The Russians discovered on Monday morning the 28th the cost of the invasion of Ukraine. As soon as the markets opened, the ruble fell 30% against the dollar. The Russian central bank had to intervene urgently by increasing its key rate by 10 points to bring them to 20%. This intervention allowed the ruble to recover at midday and probably prevent the Russians from rushing to withdraw their deposits from the banks. But a certain concern was perceptible among savers: “Inflation, food shortages, problems with air travel… Our generation has been through it all before. It’s the return of the USSR. It will be especially hard for young people. reacted yesterday this Muscovite of about fifty years.
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In addition, to avoid a crash, the Moscow Stock Exchange remained closed on Monday. On Western markets, Russian assets were sold off, such as Sberbank, the country’s main commercial bank, which plunged 74% at the opening of trading in London. In question, «bankruptcy or probable bankruptcy» of its European subsidiary established in Austria according to the European Central Bank (ECB). A bankruptcy resulting from «significant deposit outflows due to reputational impact of geopolitical tensions” depositors.
Russia, “economic pariah”
Deprived of cash to meet its obligations, this subsidiary is therefore in great difficulty. This is the effect sought by the sanctions. They target banks and the financial sector. They make Russia a “economic pariah”, in the words of an American official. They cut most of Russia’s ties with rich countries: European Union, United States, United Kingdom, Canada and Japan. Even Switzerland, usually neutral, will apply the sanctions.
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These measures provide for the tracking of the assets of a number of oligarchs, an embargo on the export of technological products, the banning of Russian planes from flying, the disconnection of 70% of Russian banks from Swift messaging, which allows ensure transactions between banks. “Russia developed its own alternative messaging service in 2014, but only 23 banks outside Russia are connected to it,” notes Éric Dor, director of economic studies at Iéseg.
But above all, the sanctions provide for a freezing of the assets of the Russian central bank held in Western banks. It is a question of attacking the reserves of Russia, the “war chest” of Vladimir Putin, planned precisely to cushion the effect of possible sanctions. These reserves amount to 560 billion euros. About half are in custody in developed countries, and should therefore end up in escrow.
The return of the instability of the 1990s
With these measures, the allies want to weaken the banking system and the currency, or even cause a crisis. This would plunge Russia back into the economic instability of the 1990s. Precisely the instability that the master of the Kremlin boasts of having overcome, offering the Russians the “stability”. This is to show that the choice to invade Ukraine is to plunge the country back into chaos.
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The Kremlin spokesman acknowledged that these sanctions are « lourdes » and “problematic”but he assured that Russia has “the capacities necessary to compensate for the damage”. He stated: “The president continues to work in the Kremlin today on economic issues. »
All of these sanctions should have a progressive effect. They force the central bank to sell currencies to support the ruble. And they will put a brake on imports and exports. In 2014, already, during the annexation of Crimea, the West had threatened to disconnect the Swift system. The Russian finance minister then estimated that the measure would cost the country five points of GDP.
The risk of energy upside
To get out of it, Russia can still bet on the sale of hydrocarbons, for the moment spared by the sanctions. “Even before the outbreak of the invasion of Ukraine, due to Covid and the acceleration in demand, gas and oil were at high levels, analyzes John Plassard, deputy director of the Mirabaud group. As a result, revenues related to hydrocarbons for Russia have never been so important. The sanctions adopted are historic in their scope, but they still have this cushion. »
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Russians, however, are expected to see prices rise, in a country where inflation was already high, to 6.4% in 2021. “In the event of hyperinflation, with a central bank that no longer controls the fall of the rouble, the discontent of the population could move the lines”, pursuit John Plassard.
These sanctions will also have an effect on developed economies. They could contribute to increasing inflation here as well. “There could be a runaway in oil and gas prices,” explains Alexandre Hezez, head of strategy at Banque Richelieu. Central banks will certainly be on the move to cushion the blow in return: “Everything is done to bring Russia to its knees economically without affecting our economies too much: we expect an intervention similar to what was done in March 2020, explains Alexandre Hezez. The ECB will have to continue to support the economy. »