Even a fall of 30% from the peak on the Moscow Stock Exchange did not prevent Russian President Vladimir Putin from recognizing the pro-Russian enclaves in eastern Ukraine and thus leading to a geopolitical security escalation. Energy and commodity prices have risen sharply as a result, with the price of a barrel of oil already touching the $ 100 level earlier this week. The continuation of the crisis will have an impact on global inflation which has meanwhile raised its head as a result of supply disruptions created due to the corona.
For now, the sanctions imposed by the West in response to Putin’s move are at a relatively moderate level, and it appears that these will increase as the situation escalates. What backing does Russia have in the event of a worsening of sanctions? According to the IMF, Russia has foreign exchange reserves in the order of $ 640 billion, which is about 10% of GDP. By comparison, the foreign exchange reserves of the Israeli economy are about 50% of GDP. Russia has reserves of natural resources but the question arises as to the nature of these in the event that Western countries distance themselves from sanctions and how Russia will respond.
“Russia will pay a high price and this is reflected in the financial markets. There are many ways to hurt the Russian economy but it has implications for the whole world in the way of commodity prices. It probably will not do good to GDP and global trade volume,” Gil Befman With Globes. “On the whole, Russia’s economy is expected to suffer, while entering a recession, a significant devaluation of the Russian ruble, an acceleration in inflation, which is already high in Russia, and raising the interest rate by the Central Bank of Russia to double digits. Russia’s economy, the West will have to suffer economic damage as a result, so there is a “balance of terror” in the economic field as well.
The impact of sanctions on banks may be large
The most powerful bargaining chip is Russia’s disconnection from the global payment system (SWIFT). So far it has been used selectively against only two banks, for now. These are the VBA Bank, which is used to raise capital for the government, and the PSB Bank, which is used to finance initiatives in the security field.
Befman says the U.S. has already issued a restraining order on investment, trade and finance by U.S. entities but it is mostly a symbolic side for now. Economic activities that are considered close to President Putin, in an effort to influence the direction of Russian policy.These were among the sanctions imposed after the annexation of the Crimean peninsula in 2014. In 2018, when sanctions were targeted at specific companies, mainly Rusal, an aluminum producer, this hurt Russia’s financial markets. And raised world aluminum prices.However, we recall that in the case of the annexation of the Crimea, there were sanctions, but we forgot about it.The Russians are still sitting there despite the sanctions when Putin established facts on the ground.
“Among the measures that could significantly hurt Russia’s economy are sanctions on companies in Russia’s energy sector and especially damage to Russia’s financial system by disconnecting from the international SWIFT system. Although Russia has developed an independent system for interbank transfers (MIR), it has yet to catch up. Significant market share The countries that implemented the MIR payment system include: the United Arab Emirates, Uzbekistan, Bulgaria, Turkey and Thailand. And even while expanding restrictions on all financial activity between the U.S. private sector and any Russian entity. Such measures could hurt Russian banks’ ability to convert rubles to dollars and also hurt its foreign trade. Machines and equipment.
Europe’s ability to completely avoid Russian gas does not exist
Befman mentions that 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, which will make it difficult to impose full sanctions on the Russian energy market, however, the most likely sanction is likely to be by way of real restrictions on the operation of the new NORD-STREAM2 submarine gas pipeline And further action against Russian banks.The move of a sanction 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. From Russia to Germany. “