The ruble has already staggered, experts say.
Why against the backdrop of high energy prices in the Russian Federation the ruble sags, which means for the economy of the Russian Federation the gas pipeline & # 171; Nord Stream-2 & # 187; and how new US and EU sanctions may affect Russia Against the background of the aggravation of military rhetoric in Ukraine, the national currency devalued to 29 USDUAH, although by the beginning of February the rate had rolled back to 28.7 USDUAH. Foreign investors began to massively sell their portfolios of Ukrainian domestic government bonds (OVGZ) and buy dollars with the proceeds.
However, the Russian ruble also staggered. If at the end of 2021 its official exchange rate against the dollar was 74.29 USDRUB, then by January 27, 2022, the ruble dipped to 78.95 USDRUB (-6%). However, by the end of the month, the ruble strengthened somewhat to 77.82 USDRUB. Meanwhile, according to the American business publication Forbes, which monitors the wealth of the world's richest people in real time, the combined wealth of 104 Russian billionaires has decreased by $27.9 billion from December 20, 2021 to January 24, 2022.
The Russian mass media pay little attention to such economic processes and continue to pump up the audience with aggressive rhetoric about the threat to the Russian Federation from NATO, the supply of foreign weapons to Ukraine and the need for «Minsk agreements». We decided to find out what is really happening with the economy of the aggressive neighbor.
Ruble unrest: what is happening with the Russian national currency
The aggressive rhetoric of the Russian authorities hit the currency and stock market of the Russian Federation like a boomerang. As Andrey Shevchishin, head of the analytics department at the Forex Club Group of Companies, explains, Russian assets were under pressure from non-residents who actively exited due to the risks of the outbreak of hostilities and, accordingly, the introduction of large-scale economic sanctions against Russia by the West.
«The devaluation of the ruble is a natural consequence of the aggressive policy of the Kremlin and the tension in relations between the Russian Federation and the civilized world, which is assessed as the risk of a large-scale military conflict in Eastern Europe, continues Vitaly Lomakovich, Advisor to the Minister of Finance and founder of the Growford Institute. — Accordingly, investors make decisions that affect the exchange rate, the borrowing market and the stock exchange.
As an example, the expert cites the recent recommendation of the US Embassy in Kiev regarding the evacuation of American diplomats from Ukraine, due to which the dollar rose by 1.75% and exceeded 80 USDRUB, and the euro for the first time in six months rose above 90 EURRUB (+ 1.7%) . As an analogy, the expert recalls that in 2014, when Russia launched a war against Ukraine, according to Bloomberg, the Russian stock market lost about $28 billion, which led to a collapse in the foreign exchange market.
Another factor of influence, according to Shevchyshyn, there was a local outflow of capital from emerging markets against the backdrop of curtailing the US Federal Reserve's economic stimulus measures and the expected tightening of monetary policy. However, this trend is observed in all markets.
However, according to Natalia Shapoval, head of the KSE Institute, vice-president for economic and political research at KSE, the dynamics of the ruble exchange rate does not look critical yet, given that Russia has accumulated significant reserves in previous years. At the same time, ordinary Russians will feel the devaluation, for whom imported goods will cost more and more.
Already in December 2021, the inflation rate in the Russian Federation amounted to about 8.39%, which was almost a record since 2016 of the year. In response, the Russian Central Bank raised its discount rate to 8.5% per annum.
«Inflation has accelerated around the world due to rising prices in global commodity markets, disruptions in supply chains due to the coronavirus pandemic, and a sharp increase in the money supply as a result of massive stimulus measures from central banks and governments. But the main contribution to inflation in the Russian Federation is made by the rise in food prices,” explains Vitaly Lomakovich. According to the interlocutor, the acceleration of inflation in the Russian Federation is also affected by negative expectations due to a possible aggravation of the conflict with Ukraine.
«If the factor of geopolitical tension is removed, then inflation in the Russian Federation may decrease, but the first half of the year will maintain high annual rates», Andrey Shevchishin predicts.
Small growth: how Russia's GDP is changing and what is on it affects
If we take into account not only the current winter, but also a longer period, we can note a clear slowdown in Russia's GDP growth. As Natalia Shapoval notes, during the three «dokovid» years (2017-2019), the average growth rate of the Russian economy was 2.3%, which indicates more of a movement by inertia, rather than a real increase in productivity and competitiveness.
