Is Russia's economy ready for sanctions?
Things are escalating little by little as each day passes in the Russia-Ukraine crisis. The West has hit Russia with economic sanctions but how well is the country prepared to handle them?
Russia's economy stands at $1.7 trillion. To put it in context, this makes Russia the 5th biggest European economy and 11th largest in the world. Given its huge landscape, the country has a large number of natural resources. In fact, the country is an energy powerhouse. It is the world's largest exporter of Natural Gas and the second largest when it comes to crude.
The above chart shows the first impact of the sanctions on Russia. However, it's not all that bad. Russia has $630 billion in FX reserves and a foreign currency debt of just 18% of its GDP. While the central bank of Russia can no longer offload its Treasuries, Russia had actually sold off the majority of this US debt held in reserves back in 2018. Source. In fact most of the foreign reserves are held in Gold and Gold has probably returned them more money since 2018.
As far as the local economy is concerned, Unemployment is at 5%, which is OK for a country such as Russia, the country's GDP has been growing in the last few years and there shouldn't be any domestic issues from this fallout in the coming months. Russia also has a current account surplus. Russia's largest trading partners for both its exports and imports are China & European Union. I doubt Russia-China trade will be impacted as a result of the sanctions. In fact, Russia and China have been settling their trade in local currencies since the last year. Source
In the first half of 2020, bilateral trade settlements between China and Russia in the US dollar fell to 46 percent from 90 percent in 2015, while deals settled in the yuan and ruble jumped to 24 percent, a report by Renmin University of China showed last year.
The EU will be forced to cut-off ties with Russia so that trade will be impacted. Russia is the biggest exporter of essential commodities - Wheat, Oil, Natural Gas, Fertilizers, Nickel, and Iron; whereas it imports mostly non-essential items. Among its largest imports and exports, 50% of the trade is with China. Source Along with that, large foreign exchange reserves in Gold mean that Putin is not too concerned about sanctions at the moment.
A lot has changed since the Crimea annexation and Russia is not the same from an economic standpoint, as it was in 2014. They have enough economic cushion to continue with their attack on Ukraine.
The concern for me is the daily escalations little by little. Everyone was expecting the war will not happen but it did. Now Russia has put nuclear deterrent forces on high alert. While we all hope sanity to prevail and this to be seen as a psychological move, escalation means that every side moves a little and then things get out of control. While Russia may be financially ready to fight this war, the world is not ready for anything serious!
hello @karamyog,
Personally I don't think Russia was prepared for this war, at the beginning of the military operations Russia seemed strong and orderly, but now it seems that it can't take control of Ukraine, this situation is something that showed Russian corruption. Incombustible tanks, lack of ammunition and other problems are making it very difficult to take control of Ukraine and are a sign that Russia was not prepared.
On the other hand China will never abandon such a good trading partner as the United States and the European Union, to support Russia as China asked Russia to negotiate with Ukraine.
In my personal opinion, I think Russia expanded its military operation thinking it could take the country in 48 hours, now with the support of the West Ukraine seems to be a little closer to expel the Russians, this will certainly affect Russia's economy and geopolitical relations.
hi @trabajosdelsiglo
Amazing comment.
I was wondering if you have any view on futute of Russia financial system (especially from the perpective or regular people) after interest rates has been hiked to 20%?
I can hardly imagine being able to pay any loans or morgage in similar situation. Especially while knowing, that all imported items will cost so much more since value of Rubel dropped so badly.
Any thoughts you like to sharE?
Cheers, Piotr
From whatever I have read and heard as well, Russia may not have been fully prepared for war. They may have expected Ukraine to fall sooner but that hasn't happened and Russia is dealing with logistical issues. However, most of what we see in the media is pro-West. I am not going to discount Putin and his intellect.
As far as China is concerned, the west needs China more than China needs the West. China, like Russia, has massive land and importantly, natural resources. They are the factory of the world. COVID-19 showed us that, and while the West wants to de-risk this dependence on one country, it will take years before they can de-risk. China on the contrary needs trading partners that have a large population and rising incomes - African countries and South Asian countries. China's suggestion to Russia to have diplomatic talks is a facade in my opinion.
This 48-hour idea is planted by the Western Media. As I said, I am not going to discount Putin over a 48 hour period. The West hasn't even been able to implement proper sanctions. There are financial consequences for the West from the sanctions and of course, the West stands to make money from this conflict by selling arms.
Hi @karamyog
From my perspective I also doubt that trade between Russia and China will be affected as a result of the sanctions, I think this is just a ploy by the world powers to manipulate trade and subjugate countries.
Best regards, be well.
Trade between russia and china can never be impacted, in fact those two want to break US' financial hegemony
Greetings @ karamyog
When Putin dares to do what is happening, it is because he already valued many of the things and I certainly believe that his economy can withstand the sanctions , moreover these will be a boomerang for the US.
Thank you very much for sharing
china and russia already want to end this dollar power that us has, even europe should be doubtful of the US. However, there is just no other solution, except Bitcoin :)
No matter the sanctions, Russia had bitcoin in its sights in anticipation of such sanctions.
maybe
hi @karamyog
I myself am not really convinced if introducing SWIFT sanctions is a way to go.
Sanctions didn't "break" goverment of Iran, Venezuela or neither North Korea. It only made things worse for regular people. And implementing sanctions which target common people should be as illegal as shooting to them and killing them.
After all, Putin will still carry on with his war. But thousands of common Russians will die because of economic consequences.
Biggest irony is, that as far as I'm aware - european countries are still buying oil and gas from Russia. While revenue from that trade is directly the one used by Russian governing party.
Perhaps you may find my own post worth visiting:
SWIFT SANCTIONS - is it a NUCLEAR WEAPON in financial markets?
Cheers, Piotr
I did see your post and I think I responded as well.
I agree the ones who bear the brunt of sanctions are not governments but small importers, exporters, common citizens and I agree that if Putin is doing military warfare and killing civilians instantly, then the west is doing financial warfare and that is akin to killing civilians slowly and painfully.
It's me again
I was wondering if you have any view on futute of Russia financial system (especially from the perpective or regular people) after interest rates has been hiked to 20%?
I can hardly imagine being able to pay any loans or morgage in similar situation. Especially while knowing, that all imported items will cost so much more since value of Rubel dropped so badly.
Any thoughts you like to sharE?
Cheers, Piotr
I think people will face hardships. However, is this the first time that Russian banks have had to deal with sanctions?
Look at the USD RUB chart (above) from 2014. How much did the Ruble depreciate versus the dollar? Is the depreciation still the same?
Base rates do not imply that my loan rates became 20% more expensive. Below is 10 year Russian govt bond
Russian citizens have seen 14% interest rates twice before in the last 20 years. Also, I think in loans one has 2 options - increased installment or increased tenor. At 14% what will people choose to do? Increase the tenor of the loan. 5 years later, when things are back to normal, tenor comes back down.
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