Saturday Digest: Russian Economy Decelerates as Sanctions Bite
Saturday Digest: Russian Economy Decelerates as Sanctions Bite
Russia's economy is under enormous duress from the barrage of economic sanctions, as Gazprom, Lukoil and Sberbank are now penny stocks
Russia will feel the affects of Western sanctions
In the past week, Western countries have put in place a variety of penalties against Moscow. Russia's Central Bank responded by raising interest rates to 20%. Stock exchanges in London and New York to suspend trading in several exchange-traded funds that track Russian shares.
It's no surprise to see the United States ($20.89Trn) and China (14.2Trn) leading the 'World Economic League Table'. Languishing behind in 11th is the Russian economy with a nominal GDP of $1.48 trillion. However, Russia’s economy will contract in the wake of Vladimir Putin’s decision to invade Ukraine.
Sberbank, which had assets of over $500 billion at the end of 2021, traded for 3 cents a share this week. Shares in Russian steelmaker Evraz fell by 19%, wiping 77% off its value. Chelsea FC owner billionaire, Roman Abramovich holds a 29% stake in the company.
In 2019, Russia's exports peaked at $407b, according Observatory for Economic Complexity. Crude Petrolium was Russia's top export during that period, with 16.5% and 27.3% heading to the Netherlands and China, respectively.
Leaders in Britain and the EU are under pressure to find alternatives to Russian gas and oil. But some analysts say that's a pipe dream.
The cold, hard fact is that there is no substitute for Russian gas. Our current level of imports suffices to meet our needs, Ian Bruce, a spokesperson for the British Energy Ministry.
Germany opened the floodgates when it abandoned its nuclear energy programme in the wake of the Fukushima disaster, relying instead on Russian supplies of natural gas. However, the German government made two u-turns. First, it reversed a decision not to supply Ukraine with lethal aid. Later, under mounting pressure to impose economic sanctions on Russia, Germany turned off the taps to the Nord Stream 2 gas pipeline.
Construction costs for the pipeline topped $9.5Bn. UK's The Mail reports that in Germany, the supervisory authority BaFin suspended the licence for Nord Stream 2 AG, a joint venture between Russia's Gazprom and four Western companies. The suspension is a blow to the Russian giant's hopes of pushing through the pipeline with energy partners.
Gazprom suffered a blow when German soccer team, Schalke 04 and UEFA severed ties with the oil giant. Gazprom’s deal with the UEFA Champions League was worth £34m per season. St Petersburg will not host this season's Champions League Final. Paris is the new venue for football's most lucrative European Club fixture.
Gazprom isn't the only Russian giant to find itself being abandoned by the West. Manchester United announced they were distancing themselves from the Russian carrier, Aeroflot. Formula One's governing body, the FIA announced they were removing the Russian Grand Prix indefinitely. On the last day of F1 testing in Barcelona, Formula 1 team Haas dropped their Russian themed livery, displaying an all-white car.
China could help the Russian economy recover from recent sanctions through imports, but don't expect Chinese banks to cash any cheques. Beijing has not condemned the Kremlin's decision to invade Ukraine, and there are no indications that China will impose sanctions on Russia.
Chinese banks are watching the West's sanctions, and there is little appetite to hand out an olive branch to Russia's Central Bank. One inhibitor to Chinese lending is a 2017 law that allows the U.S. to penalise foreign entities that trade with sanctioned companies, countries and individuals. Britain has imposed sanctions on 10s of Russian oligarchs, finally putting closure on Londongrad. The City of London is no longer a safe haven for Putin’s allies and their dirty money. President Joe Bide has threatened to follow the lead of the UK government, but actions speak louder than words.
Chinese financial institutions are taking these sanctions seriously and being very careful about understanding what the risks are. Due to the broad Western actions, there’s now less room for Chinese companies and financial institutions to be doing business with Russian counterparts. - Chen Zhu, a Hong Kong-based partner at Morrison & Foerster LLP, via Wall Street Times
The Rouble has taken a hammering on the global markets. On February 9th, 1$ was worth 74.5₽. The Rouble fell to 121.79₽ when trading closed at the New York stock exchange of Friday.
Markets have grown risk averse in the wake of war. The MOEX has not traded in a week, and several Western behemoths, including IKEA and Apple announced their decision to withdraw from the Russian economy. Coca Cola came under pressure on Social Media yesterday to follow suit.
Russia's fiscal policymakers have taken a haymaker, but for now they remain standing. The invasion of Ukraine has backfired on the Rouble and Russian stocks. VTB, Gazprom, Lukoil and Sberbank and have seen their share prices reduced to penny stocks as oligarchs look for ways to leave Londongrad through the back door.
Vladimir Putin was supposed to be the man to give ordinary Russians hope. Instead, his kleptocracy has swelled the bank balances of the few, and Western sanctions froze Russia's $630bn of foreign-exchange reserves. Putin's foreign policy resembles the dark ages of the Cold War, when Nikita Khrushchev and John F. Kennedy squared off during the Cuban Missile crisis. If Putin reels for a return to the Soviet Union he will have to do it with a bleak balance sheet.