In 2021, supposedly, there has been a revival. Over the three quarters of 2021, the Russian economy grew by 4.6%, and according to preliminary estimates of the Russian Ministry of Economic Development, the annual figure should be 4.4-4.5%. However, forecasts for the future are much more modest. Vitaly Lomakovich draws attention to the fact that the International Monetary Fund (IMF) once again lowered its estimate of the growth of the Russian economy in 2022 to 2.8%, while in April 2021 the fund estimated this figure at 3.8%.
«The main problem of the Russian economy is that it never became a full-fledged market economy. Focusing on the export of hydrocarbons and other raw materials, it exists in the conditions of a militarized, command-administrative machine, which does not contribute to the development of innovative industries and technologies», Lomakovich believes.
The expert notes that Russia, due to participation in international conflicts, is constantly exposed to the risk of sanctions, devaluation of the national currency, falling quotations of government securities and the stock market. This is what leads to the flight of investment and technology. A recent example is the recent refusal of the Italian group UniCredit to buy the Russian bank «Opening» due to the situation around Ukraine and the threat of sanctions. The exit of non-residents from the securities of the Russian Federation is also very noticeable. According to the Bank of Russia, foreign investors reduced their investments in bonds and Eurobonds of the Russian Federation by $3.2 billion in 2021 against an inflow of funds from non-residents by $3.9 billion in 2020. Moreover, in annual terms, for the fourth quarter of 2021, the net outflow of funds from non-residents amounted to $4.3 billion.
«The flow of investment to Russia has been blocked due to several packages of economic sanctions imposed since 2014 and the protectionist policy of the Russian Federation, which spends significant resources on maintaining inefficient and corrupt sectors of the economy, continues Agia Zagrebelskaya, founder of «Antitrust League« 187;. “And further armed aggression by Russia against Ukraine will block even those remaining Western investments that yesterday were considered almost a resolved issue».
In conclusion, Zagrebelskaya comes to the conclusion that it is the Putin regime that is the main problem of the Russian economy. However, he still has a «margin of safety». Indeed, since 2014, Russia has accumulated a «financial cushion» in the form of $640 billion in international reserves and the National Wealth Fund, which is equivalent to 12% of GDP.
«Under an authoritarian-kleptocratic regime, the accumulation of this «cushion» occurred through the sewerage of incomes in inefficient and corruption-ridden state-owned companies, a decrease in the standard of living of the population and minimization of investments in development», — Zagrebelskaya clarifies.
The gas lever: how the gas pipe helps the economy of the Russian Federation
«The Russian economy is not diversified and is very dependent on fuel, continues Natalia Shapoval. — For the three quarters of 2021, 12.9% of gross value added was generated by the mining industry. And in 2020, the oil and gas sector created 15.3% of GDP. The share of oil and gas in exports is more than 40%. Therefore, the growth rate of the Russian economy, the exchange rate and other factors affecting the standard of living of Russians are determined by world prices for gas and oil».
That is, as Yuri Korolchuk, co-founder of the Energy Strategies Fund, notes, if the price of oil rises by 50% to $90 and stays at this level for a year, then Russian budget revenues will approximately increase by 25-30% compared to the previous annual period. Then the budget of the Russian Federation will receive funds for new expenses — for the social sphere, education and the army. In this context, according to Korolchuk, the devaluation of the ruble looks even beneficial for Russia. After all, in ruble terms, oil will generate more revenue, which will further inflate budget spending.
There are no prerequisites for reversing the current trend of high energy prices.
«Brent oil is expected to reach $100 a barrel or more. Gas prices will correct after the heating season, but revenues (from the sale of Russian gas, — ed.) will remain high,» Andrey Shevchishin predicts. Recall that in the autumn of 2021, on European stock exchanges, gas prices reached an all-time high of about $2,000 per thousand cubic meters. In January 2022, gas on the exchanges costs about $1,000 per thousand cubic meters, which is also considered an abnormally high price.
Throughout this period, Gazprom continued to sell gas under previously concluded contracts, at prices significantly lower than the exchange ones. Shevchyshyn does not rule out that rising oil prices and high gas prices on the world market may become the subject of negotiations to revise contracts, the most important part of which will be the launch of the new Russian gas pipeline built around Ukraine «Nord Stream-2».
