The latest International Monetary Fund (IMF) global economic outlook has just been published and, like all of them, it has many interesting aspects. It acknowledges the economic slowdown in many economies and has dramatically increased the Fund’s inflation estimates.

Global growth is now projected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January. Estimates for 2022 of inflation projections have risen to 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January.

The most recent macroeconomic figures show that the Chinese slowdown is much more severe than expected and not only attributable to the covid-19 lockdowns.

The lockdowns have an enormous impact. 26 of 31 China mainland provinces have rising covid cases and the fear of a Shanghai-style lockdown is enormous. The information coming from Shanghai proves that these drastic lockdowns create an enormous damage to the population. Millions of citizens without food or medicine and rising suicides have shown that the infamous “zero covid” policy often disguises mass population control and repression.

The proposals of the European Union and the United States to implement a complete energy embargo on Russia must consider the reality. Asia is importing all that Russia can offer. China, India, and the main Asian economies will send Russian exports to a decade-high, according to the Financial Times. In fact, Russia’s trade account surplus could reach $28 billion in March, an all-time high, according to Reuters.

That does not mean that sanctions do not work. Estimates of Russia’s GDP fall range between 11 and 15% in 2022 and inflation is close to 200%, according to JP Morgan, Quartz, and Business Insider.

There are numerous headlines showing the surprising recovery of the Russian ruble against the US dollar and the euro. By the first week of April the Russian currency had recovered all the losses against the greenback and the euro area currency.

Obviously, there is an important difference that needs to be considered. Massive capital controls were implemented in Russia after the heavy sanctions of the West and no Russian citizen or business can sell rubles to buy dollars, euros, pound, or yen. It is impossible to know what would have happened to the Russian currency if capital controls had not been implemented, but we know that no Russian citizen can exchange local currency for international ones and very unlikely at the official rate. In essence, the Russian ruble “traded” price does not reflect an abrupt change in demand, just the effect of capital controls.

We do not know what exchange rate is used in the underground market, but we can safely assume that the free-market exchange rate of the ruble is significantly lower than the official rate. According to Business Insider, there is a underground market using Telegram and other social media chats where citizens can buy or sell foreign currency, with some messages showing prices for rubles that are 30% to 50% lower than the official rate.

Apart from the reality of the exchange rate, there are two channels in which the Russian central bank is avoiding collapse. China and the exports of energy to Europe.

Russia continues to export natural gas to Europe, which means hundreds of millions of euros of inflows of international reserves. The Russian central bank is conducting daily auctions with energy exporters to channel liquidity and avoid default.

Russia has recently threatened to cut gas supplies to Europe if the euro area customers do not buy their gas in rubles. This would force European nations to sell euros and buy rubles at the above-mentioned debatable official rate, which would pump up the Russian domestic currency. This measure is easier said than done, as take-or-pay contracts cannot be redenominated at one party’s will, and the Russian energy suppliers like Gazprom require the inflow of international reserves nonetheless. Forcing importing customers to buy the local currency is much more difficult than we may believe. If it was that easy, countries like Venezuela, Iran and Argentina would not have such poor global demand for their domestic currency. Russia is a stronger economy, but not that massive to enforce such a measure successfully.

Digital currencies, on the other hand, have been a modest relief for Russian citizens to preserve the purchasing power of their savings and the ability to make a living, but it is very small. I find it amazing to read that the ECB head, Ms Lagarde, is saying that cryptocurrencies are being used by Russian oligarchs to avoid sanctions when the reality is that inflows from European imports in euro and the support of the Chinese financial system are the real drivers of the small lifeline against sanctions.

China is a channel for international reserves into the Russian central bank through exports and the use of Hong Kong and the mainland China trading platforms to maintain the financial inflows and avoid a total collapse of the Russian system. India is taking advantage of the unprecedented discounts offered for Russian Ural oil to purchase more cheap crude in a difficult inflationary environment. The strong foothold of Chinese financial entities in Africa and Emerging Markets is also generating a lifeline for the inflow of reserves into Russia from Venezuela, Syria, and other nations.

This does not mean that the sanctions are not hurting the Russian financial system or the real economy. They are, and very much. What this basically shows is that there is virtually no way to financially isolate a nation completely, let alone one that remains such an important trading partner for so many others.

We have entered a very dangerous currency war with unexpected consequences. The winners are unlikely to be fiat currencies managed by governments, but alternative and decentralized systems.