1998 Default Haunts Russians as Banking Crisis Deepens

(MOSCOW) – Russia’s three day special military operation has made no territorial gains during the month of April, instead losing approximately five square kilometres, whilst Ukraine has carried out attacks across roughly 1.4 million square kilometres, or 540,000 square miles, of Russian territory.

Ukraine struck border cities, oil ports, pipelines, refineries, and deep interior infrastructure, targeting Russia’s very ability to fight a war. As national security adviser and Kyiv special correspondent Dr Jason Jay Smart noted, without money, a country does not win wars. The front lines within Ukraine barely moved. Russian news recently discussed taking a village in eastern Ukraine by the summer, exactly the same village they discussed taking by the summer one year ago. What is dynamic, what is moving very fast, is the situation inside Russia.

Ukraine has carried out attacks in places such as Belgorod, Bryansk, Tapsi, Perm, and Orsk, all in the past three days. These strikes are occurring multiple days in a row on the same facilities, suggesting either routine penetration of air defences or their complete absence. President Zelenskyy has repeated that Ukraine is planning to go full throttle and will eject the Russians.

The Russian side is starting to decompress, starting to break up, as it is no longer able to fight a war with such consequences. Russian forces are taking roughly 1,300 casualties per day, whilst current recruitment levels stand at less than 800 new personnel per day, leaving a sizeable deficit on the front line.

or ordinary Russians, however, the distant front line is less alarming than what is happening to their money. The economic situation in Russia has been difficult for some time.

Capital Flight in January Just in January alone, slightly less than $20 billion (approximately £15.8 billion) was taken out of banks by Russian citizens. Of that sum, $14.6 billion stayed in people’s pockets and did not return. Only about $5.1 billion went back to the banks. This represents a clear vote of no confidence in the banking system as a whole.

Liquidity and Withdrawal Limits Although Russian banks are currently making a profit, they face liquidity and stability problems that will probably change in the near term. The government has introduced the following restrictions:

• State Certificates: Those with deposits over $37,500 (£29,600) will be locked into three-year state certificates.

• Withdrawal Caps: The daily cash withdrawal maximum will be set at $1,650 (£1,300).

Citizens who have saved their entire lives for retirement will be unable to access their money for years because the state decides when they may withdraw it.

The Russian government typically introduces such measures through the FSB security service, claiming it is in the interest of protecting citizens from fraud. In reality, this is the method they will use to prevent a run on the bank when a teller realises funds are low. Whenever a government says not to worry because one’s money is safe in its hands, concern is warranted. When it is the Russian dictator saying it, there should be great concern.

The government appears poised to close foreign currency exchanges and money changers in Russia because it wants to control all euros and dollars. Russia can use Chinese national currency for oil sales and trade with China, but it still requires dollars or euros for international obligations. If it runs out, it has two options: default, which brings true economic chaos, or print more money, which can turn wild very fast.

Russia spent well more than its entire annual deficit allowance in just the first three months of the year. Consequently, it recently sold off 21.8 metric tons of state gold, but only raised $3.3 billion (£2.6 billion). The financial holes are causing hospitals to close and many state functions to cease.

Russians have historical experience with such situations. In 1991, the state suddenly restricted personal cash access. In 1998, Russia defaulted and the life savings of everyone with money in banks was essentially wiped out. Russians know these setups can go very wrong.

The paradox of banks making profits amid collapse is explained by the oligarchy. There are now 155 men in Russia who are billionaires with a joint total net worth of around $700 billion (£553 billion). Their wealth has increased enormously during the war. A small fraction could cover all current deficits. Their total net worth is several times more than the entire annual national budget of Russia. Those close to the Russian dictator are making seven times more than those who were not close to him before the war.

The FSB is taking over more industries, with formerly public companies that became private being made public again and turned over to new oligarchs. More than 90 per cent ended up in the hands of people close to the dictator. They are simply robbing everything they can, aware that this ride may not continue much longer. To keep the oligarchy from splitting off, the Russian dictator has made a devil’s bargain, allowing them to steal more and take things that weaken the country long term. His survival today is his top priority.

The three day special military operation is now on day 1,525. Russian propagandists are increasingly talking about the difficult economic situation. One economics professor has suggested this could be to foreshadow a default so people are not shocked when it finally happens. The Russian dictator has not been seen for about ten to twelve days, which is quite unusual.

One of Russia’s most famous propagandists, Vladimir Solovyov, a personal friend of the dictator, recently discussed these matters on his show. He talked endlessly about the need to be in Russia and how Russia is the centre of where all Russian people should be to experience life. Yet his son studied in London and worked for a model agency there. Two of his daughters were born in the United States and hold American passports. His partner also holds an American passport. Solovyov himself taught economics at the University of Alabama in 1991 and holds a PhD in economics.

There is a significant difference between what the elites know and what the elites say. Those running the banks publicly complain about difficulties and challenges, but they pay themselves first. In Russia, actions matter first and foremost. Words come later and carry a heavy discount. The report was based on analysis by Dr Jason Jay Smart.