The boomerang effect of the sanctions against Russia dictates their severity and scope.
In reaction to the Russian offensive in Ukraine, European stock markets had one of the worst sessions since March 2020 on Thursday, losing up to 5% at the worst of the day. At the close, Frankfurt lost 4%, Paris 3.8%, Milan 4.2%, London 3.9%. The Warsaw Stock Exchange, the main financial center of Central and Eastern Europe, fell by more than 10%, and that of Moscow collapsed by more than 35%, which brings the fall of the RTS index since the beginning of January at 53%.
Wall Street was also jostled at the start of the session, the flagship index, the Dow Jones, falling by 1.6%, and the broader S&P 500 index, by 0.7%. Bargain hunters then activated to push benchmarks higher into the close as the prospect of a less assertive Central Bank offset news of the invasion, reads a text from the l ‘France Media Agency.
But beyond the human consequences, fears that reprisals for the Russian offensive will fuel a long-term inflationary outbreak dominated the session with, for uncertainties, the territorial ambitions of Vladimir Putin. The price of a barrel of oil exceeded US$100, both for the American barrel and that of the North Sea, a first since 2014. Aluminum and wheat were also breaking records.
For the time being, the sanctions mainly target Russian finance, banks and the economy. They target a drying up of funding sources and apply cuts to exports of technological products in order to hinder technological and military development, at a time when Russia seeks to diversify its economy to reduce its dependence on hydrocarbons. And if the Russian president seems insensitive to the suffering of a population struggling with inflation of more than 8% and a decline in purchasing power which varies between 2 and 5% per year since the annexation of Crimea in 2014 , the sanctions seek to make life difficult for the rich Russian oligarchs, close to Vladimir Putin.
Going further, in particular blocking access to Russian financial institutions from the SWIFT interbank network, still remains an option for the American president, who is however encountering hesitation from the Europeans. Without SWIFT, it would be more difficult for Russia to collect foreign currency. It could also result in a major flight of capital. But it could be difficult, if not impossible, for Moscow to honor its commitments to all European countries, which would shake up the European financial system, we have already written.
For its part, the scope of the sanctions should be considered according to the perspective in which Russia has prepared for them. The Russian central bank has accumulated tons of gold and stored the equivalent of 620 billion dollars in foreign exchange reserves, which is added to the 190 billion of the sovereign fund, according to figures published in The world. A kitty accounting for almost half of its GDP, enough to allow it to cushion the shock of the sanctions for a certain time. Not to mention the country’s low debt, whose public debt accounts for 16% of GDP.
Risk of stagflation
Another factor, Russia is not without betting on the fact that the stronger the sanctions, the greater the collateral effect could be on European partners, for countries dependent on the import of agricultural products, even for Mondial economy.
Back to the numbers. Russia is the source of some 40% of the European Union’s gas supply. On a global scale, it is the leading exporter of natural gas (17.1% of world production) and the second exporter of crude oil (12.1%). Russia and Ukraine are also important agricultural producers: their combined exports of wheat, barley and maize represent 21% of the world total.
In addition, Russia and Belarus account for around 20% of total fertilizer exports, thus a vital part of global food production. At the same time, Russia is one of the world’s largest producers of critical metals.
In short, any disruption in the supply of these products will be global in scope. First on supply chains, then on the pressure that prices are under in an already overheated inflationary environment, which will increase. The risk of stagflation is suddenly increased.
On the politico-economic scene, this will necessarily result in a reinforced intimacy between the Sino-Russian couple, who have democracy in general and the United States in particular as common enemies. But at the risk of a position of increased dependence on an economy ten times bigger, according to the size of the GDP. The French media L’Express recalled that while China has become Russia’s leading trading partner, while it now accounts for a quarter of its imports, Russia was only the 14e partner of China in 2020, far behind the United States and Japan. And like the model prevailing with Europe, when Russia mainly ships hydrocarbons, China sells it equipment and machinery with high added value.