How Putin tried — and failed — to protect the ruble from sanctions

That money was essential to Russia’s efforts to withstand escalating sanctions. Without it, Russia’s central bank cannot step in to protect the value of the ruble, weather trade disruptions or stabilize the country’s overall economy.

Russia has lived with economic sanctions since 2014, which limited trade and access to U.S. and European capital. Since then, the government has increased its reserves from $430 billion in May 2014 to $640 billion, financed largely through sales of oil and gas. It also diversified its reserves away from U.S. dollars and euros.

Since March 2014, Russia has more than halved the central bank’s share of U.S. dollars, more than doubled its share of gold and started investing in the Chinese yuan.

Those reserves are only as good as Russia’s access to them. Although Russia owns its reserves, the money is held in banks in other countries. Since 2014, those reserves have shifted away from the West.

Until last week, there was no reason to believe Russia would ever lose access to its reserves across the United States, Europe and Japan.

“While other countries like Afghanistan, Iran, and Libya have had their central bank assets seized before, the scale and scope of the sanctions imposed on the Russian central bank are unprecedented,” said David Beckworth, senior researcher at the Mercatus Center at George Mason University.

Cutting off access to the central bank’s reserves severely restrains Russia’s response to a brewing economic crisis and threatens a nosedive for its currency.

The ruble, like all currencies, depends on people trusting that it will maintain its value over time. When confidence falters, people flock to more stable currencies, like the dollar or the euro. This floods the market with rubles, driving down their value, which can create a vicious cycle if more people seek to unload the currency.

In ordinary times, or under less sweeping sanctions, the Russian central bank could cut that cycle short by trading rubles for dollars at a guaranteed rate: say, 80 rubles per dollar. Because the bank is willing to exchange at that rate, 80 rubles are now worth a dollar — and will be for as long as the bank’s reserves hold out.

But that strategy requires huge reserves of cash in stable currencies. Russia stockpiled those assets, but it can no longer reach most of them.

“The fact that they have their reserves abroad showed that they really didn’t expect the United States to go this far,” said Hagar Chemali, a senior fellow with the Atlantic Council’s GeoEconomics Center and a former Treasury Department spokesperson.

Russia’s central bank has heavily invested in gold since 2014, creating a large domestic stockpile. But the gold cannot be used to bolster the ruble, because the country cannot sell the gold for dollars, euros or yen.

Other sanction protection strategies aren’t developed enough to fully shield the country’s economy, according to a report from the Institute of International Finance. Russia sharply reduced its debts to other countries since 2014, from $733 billion to $478 billion. Indebtedness to other countries has deepened economic crises in other sanctioned countries such as Myanmar and Turkey.

Russia also attempted to reduce reliance on SWIFT, the Belgium-based international banking communication system, by creating its own messaging system. However, about 80 percent of Russian banking transactions still use SWIFT, and those that don’t are mostly domestic. Over the weekend, key Russian banks were removed from SWIFT.

“Putin’s strategy built up a wall, but that wall has a lot of holes,” said Clay Lowery, executive vice president at the Institute of International Finance. “What you’ve seen in the last few days is a dramatic attack on those holes.”

Russia’s central bank has marshaled its remaining resources to try to contain the crisis. The bank mandated that exporting companies sell 80 percent of their foreign exchange revenue to support the ruble, as it cannot. It also raised the interest rate on savings accounts from 9.5 percent to 20 percent to incentivize Russians to keep their money in the bank.

The ruble’s dramatic drop in foreign exchange markets does not immediately translate to less purchasing power on Moscow’s streets. Bread did not suddenly become 25 percent more expensive on Monday.

But more so than other sanctions, restricting the central bank will undoubtedly affect everyday Russians. “The Treasury Department always tries to target sanctions as much as possible,” said Chemali. “But something that impacts a currency is automatically going to create collateral damage.”

Signs on the ground pointed to a troubled future as Russians rushed to withdraw money from banks and the country’s stock market closed for days.