Editor’s Note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. As the pain of sanctions continues to reverberate in Russia, a key question for the U.S. and its allies is where ordinary Russians will lay the blame. Restrictions on major Russian banks and oligarchs, as well as on the country’s sovereign debt and foreign reserves, is primarily slamming financial markets. Deputy Treasury Secretary Wally Adeyemo on Thursday said Russia’s economy is shrinking and is in the midst of “an acute financial crisis” as Russians and other investors pull their money out of the country. That will eventually give way to soaring inflation, shortages and a sharp decline in Russians’ standard of living. Why this matters: Even if his military campaign succeeds, massive economic pain at home could undermine Putin’s power now and in the future if Russians perceive him as responsible. Typically, the initial impact of sanctions is to strengthen the targeted regime as citizens rally around the government, which is able to take advantage of the situation to keep constituencies in line, said Marcus Noland, executive vice president and director of studies at the Peterson Institute for International Economics. The longer the sanctions are in place, however, the more likely that sentiment will start to change. “One could make a pretty good case that the Russian people will see Vladimir Putin as being the source of their misery, not the West,” Noland said at a briefing Thursday. “The real question is to what extent that occurs, and how fast that occurs in a situation in which the state has, not total control of information, but a lot of control.” Can discontent be mobilized into political action? The U.S. is already trying to take advantage of the growing fissures in Russian society over the Ukraine invasion. Antiwar protests have sprung up across the country and U.S. officials have made direct appeals to the people, with the goal of providing facts and context they can’t find on Kremlin-controlled outlets, our colleague Nahal Toosi wrote this week. “Putin, meanwhile, is using his far-reaching control over Russian media to stir up nationalism in favor of the war. Russian news outlets already are filled with headlines appealing to such sentiments, like ones that falsely claim that Russian speakers in Ukraine face a ‘genocide.’” Over time, Putin is sure to use the same lever to try to persuade his people that the economic pain they feel from sanctions is the fault of the West, not him or his war. Will it work? Russia has withstood pressure from sanctions before. But this time is clearly different. The raft of measures imposed by the U.S. and its allies over the past week, including restrictions on Russian banks and oligarchs, have sent Russia’s markets into a tailspin and triggered panic among ordinary citizens rushing to secure cash. They’ve also sparked a frenetic effort by the Bank of Russia to defend the ruble, which has plunged in value after Western countries cut off the Kremlin’s access to its war chest of foreign reserves. Russian debt and equity markets have been closed all week, and the central bank has instituted stringent new capital controls. On Wednesday, it also lowered reserve requirements for the country’s banks, a move designed to shore up their balance sheets and help prevent a devastating run. “Anyone who can is trying to take money out of Russia,” Adeyemo said in a virtual interview with the Washington Post. That will eventually inflict pain on Russians who may not have anything to do with Putin’s war. “It is a very open-ended problem” for Putin, Noland said. “I am not particularly confident that this case will follow the normal trajectory of people rallying around the regime and being able to put up with this kind of dislocation for an extended period of time.” IT’S FRIDAY — Nine weeks down, 43 to go. We’ll see you back here on Monday. What should we be writing about next week? Let us know: kdavidson@politico.com, aweaver@politico.com, or on Twitter @katedavidson or @aubreeeweaver.
| 
