US Secretary of State Anthony Blinken appears on screen as he speaks at the 49th session of the UN Human Rights Council at the UN European Headquarters in Geneva, Switzerland, March 1, 2022.
Salvatore di Nolfi Reuters
LONDON – Western nations have responded to Russia’s invasion of Ukraine with a series of sanctions designed to cripple the country’s economy, and economists suggest it may work.
The major G7 economies (Group of Seven) have imposed unprecedented sanctions on Russia’s central bank, along with widespread Western measures against the country’s oligarchs and officials, including Russian President Vladimir Putin.
Key Russian banks are banned by the international payment system SWIFT, which prevents them from secure international communications and drives them out of much of the global financial system.
The sanctions announced by the United States over the weekend are also aimed at the National Welfare Fund of the Russian Federation and the Ministry of Finance of the Russian Federation.
They also effectively ban Western investors from doing business with the central bank and freeze its foreign assets, not least the huge foreign exchange reserves that the CBR uses as a buffer against the devaluation of local assets.
During the latest crackdown on Moscow, US President Joe Biden announced on Tuesday that Russian flights would be banned from US airspace following similar decisions by the EU and Canada.
French Finance Minister Bruno Le Mer told a French radio station on Tuesday that the latest round of sanctions was aimed at “causing the Russian economy to collapse”.
The Russian ruble has fallen since Russia invaded its neighbor last week, reaching a low of 109.55 against the dollar on Wednesday morning. Russian stocks also went through massive sales. Moscow’s stock markets closed for the third day in a row on Wednesday as authorities tried to stem bleeding from local asset prices.
Meanwhile, the country’s largest lender, Sberbank, withdrew from its European operations and saw its London-listed shares fall more than 95% to a penny. Shares of other major players on the London Stock Exchange, including Rosneft and Lukoil, also collapsed.
The central bank on Monday more than doubled the country’s key interest rate from 9.5% to 20% in a bid to limit the effects, but analysts say the move to freeze its foreign exchange reserves is key to blocking its ability to stabilize Russia. economy.
Anders Oslund, a Swedish economist and former senior member of the Atlantic Council, wrote on Twitter on Wednesday that Western sanctions had effectively “cut off Russia’s finances in one day”.
“The situation is likely to get worse than in 1998 because there is no positive end now. All of Russia’s capital markets appear to be destroyed and are unlikely to return with anything less than deep reforms,” he added.
Faced with ‘serious financial crisis’
“While before the CBR could rely on its reserves to smooth over any temporary instability of the ruble, it is no longer able to do so. Instead, it will have to adjust interest rates and other non-market measures to stabilize the ruble, “said Clemens Graf, chief economist for Russia at Goldman Sachs.
“Limiting the volatility of the ruble without adequate reserves is more difficult and the ruble is already sold out, with consequences for inflation and interest rates.
Goldman Sachs raised its forecast for Russian inflation at the end of the year to 17% on an annual basis from a previous forecast of 5%, with risks distorted upwards, given that the ruble may sell off further or the CBR may be forced to raise interest rates further to maintain stability.
Economic growth is also expected to be hit hard, with the Wall Street giant lowering its GDP forecast for 2022 from 2% growth to 7% contraction on an annual basis, although Grafe acknowledged uncertainty over those figures.
“Financial conditions have tightened to a level similar to 2014 (Russia’s annexation of Crimea), and we therefore believe that domestic demand will shrink by 10% [year-on-year] or a little more, “said the Count.
“While exports have generally not been significantly limited by sanctions so far, we expect it to shrink by 5% on an annual basis due to the physical disruption of exports through Black Sea ports, which are essential for dry bulk exports, and the risk of sanctions to reduce other exports. “
This rate of decline is similar to the 7.5% decline during the 2008/9 financial crisis and the 6.8% contraction during the 1998 financial crisis in Russia.
“Tightening Western sanctions, along with tightening financial conditions and the prospect of a banking crisis, mean the Russian economy is likely to experience a sharp contraction this year,” said Liam Peach, an emerging markets economist at Capital Economics. remark Tuesday.
Although the outlook remains highly uncertain, Capital Economics’ baseline forecast is for a 5% contraction in Russia’s GDP in 2022, compared to its previous forecast of 2.5% growth and annual inflation of 15% this summer.
Peach suggested that Russia’s worst-case scenario for international sanctions would include restrictions on oil and gas flows, which account for about half of all exports and a third of government revenues.
“Restricting them would also stifle a key source of income in dollars for energy companies that have foreign currency debts and could lead to a much more significant financial crisis in Russia,” he added.
The depth of the recession depends on exports, China
Stephen Bell, chief economist at BMO Global Asset Management, said Russia was now facing a “serious financial crisis” as China’s role became increasingly important to Moscow due to demand for raw materials and energy.
“Russia has also shifted much of its foreign exchange reserves into Chinese currency and transferred its payment systems to Chinese banks. China may hold the key to Russia’s ability to sustain the conflict,” Bell added.
There are currently no sanctions on Russian exports, and SWIFT exclusions are targeted at specific banks to allow export payments to continue to be processed. Grafe of Goldman Sachs suggests that may not be the case for long.
“The G-7’s willingness to spend is increasing, and this could ultimately mean that restricting Russian exports and adopting higher commodity prices may become politically feasible,” Grafe said.
Russia’s main limitation is its inability to use its foreign exchange reserves to secure the ruble, but Grafe suggested that this could be overcome by changing the ruble’s reference currency to the Chinese yuan from the US dollar.
“This will also allow the CBR and the Ministry of Finance to adhere to their fiscal rule, which directs excess fiscal savings due to higher oil prices in foreign assets,” he said.
However, the creation of a cross-currency market will require full cooperation from Beijing, which Goldman Sachs considers unlikely given China’s risk of secondary sanctions to help Russia circumvent Western sanctions.
China’s banking regulator said Wednesday that the country opposes and will not join financial sanctions against Russia. China’s foreign ministry has so far refused to call the attack on Ukraine an invasion, instead promoting diplomacy and negotiations.