It was only on Sunday that I wrote about the drastic escalation on the economic and financial side of the war between Russia and Ukraine.

That was before financial markets opened on Monday, and before Russia had a chance to react.

But even then – early Sunday morning, Moscow time – huge queues had begun to form outside Russian ATMs, many of which were running out, and reports had begun to surface that Russians invaded luxury retailers to exchange their rubles for anything that might hold its value.

It was the start of what is sure to be Russia’s biggest financial crisis since the 1998 Russian financial crisis that brought it to its knees.

The Russian economy was so damaged as a result of this event that the Russian government ended up asking the International Monetary Fund for food aid.

1998 on steroids

The 1998 crisis triggered massive capital flight, a sharp devaluation of the rouble, default on public debt, hyperinflation and a huge increase in interest rates.

It was devastating and left Russia’s global financial reputation in tatters.

The parallels of recent days are striking. When foreign markets opened on Monday, the ruble immediately fell more than 30% to record highs after foreigners began desperately selling out of Russia.

Read more: “Just before nuclear”: these latest financial sanctions will cripple the Russian economy

Perhaps the most devastating measure is the freezing of at least half of the Bank of Russia’s foreign exchange reserves held by the central banks of cooperating countries. It is the war chest that Russia has been building up with great discipline for many years, precisely to guard against sanctions.

Central banks are generally treated as no-go zones for sanctions – sacrosanct, if you will. Russia presumably thought so.

The freezing of reserves is no longer prohibited

But just as Russia seems to have underestimated the Ukrainians’ willingness to fight militarily, it also seems to have underestimated the West’s willingness to fight financially.

Without the ability to use these foreign reserves to support the rouble, Russia was forced to revert to a series of desperate measures.

The Moscow stock exchange was kept closed on Monday and has not yet reopened. After all, you can’t have a stock market crash if the market never opens.

Russia more than doubled its key central bank rate from 9.5% to 20%.

This may seem curious in the midst of an economic crisis.

But when your currency is in freefall because people are selling it, you need to provide a very strong financial incentive for people to hold on to it, including paying higher interest rates on remaining rubles in savings accounts. .

The economy is collapsing, but even higher rates

The higher rates immediately translated into higher mortgage rates for ordinary Russians – the last thing a collapsing economy needs – as well as loans funding business investments.

This is the diabolical conundrum facing Russia as it is hit by a financial crisis with at least one hand tied behind its back by the West.

Russia has also banned Russians from buying Russian assets from foreigners, to prevent foreigners from bailing out Russia. It required every Russian company to convert 80% of its foreign income into rubles – essentially confiscating foreign dollars to be used instead of its own frozen foreign reserves.

Read more: How Russia’s disrupted gas supply will affect global and Australian prices

And, more recently and more ominously, he halted interest payments on three trillion rubles ($27 billion) of Russian public debt held by foreigners.

Another way of saying this is that the Russian government is now in default.

This makes one thing certain: there is no turning back for Russia now. The damage will be permanent.

Ultimately, each of Russia’s measures is aimed at rebuilding foreign currency holdings inside Russia. Even with the sanctions, Russia receives billions of dollars in foreign revenue every day from still-allowed exports, including oil, gas and wheat.

Russia’s goal is to hoard this money and replenish its war chest, giving it more room to manoeuvre. Given that $300 billion in reserves are frozen, this will take time.

How long before the collapse?

While the West has made efforts to exempt energy from sanctions, the interconnectedness of global financial markets and nervous participants fearful of inadvertently falling under sanctions have already seen energy deals disrupted.

Contracts for the future supply of Russian oil are not selling, even at deep discounts.

This raises the key question Western leaders are asking themselves right now: how long can the Russian economy – and therefore its people and leaders – survive?

It is a baffling irony that just as the Russian military surrounds Ukrainian cities in an attempt to besiege them, Western governments have surrounded the Russian economy in an attempt to besiege it.

More drastic measures likely

Despite everything Russia has done to fight sanctions so far, the ruble remains 26% below its level last week and 32% below its level a month ago.

It seems likely that to properly stabilize its financial system, it will need more drastic measures – such as banning bank withdrawals and rationing. They will hurt the economy even more than 20% interest rates and sanctions.

Is this degree of economic damage sufficient for Russia to change course in Ukraine? Can the Ukrainians hold out long enough for the economic costs to Russia to become unsustainable?

Read more: US-EU sanctions will hit Russian economy – two experts explain why they may stick and sting

If necessary, will the West be ready to double down and really up the game by limiting its purchases of Russian oil and gas?

This could well be the nail in Russia’s coffin – but also very damaging to the European and global economy. Only time will tell.