Tue, 30 May 2023

Will Ukraine crisis destroy Russian economy

20 Jan 2022, 22:12 GMT+10

The West is threatening Russia with crippling sanctions over potential conflict with Ukraine

The Western media, as well as multiple US officials, have repeatedly warned of an imminent Russian invasion of Ukraine over the past few months and threatened Moscow with severe sanctions if this happens. Washington and its allies have cited the movement of Russian troops within the country's vast Western territory as 'proof' of such plans. Moscow has consistently denied the allegations, insisting it has a right to carry out military maneuvers within its borders as it pleases.

What additional sanctions could Russia face?

Washington and its allies have promised "severe consequences" if Russia takes military action against Ukraine, including sanctions against the country's leading banks, a ban on trading government debt, the possible but unlikely disconnection from the SWIFT interbank global payment system, an embargo on US chip technology, and implications for the Nord Stream 2 gas pipeline.

How will Russia fare if these sanctions are approved?

The US and EU have previously placed sanctions on Russian banks and companies over Ukraine. Russian Finance Minister Anton Siluanov said last week that further sanctions would be "unpleasant," but the country would cope. "I think our financial institutions can handle it [if] these risks emerge," he said.

What will happen to the ruble?

Military escalation in Ukraine and tough sanctions could lead to a depreciation of the ruble and, as a result, a tightening of the Central Bank's policy and foreign exchange interventions to ensure financial stability, Renaissance Capital analysts say. "In this case, we expect that the outflow of funds from the debt and, more importantly, the stock markets may approach the indicators of 2014-2015 [the beginning and the acute phase of the conflict in eastern Ukraine - Ed.], with the ruble depreciating up to 20%, expanding country risk premium by 200 basis points and a comparable tightening of the monetary policy of the Central Bank," they said.

What will happen to the price of oil and gas?

Analysts warn the crisis could be a 'seismic event' for the energy market. European gas prices will probably exceed the record highs of €180 per MWh seen late last year, according to Capital Economics. "Whereas the Russian-Ukrainian crisis directly affects the regional natural gas prices, crude oil prices are generally aloof, since little Russian oil transits through Ukraine," Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch. "Still, the possibility of an armed conflict is a serious development, and has wide geopolitical ramifications, thereby boosting oil price premiums," he added. The tensions raise the prospect of oil supply disruptions, with the crude price rallying to a seven-year high this week to almost $90 a barrel.

Can Russia adapt or minimize the effects of sanctions?

In the past seven years, the Russian government and central bank have reduced the country's exposure to the US dollar, shifted assets out of the US, and sold a smaller share of its debt to foreigners. Russia has been reshaping its international holdings in favor of other currencies and gold. International rating agencies previously said that Russia's financial reserves will allow the country to cope with the negative effects of sanctions. According to the Russian central bank, the country's foreign reserves now amount to a record $630 billion, with a $30 billion increase last year alone.

How will the global economy react if Russia is severely sanctioned?

Russia accounts for about 1.7% of the world's gross domestic product; however, it's a major trading partner for many countries, particularly in the EU. Cutting off Russia would hurt European economies which have significant trade with Moscow. The current sanctions have already proved inefficient, with European businesses suffering huge losses. After years of being Russia's biggest trade partner, last year, the EU fell to number two after China. Around a third of Russia's imports still come from Europe and roughly the same amount of exports, mostly energy, go to the EU. Total trade in goods between Russia and the EU totaled €174.3 billion in 2020.

Does it mean I should short my Russian stocks?

Russian stocks have been crashing as fears of a possible military escalation over Ukraine continue to hit the ruble and share prices. The Russian stock market plunged 8% in dollar terms on Tuesday in the sharpest one-day fall for the market since March 2020. The dollar-denominated RTS index of the leading Russian shares has tumbled 15% over the last week, wiping away more than $105 billion from the value of its constituents. However, analysts say Russia is a "screaming buy," as they see the potential for bargains in the market, pointing out that the price crashes have always been followed by gains.

For more stories on economy & finance visit RT's business section


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