How sanctions over Ukraine are penetrating Fortress Russia : The Indicator from Planet Money President Vladimir Putin spent years trying to sanction-proof Russia's economy. With recent sanctions from the West, his Fortress Russia idea is now being put to the test.

Economic warfare vs. Fortress Russia

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript






And I'm Darian Woods. We are watching devastating scenes in Ukraine as Russian trucks and tanks invade the country from the north, from the south and from the east. It's war, but it's also a financial war. And Russia has been building a financial defense system for something like this for years. You might have heard of it recently. It's called fortress Russia.

MA: And at the core of fortress Russia is massive foreign exchange reserves. That's officially about $640 billion worth of cash, other governments' bonds and gold that Russia's central bank has amassed over the years. The idea is that these reserves could wait out the sanctions. Russia needs foreign currencies for imports, and they import a lot. The reserves were built up so that Russians could still exchange their rubles for dollars and euros to buy cars and furniture and phones, even in the rough times.

WOODS: Think of Russia's reserves like a rainy-day savings account - about $5,000 worth for every man, woman and child in Russia just sitting there waiting to prop up the Russian ruble if needed.

MA: But that fortress is freezing up after a financial attack. Leaders from Europe and North America announced unprecedented sanctions over the weekend. The ruble has lost about 30% in value against the dollar. And on Tuesday, the Russian stock market closed for the second day in a row. All in all, this financial fortress Russia has tried to build is starting to look more like a cage, and we'll explain why after the break.


MA: Michael S. Bernstam is an economist at Stanford's Hoover Institution.

WOODS: Hello, Michael Bernstam.

MICHAEL BERNSTAM: Hello, hello. How are you?

MA: Michael has worked for the Russian central bank and in Ukraine. And he says he first started thinking about global finance about 70 years ago. It was just after World War II in Soviet Russia. Michael had fallen sick as a young child.

BERNSTAM: My parents needed to buy some antibiotics on the black market.

WOODS: The black market was the only place to buy antibiotics because the Soviet currency wasn't able to be freely exchanged to buy imports like penicillin. But Michael's grandmother had a trick up her sleeve. She was a dentist, and she used gold and silver for teeth fillings. She exchanged that silver and gold for penicillin.

BERNSTAM: So I learned high finance very well at the age of 4.

MA: Learning high finance at the age of 4, Michael could see that currencies were only as valuable as what you could exchange them for.

WOODS: Today, Michael has been analyzing whether Russia's financial fortress can support the ruble enough so that Russians can keep importing products like antibiotics.

MA: We asked Michael on Monday what he thought about the fortress.

WOODS: Can those assets be used to prop up the Russian economy?

BERNSTAM: As two days ago, yes. As today, no.

WOODS: The reason is that over the weekend, European and North American leaders announced extraordinary new sanctions against Russia.

MA: Western leaders announced two supersized sanctions in particular. First, they blocked some of Russia's big banks from accessing the SWIFT bank messaging system used for bank transfers, and that is huge, right? So the SWIFT messaging system is basically the completely dominant way for banks to talk to each other when they transfer money. It covers about 11,000 global banks. And without it, a lot of money can't move across borders. You're effectively shut out of the global financial system.

WOODS: And second, Western leaders sanctioned the Russian central bank, and that is just unprecedented action against an economy the size of Russia's. Now, there is one giant loophole here. Payments for Russia's big exports, oil and gas, are still being allowed from some banks. But even with this loophole, the sanctions announced over the weekend are so large that not even Russia's $640 billion fortress is enough to protect its economy. We'll explain why these sanctions make Russia's financial fortress look more and more threadbare by going through all its components.

BERNSTAM: You don't need a calculator. You don't need an abacus. All you need is just a few numbers.

MA: First, number - roughly $250 billion.

BERNSTAM: So 250 billion are now unavailable because those are United States government bonds, government bonds of the European Union, Japanese bonds, British bonds.

MA: And all those government bonds from Western-aligned countries pose a problem for Russia because, well, it's not like the days before computing where you could get, like, a physical certificate that another government owes the money to the bearer of that certificate. Instead, it's a digital entry in the ledger of a country's treasury or central bank.

BERNSTAM: And so in order to withdraw them, you need the goodwill of people and institutions.

WOODS: And Russia does not have the goodwill of Western-aligned institutions. So given the sanctions on the Russian central bank, these bonds are frozen. The U.S., EU, Japan and the U.K. haven't confiscated the bonds, but these bonds cannot be redeemed or sold for cash right now.

MA: That brings us to our second number, which is $150 billion - that's the rough value of what Russia has in savings accounts in banks all over the world. And in peacetime, this might make sense because, you know, why not earn a bit of interest on your cash? But that whole equation breaks down now that Russia has invaded Ukraine. Now, European and North American banks aren't allowed to let the Russian central bank touch its own savings. That means that $150 billion is basically useless for as long as these sanctions last.

BERNSTAM: The rule No. 1 is you have to understand you don't fight the country where you keep your money.

WOODS: That basic rule seems like a bit of oversight from Putin's government.

MA: Maybe they didn't actually expect these sanctions to be so severe.

WOODS: Yeah - certainly not from Europe, especially. And that brings us to a country that is not as aligned with North America and Europe. It's China. Russia has $84 billion worth of Chinese government bonds. But even if China allows Russia to sell these bonds back, they're denominated in yuan, the Chinese currency.

BERNSTAM: The Chinese currency in the minds of the Russian people is not a kind of world currency. No one is using it. No one has ever seen it.

MA: Michael says if the point of this fortress is to reassure everyday Russians they can keep confidence in the ruble, it doesn't do a very good job of that. You want to convince citizens that they'll still be able to convert the rubles into global currencies at some later date. But average Russians today are used to dollars and euros, not yuan.

WOODS: The fourth part of Russia's fortress is more old-school. It's gold - gold bars. That's estimated to be valued at about $130 billion. Gold bars can be sold to any remaining friends of Russia's, right? Like, maybe Iran or Pakistan might want some or maybe, just like Michael's grandmother's gold, you know, maybe you could trade it on the black market. But Michael says the logistics of selling this much gold in a rush are just unrealistic. You don't see a train of gold bars going from Moscow to Beijing.

BERNSTAM: No, it's possible. It's possible, but it takes time, and it's not much.

MA: So that just leaves cash - actual hard physical bank notes locked in a secure basement in Russia somewhere. Michael estimates that to be around $30 billion of large denomination bills - right? - like euros, pounds and dollars locked in a vault. And so when you zoom out, this $640 billion fortress that Russia has spent years amassing kind of just boils down to $30 billion of cash.

BERNSTAM: No one now wants to get under the U.S. sanctions.

WOODS: That's how powerful these financial sanctions have been.

BERNSTAM: Yeah, absolutely. They are the weapons of mass financial destruction.

WOODS: The weapons of mass financial destruction.

BERNSTAM: They destroy their currency. Then they destroy the banking system. Then the supply chains weigh (ph) down because the companies want dollars. And then the most difficult thing is, how do you govern?

MA: How do you govern a country in economic free fall facing colossal sanctions?

BERNSTAM: That's a dangerous weapon. The weapon of mass financial destruction is very dangerous.


WOODS: This show was produced by Nicky Ouellet with help from Gilly Moon. It was fact-checked by Corey Bridges. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.


Copyright © 2022 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.