US Secretary of State Anthony Blinken appears on a screen as he delivers a speech during the 49th session of the United Nations Human Rights Council at the United Nations European Headquarters in Geneva, Switzerland, March 1, 2022.
Salvatore de Nulvi | Reuters
LONDON – Western countries have responded Russia’s invasion of Ukraine With a raft of sanctions aimed at crippling the country’s economy, economists suggest they may work.
The Group of Seven (G7) major economies have Unprecedented punitive penalties were imposed Against the Central Bank of Russia along with the broad measures taken by the West against the oligarchy and officials in the country, including Russian President Vladimir Putin.
Major Russian banks were banned from the international payments system SWIFT, which prevented them from secure international communication and was ostracized from much of the global financial system.
The sanctions announced by the United States over the weekend also targeted the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation.
It also effectively prohibits Western investors from doing business with the central bank and freezes its overseas assets, not least the massive foreign exchange reserves that the Central Bank of Canada has used as a buffer against depreciation of domestic assets.
In the latest crackdown on Moscow, US President Joe Biden announced on Tuesday that Russian flights will be banned from US airspace, following similar decisions by the European Union and Canada.
On Tuesday, French Finance Minister Bruno Le Maire told a French radio station that the aim of the latest round of sanctions was to “cause the collapse of the Russian economy”.
The Russian ruble has fallen since Russia invaded its neighbor last week and hit an all-time low of 109.55 against the dollar on Wednesday morning. Russian stocks also witnessed intense selling. Stock markets in Moscow were closed on Wednesday for the third consecutive day as authorities sought to stem the bleeding in domestic asset prices.
Meanwhile, the country’s largest lender, Sberbank, exited its European operations and saw its London-listed shares plummet more than 95% to trade a penny. Shares of the country’s other major players on the London Stock Exchange, including Rosneft And the Lukoilalso collapsed.
Russia’s central bank on Monday more than doubled the country’s key interest rate from 9.5% to 20% in a bid to limit the fallout, but analysts believe the move to freeze foreign exchange reserves is key to hampering its ability to stabilize Russia’s economy.
Swedish economist and former senior fellow at the Atlantic Council Anders Aslund wrote on Twitter on Wednesday that Western sanctions had “effectively weakened Russia’s financial resources in a single day.”
“The situation is likely to get worse than it was in 1998 because there is no positive end now. It seems that all capital markets in Russia have collapsed and is unlikely to return with anything less than deep reforms,” he added.
Facing a ‘serious financial crisis’
“While the central bank could previously rely on its reserves to smooth out any temporary fluctuations in the ruble, it can no longer do so. Instead, it will need to adjust rates and other non-market measures to stabilize the ruble,” Clemens Graf, senior Russian Economists at Goldman Sachs.
“Reducing the volatility of the ruble without sufficient reserves is more difficult and the ruble has already sold off, with repercussions for inflation and rates.”
Goldman Sachs raised its year-end forecast for Russian inflation to 17% y/y from a previous forecast of 5%, with risks skewed to the upside as the ruble could sell off further, or so could the CBR. They had to increase interest rates to maintain stability.
Economic growth is also expected to be hit hard, and the Wall Street giant lowered its forecast for 2022 gross domestic product (GDP) from a 2% expansion to a 7% year-over-year contraction, although Grafe acknowledged the uncertainty surrounding those numbers.
“Financial conditions have tightened to a level similar to 2014 (Russia’s annexation of Crimea), and therefore we believe that domestic demand will contract by 10%. [year-on-year] or a little more.”
“While exports, in principle, have not been significantly constrained by sanctions so far, we expect them to shrink by 5% year-on-year due to the physical disruption of exports through Black Sea ports, which is beneficial to dry bulk exports, and the risks of sanctions that reduce exports. other”.
This measure of decline is similar to the 7.5% decline during the 2008-2009 financial crisis and the 6.8% contraction during the 1998 Russian financial crisis.
“The escalation of Western sanctions, along with tightening financial conditions and the potential for a banking crisis, means the Russian economy is likely to experience a severe contraction this year,” Liam Beach, emerging markets economist at Capital Economics, said in a statement. Note Tuesday.
Although the outlook remains highly uncertain, Capital Economics’ baseline forecast calls for a 5% contraction in Russian GDP in 2022 compared to its previous forecast of 2.5% growth, and annual inflation to reach 15% this summer.
Beach noted that the worst-case scenario for Russia in terms of international sanctions would include restrictions on the flow of oil and gas, which accounts for about half of all merchandise exports and a third of government revenue.
“Restricting these would also stifle a major source of dollar income for energy companies with foreign currency debt and potentially cause a much bigger financial crisis in Russia,” he added.
The depth of the recession depends on China’s exports
Stephen Bell, chief economist at BMO Global Asset Management, said Russia is now facing a “serious financial crisis” with China’s role is more important than ever to Moscow because of its demand for raw materials and energy.
“Russia has also transferred a significant portion of its foreign exchange reserves into Chinese currency and transferred its payment systems to Chinese banks. China may hold a key to Russia’s ability to sustain conflict,” Bell added.
So far, there are no sanctions on Russian exports, and SWIFT’s exceptions target specific banks to allow export payments to continue to be processed. Grafe suggested to Goldman Sachs that this may not be the case for much longer.
“The willingness of the G7 to bear the costs is increasing and that may eventually mean that restricting Russian exports and accepting higher commodity prices could become politically feasible,” Graf said.
The main drawback of Russia is its inability to use its foreign exchange reserves to guarantee the ruble, but Graffy suggested that this be overcome by changing the reference currency of the ruble to the Chinese yuan from the US dollar.
“This will also allow the Central Bank of Jordan and the Ministry of Finance to abide by their financial rules that direct excess financial savings due to high oil prices to foreign assets,” he said.
However, creating a multi-currency market will require the full cooperation of Beijing, which Goldman Sachs sees as unlikely given the risk of secondary sanctions on China to help Russia avoid Western sanctions.
China’s Banking Supervision Authority said on Wednesday The country opposes financial sanctions against Russia and will not join them. China’s Foreign Ministry has so far refused to describe the attack on Ukraine as an invasion, instead Strengthening diplomacy and negotiations.