| Dr. Gil Michael Befman, Chief Economist, Bank Leumi
The situation in Eastern Europe, with an emphasis on Russia-Ukraine-Belarus, is very fragile. From a macroeconomic point of view, the main question now is how far Western countries will go in sanctions and how Russia will react.
The U.S. has issued a restraining order on investment, trade and finance by U.S. entities, and this is mostly a token side for now. The U.S., EU and UK have said they will announce further sanctions soon. These measures are expected to include specific restrictions on economic activities considered close to Russian President Vladimir Putin in an effort to influence the direction of Russian policy. These were among the sanctions measures imposed after the annexation of the Crimean peninsula in 2014. In 2018, when the sanctions were targeted at specific companies, mainly Rusal, an aluminum producer, this hit Russia’s financial markets and raised world aluminum prices.
The US Treasury Department has already imposed sanctions on two Russian banks linked to the government and their subsidiaries: VBA – a bank used to raise capital for the administration (a state-owned Russian investment corporation); PSB – Bank used by Russia’s defense sector. This bank is controlled by two Russian oligarchic brothers, and it assists the Russian government in providing entrepreneurial loans to the defense industry and providing financial support to the defense industry.
The VBA was included in sanctions imposed by the United States on Russia in 2014, following the Russian invasion of the Crimea, and the bank managed to last until 2017, thanks to government assistance it received, but despite this, about 40% of the bank’s debts in 2017 were in jeopardy. For insolvency.
It is likely that the Russian government will once again provide support to the bank, should there be any concern about its stability – which means that the impact of sanctions on the Russian economy will not be immediate.
Among the measures that could significantly hurt Russia’s economy are sanctions on companies in Russia’s energy sector, and in particular damage to Russia’s financial system, by being cut off from the international SWIFT system.
Although Russia has developed an independent interbank transfer system (MIR), it has not yet managed to capture significant market share. The countries that have implemented the MIR payment system include the United Arab Emirates, Uzbekistan, Bulgaria, Turkey and Thailand.
Therefore, the impact of sanctions on specific banks may be large, prohibiting US banks from operating with / for Russian banks, and even extending the restrictions to any financial activity between the US private sector and any Russian entity. Such measures could hurt the ability of Russian banks to convert rubles into dollars and also hurt its foreign trade. Impact is expected on Russian areas of activity that are particularly dependent on Western goods and services, such as software, machinery and equipment.
No extensive sanctions have yet been imposed on the Russian energy sector, with the exception of two companies of oil tankers (ships), which are subsidiaries of PSB. Europe’s ability to “avoid” Russian energy consumption is impossible – making it difficult to impose full sanctions on the Russian energy market.
However, the most likely sanction is expected to be by way of real restrictions on the operation of the new NORD-STREAM2 submarine gas pipeline and further measures against Russian banks.
The sanction move against Nord Stream 2 is intended to convey a message of intent to prevent Russia’s attempt to reduce its dependence on Ukraine for gas supplies to Europe. Europe appears to be more aggressive than the US, and Germany has announced the cancellation of the Nord Stream 2 pipeline approval procedure from Russia to Germany.
There may also be a ban on the purchase of certain technologies from Russia and restrictions on transactions in Russian government debt, and in particular Russian government bonds, where the volume of foreign holdings is relatively small.
Overall, the Russian economy is expected to suffer, while entering a recession, a significant devaluation of the Russian, an acceleration in, which is already high in Russia, and the raising of interest rates by the Central Bank of Russia to double-digit levels. However, the more severe the West imposes sanctions on Russia’s economy, the more it will suffer as a result of the West’s economic damage – so that there is a “balance of terror” in the economic sphere as well.
The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the Bank. They should not be construed as a recommendation or substitute for the reader’s independent discretion, or an offer or invitation to receive offers, or advice to purchase and / or make any investments and / or actions or transactions. Errors may occur in the information and changes may occur. The Bank and / or its subsidiaries and / or companies related to it and / or the controlling shareholders and / or stakeholders in which of them may from time to time have an interest in the information presented in the review, including financial assets presented in it.