billion from international oil and gas sales in the third quarter of 2021, the last period for which Bank of Russia figures are available. And, remember, that was before a huge spike in energy prices that the Ukraine crisis itself has precipitated. So Russia’s earnings in the current period could be significantly higher. 

Sanctions imposed on Russia so far explicitly exempt payments for oil and gas sales. So right now, the country is still able to earn significant amounts from those resources. (At least in theory. In practice, actually selling oil and gas on the international market may be far more difficult—more on that in a minute.)

Meanwhile, Russia also exported another $70 billion worth of other goods, including non-energy commodities such as iron and other metals in the third quarter of 2021, according to Bank of Russia figures. Russia’s imports over the same period totaled $90 billion. So, including all exports, the country was running a hefty current account surplus of about $40 billion for the quarter.

The debt question

The country does have about $40 billion of foreign-denominated sovereign debt, and it has never missed an interest or coupon payment on those bonds in its history. But the coupon payments are relatively small; its first interest payment since it invaded Ukraine, of $107 million, is due on March 16, with another coupon payment for $359 million due on March 31, according to Reuters. Its first principal payment, $2 billion, is due on April 4.

Russia could choose to default on these payments to conserve cash. Defaulting would also mean hurting foreign money managers as a way of getting back at the EU and the U.S. 

But it doesn’t have to—Russia has the money to make the payments, especially as long as it can keep selling oil and gas. 

A bigger issue may be the technical and legal challenges of actually processing the bond payments. With many Russian banks cut off from SWIFT or now on the U.S. “designated entities” list, barring financial firms that also do business in the U.S. from transacting with them, it isn’t clear exactly how Russia will be able to make payments to international counterparties.

The West still isn’t hitting Russia where it hurts the most

A lot of economic experts are now saying that if the U.S., European Union, and other allied nations really want to punish Putin, they will have to take action to limit its oil and gas exports. 

U.S. senators Joe Manchin, D-W.V., and Lisa Murkowski, R-Alaska, said Wednesday they were working on a bill to ban U.S. imports of Russian oil, petroleum, and liquefied natural gas. Roughly 8% of U.S. imports of oil and refined products, or about 672,000 barrels a day, came from Russia last year. 

In Europe, where Russia is the EU’s biggest oil trading partner, that number is much higher. Currently, Europe imports roughly 40% of its natural gas from Russia, though that percentage varies by country, according to European Union data. Germany, which formally suspended approval of the Russian-owned Nord Stream 2 pipeline last week, relies on Russian for approximately half of its natural gas numbers. In Poland, it’s about 50% (although the country has plans in place to try to phase out those imports entirely.) In Austria, Hungary, Slovenia, and Slovakia, it’s closer to 60%.

In short, cutting off Russian energy would harm the very countries trying to contain Putin and that are accepting most of the Ukrainian refugees fleeing the conflict. But this reluctance might change in the coming weeks and months. 

Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, D.C., said domestic public and international pressure on the European Union—focused on “the narrative that the EU is still financing Putin’s war”—is likely to build quickly, compelling EU countries to curtail Russian energy purchases. 

“The terror that is being unleashed in Ukraine will compel at least some European leaders to do more,” he said. If the EU cuts off purchases of Russian oil and, more critically, natural gas, that will be a serious threat to Russia’s solvency. “When that happens, then Russia will very rapidly begin to run out of money to sustain this war,” he said.

Putin’s next play

While Kirkegaard said that Putin could print rubles to cover the costs of the war, without a steady stream of foreign exchange to back up those rubles, he would risk hyperinflation. Given that Putin’s main source of domestic political legitimacy, according to Kirkegaard, is that many Russians credit him with having restored the country’s financial stability after the economic chaos it experienced in the 1990s, hyperinflation would severely damage Putin politically.

Rogoff was less sanguine about the possibility that the sanctions will cause enough economic pain to force Putin’s ouster. He noted that Russia was also hit with sanctions after its 2014 annexation of the Crimea, with the ruble losing two-thirds of its value and average consumers seeing their purchasing power, especially of imported goods, crushed, and yet Putin remained firmly in power. “There was no revolt against Putin, no regime change that time,” he said. “Nevertheless it’s a different world. This could be worse.”

Even if Europe does cut off Russian energy purchases, it is likely that Russia could still find willing buyers. Neighboring Belarus, which has become essentially a puppet state of Putin, buys all of its energy from Russia. Then there’s China. Russia is already the Asian giant’s third-largest energy supplier, and in February, at a meeting between Putin and Chinese President Xi Jinping, the two countries announced a series of oil and gas deals worth a reported $117.5 billion over a period of decades. Russia could also still find buyers in Southeast Asia. Just this week, Pakistan announced a deal to import Russian natural gas as well as wheat.

Actually completing those exports may be tough though. Already there are reports that international commodity trading firms are not finding buyers willing to take Russian crude oil, even at steep discounts. In one case, Russian oil was being offered at an unprecedented $18 per barrel discount to the benchmark price, and still there were no buyers. One big issue is that shipping companies that control the world’s oil tankers are refusing to load Russian crude. These companies fear inadvertently running afoul of financial sanctions, especially those around transacting business with some Russian banks, as well as the potential damage to their reputations if there’s public outcry over them helping Russia deliver its oil. So while there are no official sanctions on Russian energy exports yet, in practice Russia is finding it more difficult to move its oil and gas.

It is possible Russia will have to further discount these energy exports, selling far below market rates to find buyers, Kirkegaard said. (Limits to how much oil and gas Russia can store mean that if it cannot find ways to export what it is producing, it may have to begin shutting down production. This will also complicate Russia’s calculus, he said.) But with that benchmark price skyrocketing as high as $120 per barrel as a result of its invasion, the highest it has been since 2014, Russia might still earn more than before, even after taking a substantial haircut.

So it is likely that Russia will be able to prosecute the war without actually burning through all of its hard currency. But that does not mean the economic hardship, particularly on average Russians, won’t be severe.

Rogoff said that he worries that the biggest danger is that economic pain compels Putin to lash out with some kind of more damaging direct retaliation against the U.S. and Europe. “When people are looking at the different things we can do to Russia, they are failing to recognize this is not like attacking Iraq. This is a nuclear power with cyber capabilities, biological warfare capabilities,” he said.

For this reason, he said, he thought the U.S., the EU, and their allies would probably stop short of taking action that would force Russia into insolvency or extreme hyperinflation.

Correction, March 4: An earlier version of this story misstated the percentage of Poland’s natural gas that comes from Russia.

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