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Analysts think Western sanctions may destroy Russia’s economy

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U.S. Secretary of State Antony Blinken is seen on screen giving a speech in the 49th session at the UN Human Rights Council, Geneva, Switzerland. March 1, 2022.

Salvatore Di Nolfi | Reuters

LONDON — Western nations have responded to Russia’s invasion of UkraineIt is possible to work with the a series of sanctions that are intended to destroy the economy.

G-7, the Group of Seven major economies are imposed unprecedented punitive sanctionsAlong with other Western measures against Russia’s officials and oligarchs, the Central Bank of Russia was also targeted.

Russian banks are now barred from SWIFT, an international payment system that allows for secure communication between countries. This prevents them from communicating with the rest of the world and also makes them less attractive to the international financial system.

Over the weekend, the U.S. announced sanctions that also included the National Wealth Fund of the Russian Federation as well as the Ministry of Finance of the Russian Federation.

The bans effectively prevent western investors from conducting business with central banks and they also freeze overseas assets of the bank, including the huge foreign currency reserves used by the CBR as a buffer to the local asset depreciation.

U.S. President Joe Biden declared Tuesday, in a new crackdown against Moscow, that Russian aircraft would no longer be allowed to fly into the United States. This follows similar actions by Canada and the EU.

Bruno Le Maire (French Finance Minister) stated Tuesday that the purpose of the most recent round of sanctions had been to cause the “collapse of the Russian Economy.”

After Russia invaded Ukraine last week, Russia’s ruble plummeted and fell to a record low of 109.55 per dollar on Wednesday morning. Russian stock markets have seen major sell-offs. Moscow Stock Markets Closed Wednesday for the Third Day in a Row as Authorities Attempt to Stop The Bleeding of Local Asset Prices

Currently, however, the largest lender in the country is SberbankThe company exited European operations, and its London-listed shares fell more than 95% to trade for a penny. Other major companies listed on the London Stock Exchange included RosneftAnd LukoilAlso, it also fell.

Monday’s CBR move more than doubled Russia’s key rate, from 9.5% – 20%. However analysts think that it is crucial for the Russian economy to be stabilized.

Swedish economist and former Atlantic Council senior fellow Anders Åslund tweeted on Wednesday that the western sanctions effectively “took down Russian finances in one day.”

Because there’s no end in sight, the situation could get even worse than it was 1998. All Russia’s capital markets appear to be wiped out & they are unlikely to return with anything less than profound reforms,” he added.

Faced with a serious financial crisis

CBR was able to use its reserves previously to help smooth any fluctuations in Ruble. However, this is not possible anymore. It will have to adjust rates, and take other measures not market-based, to stabilize Ruble,” stated Clemens Grafe (chief Russia economist, Goldman Sachs).

Limiting Ruble volatility is harder without enough reserves. Inflation and rates are already at risk because the Ruble was sold off.

Goldman Sachs’ end-of year forecast for Russian inflation has been raised to 17% from the previous projection of 5.5%. There are risks that the ruble may fall further or that the CBR will be forced to raise rates to preserve stability.

The Wall Street giant has reduced its 2022 GDP forecast (gross domestic products) from a 2 % expansion to a 7 % contraction. Grafe admitted that there is uncertainty around these numbers.

“Financial conditions are similar to those in 2014, when Russia annexed Crimea. Therefore we believe domestic demand will fall by 10%.” [year-on-year]Grafe added that the minimum is slightly higher.

While exports have not been significantly affected by sanctions, they are expected to fall by 5%yoy due to the disruption in exports through Black Sea ports. These ports are crucial for dry bulk exports and the possibility of other sanctions decreasing them.”

This is comparable to the 7.5% drop during 2008/9’s financial crisis, and the 6.8% contraction in Russia’s 1998 financial crisis.

Liam Peach of Capital Economics said Tuesday that Russia’s economic situation will be impacted by the increasing severity of Western sanctions. He also warned of tightening financial and banking conditions, as well as the possibility of a bank crisis.

Capital Economics forecasts a Russian GDP contraction of 5% by 2022. This is compared with its prior forecast of 2.5% growth. Annual inflation will reach 15%.

Peach said that Russia would face the worst possible outcome if it comes to international sanctions. He suggested that restrictions on the flow oil and natural gas could lead to Russia being unable export as much of its goods and losing a third or more of its government revenues.

“Restricting those would also choke off an important source of incomes in dollars for energy companies who have FX bonds and may cause a greater financial crisis to Russia,” he said.

China’s exports determine the depth of recession

Steven Bell of BMO Global asset Management is the chief economist. He said that Russia faces “serious economic crisis.” the role of China becoming ever more importantMoscow because of its need for raw materials, and energy.

Russia has switched to Chinese banking and moved large amounts of its foreign currency reserves into Chinese money. Bell said that China could hold the key to Russia’s ability to maintain the conflict.

There are currently no sanctions against Russian exports. SWIFT exclusions target specific banks in order to permit export payments to be processed. Grafe from Goldman Sachs suggested that it might be different.

Grafe stated that the willingness of G7 members to take on costs is increasing and could eventually lead to Russia export restrictions and higher commodity prices becoming politically possible.

Russia’s inability to borrow foreign currency reserves from abroad is a major problem. Grafe suggests that this can be solved by changing the reference currency of the ruble to the Chinese Yuan, which would replace the U.S. dollars.

He said, “This would allow the CBR to and the Ministry of Finances to follow their fiscal rule which channels excess fiscal savings from higher oil prices to foreign assets.”

But, to create a cross-currency marketplace, Beijing would have to cooperate fully. This is unlikely, according Goldman Sachs, given China’s risk of receiving secondary sanctions in order for Russia to bypass western sanctions.

China’s banking regulator on Wednesday saidThe country is opposed to and won’t join any financial sanctions against Russia. China’s Ministry of Foreign Affairs refused to label the Ukraine attack as an invasion. promoting diplomacy and negotiations.

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