So far, the most visible economic consequences of the war unleashed by Putin against Ukraine for Russians have been the collapse of the ruble (the dollar costs more than 100 rubles, the euro more than 110 rubles), queues in front of ATMs and difficulties in paying with cards.
Funds of the National Welfare Fund will be used to support the prices of Russian shares
Another clear indicator of a sharp deterioration in the financial situation in Russia is the unprecedented doubling of the base rate of the Central Bank of the Russian Federation to 20% on the morning of February 28. This was followed by a rise in the price of loans in Russian banks, including consumer and mortgage loans (although deposit rates increased at the same time). This could ruin the plans of those who were going to make a large purchase with the help of a loan, but it will especially hit all those who have to refinance existing loans in the foreseeable future.
The Central Bank of the Russian Federation will now have to save what can still be saved in the Russian financial market
Another indicator of an emergency is the cancellation of share trading on the Moscow Exchange on February 28 and March 1, which, however, can be extended until the end of the week. This is done in the hope that by the time trading resumes, the mood in the stock market will improve, or at least it will be possible to buy time to prepare for a possible panic dumping of securities by Russia’s leading companies.
The extent of the possible sale is evidenced by the fact that the government of the Russian Federation, according to Interfax, on March 1 decided to allocate 1 trillion rubles from the National Welfare Fund (NWF) in 2022 to buy shares of Russian companies (at the beginning of February, the fund had 8.769 trillion rubles). Such gigantic funds are booked despite the fact that the Central Bank of the Russian Federation has banned foreigners from selling Russian securities.
“The ruble has ceased to be a freely convertible currency”
These facts alone are enough to understand that already on the fifth day of the war, immediately after the weekend, the Russian economy began to suffer heavy losses. Their main reason is international financial and economic sanctions, which have never been applied on such a scale against one of the G20 countries. These sanctions are nothing compared to those imposed against Russia in 2014 in response to the annexation of Crimea and the war unleashed by it in the Donbass.
The usual currency exchange for Russians may be limited or even discontinued
“After such extensive sanctions, the ruble is no longer a freely convertible currency,” says Friedrich Heinemann of the Center for European Economic Research (ZEW) in Mannheim. In his opinion, from a monetary point of view, Russia is thrown back to the early 1990s: “After the Russian attack on Ukraine, assets in Russia and the ruble instantly acquired the status of garbage in the financial markets.”
The attention of many media is focused on the disconnection of approximately 70% of the Russian banking sector from the SWIFT international money transfer information system, without which export-import operations are practically not carried out. However, experts point out that an even more serious measure could be such an extremely unusual step as freezing the foreign assets of the central bank of such a large country as Russia.
Blocking of foreign exchange reserves of the Central Bank of the Russian Federation
“Apparently, two-thirds of the central bank’s foreign exchange reserves are now blocked,” says sanctions expert Jonathan Hackenbroich of the European Council on Foreign Relations (ECFR) think tank in Berlin. We are talking about those gold and foreign exchange reserves of the Central Bank of the Russian Federation, which by the beginning of the war had reached a record volume of 643 billion US dollars.
On behalf of Putin, the Central Bank of the Russian Federation has accumulated large reserves of gold, but at the moment we need cash
Ulrich Leuchtmann, foreign exchange analyst at Commerzbank in Berlin, explains: “Because of the West’s decision to freeze the foreign exchange reserves of the Russian Central Bank, some of the assets that help determine the value of the ruble are called into question.” In addition, the practical possibilities of the Central Bank of the Russian Federation to carry out foreign exchange interventions to stabilize the exchange rate of the national currency have sharply narrowed.
Thus, in a matter of days, Russia faced an acute shortage of foreign currency. This is convincingly evidenced by the decree signed by Russian President Vladimir Putin on February 28, which aims to withdraw as much foreign currency from Russian business as possible and at the same time prohibit foreign investors from withdrawing money earned on the Russian market abroad.
Russia Introduces Tough Capital Controls
“About 15 years ago, Russia had a requirement to convert part of foreign exchange earnings into rubles. Now this obligation is being introduced again. From February 28, 2022, Russian enterprises will have to convert 80% of foreign exchange earnings into rubles,” the Russian branch of the German consulting and audit firm explains to its clients. Rödl & Partner and clarifies: “The forced sale covers 80% of all foreign exchange earnings received by Russian enterprises from 01/01/2022”. This measure was introduced, therefore, retroactively.
Volkswagen is one of the largest European investors in Russia, the concern has a plant in Kaluga
As for the foreign investors working on the Russian market, Rödl & Partner continues, “it will be more difficult for them to withdraw the remaining cash reserves in Russia abroad.” In addition, experts warn, “reports are already appearing that the transfer of profits abroad will be prohibited.”
Such stringent capital controls can keep the currency in Russia in the short term, but if they last longer, they will deprive the country of fresh direct (in production) and portfolio (in securities) foreign investment. After all, what foreign company would want to invest in a country that prohibits the free disposal of profits.
The Russian economy is losing imports
These are, in brief, the events of the first two days on the Russian financial market after the international community imposed unprecedented sanctions against Russia for its attack on Ukraine.
“So far, we are seeing the first shock waves hit the financial markets. The Russian economy will feel the severe consequences of all this when it loses important supplies,” says Professor Stefan Koots, vice president of the Institute for World Economics (IfW) in Kiel. Now, according to him, Russia’s important ties within the framework of the international division of labor are being cut off, and this will soon hit its economy very painfully.
Due to the devaluation of the ruble, the economy and consumers in Russia will largely lose imports
These ties will be severed, primarily due to the sharp devaluation of the ruble (by at least 30% since the start of the war), as a result of which countless Russian companies will simply no longer be able to import foreign raw materials, components or industrial equipment. Not to mention consumer goods, food and medicine.
At the same time, international sanctions against Russian companies and certain types of business, as well as the voluntary refusal of firms from various countries to do business in the country that unleashed a war in Europe, will have an effect.
So in the very near future (we are talking about weeks or even days), Russians will face further consequences of what happened: production downtime or even a complete shutdown due to a lack of components, delays or reductions in wages, business ruin, layoffs, interruptions in the supply of the population . And, of course, a powerful surge in inflation.
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