Inna Zvyagintseva, an analyst at Adamant Capital, adds that the Russian Federation uses gas exports as a serious lever of political influence and, despite record high prices, has already limited gas exports to the EU. It can be expected that Russia will continue to actively use this mechanism of influence.
Against the gas pipeline and the oligarchs: how new Western sanctions will affect the Russian Federation
Following the reports of politicians and diplomats about the impending invasion of Ukraine by Russian troops, there were statements from European and American high-ranking officials about new sanctions for Russia and its citizens. Sanctions still remain one of the effective mechanisms, which leads to regular losses of the Russian economy, which are estimated by some analysts at about $50 billion a year. However, as a result, sanctions measures may also affect the economies of other countries, since Russia often reminds that it is she who supplies oil and gas to European countries, which she will not disdain to manipulate if new sanctions measures are drawn up in the EU and the USA. Nevertheless, new sanctions against the Russian Federation and its citizens are most likely inevitable.
Inna Zvyagintseva recalled the bill by Republican Congressman Jim Banks «On Putin's Responsibility», which provides for a set of very tough sanctions: disconnecting the Russian Federation from the SWIFT international transfer system, a ban on operations with the Russian government debt, sanctions on the gas pipeline « ;Nord Stream 2», personal sanctions against Putin and Kremlin officials.
«The EU countries, it seems, are not ready for such radical actions, continues Zvyagintseva. — For example, Germany calls not to include in the sanctions «Nord Stream-2″ and expresses doubts that the disconnection from SWIFT will be effective, and large American corporations with business in the Russian Federation — Chevron, General Electric — urge Biden to impose sanctions carefully so that companies can fulfill their obligations and not lose assets in Russia».
According to various estimates appearing in the media, the Russian leader's fortune is $70-200 billion, the lion's share of which he keeps outside the Russian Federation. On the whole, the volume of «dirty» Russian money is estimated at $1 trillion.
«However, the imposition of sanctions on Putin will have a symbolic effect and will become a legal confirmation of the statement «Putin is a killer», despite the fact that he has been blackmailing the world for many years, rewriting history, committing genocide, occupying the territories of neighboring states, discredits the «green course» and interferes in American elections,” says Agia Zagrebelskaya. According to the interlocutor, this will finally force the still hesitant leaders of some Western countries to limit official contacts with the Kremlin.
The possible disconnection of Russia from the Swift international money transfer system is also widely discussed. In 2014, when they first started talking about the use of such a measure, experts predicted a reduction in Russia's GDP by 5% per year. However, from that moment on, Russia began to work on its own payment system. Zagrebelskaya also recalls that in early January 2022, Putin's adviser Yuri Ushakov said that Russia and China would intensify the formation of an independent financial infrastructure to service trade operations between the countries.
«Disabling Swift will initially hurt the Russians more than Putin and his entourage, which will allow him to build up anti-Western propaganda. Therefore, such a sanction should be applied simultaneously with the freezing of the assets of Putin and his close circle, having previously identified them», concludes Zagrebelskaya.
However, while the West is still thinking about the expediency of disconnecting the Russian Federation from the money transfer system. Not long ago, Bloomberg reported that the US is not yet seriously considering the idea of sanctions against Russia affecting access to SWIFT or oil and gas exports, but the US and the European Union are working on a package of sanctions that would include restrictions on Moscow's ability to convert currency. In addition, according to Peter Harrell, a member of the White House National Security Council, in the event of a Russian invasion of Ukraine, the US sanctions package focused on measures that would lead to a decrease in Russian industrial potential.
Discussed in the form of sanctions and the suspension of trading in Russian public debt in the secondary market. Zagrebelskaya recalls that the ban on trading in the primary market was already introduced under Biden, which led to a reduction in the share of foreign capital in Russia's sovereign debt from 34% to 21.2%. At the same time, a complete ban will practically block the Russian government's access to world capital markets.
According to the head of NJSC «Naftogaz of Ukraine» Yuri Vitrenko, Russian gas pipeline «Nord Stream-2» generally built so that in the event of an attack on Ukraine, Moscow could freely supply gas to Europe. Experts are sure that now it is important for the EU to make it clear to Russia that the gas pipeline, in which investments are estimated at the level of 10 billion euros, can forever remain without gas.
In the past two weeks, foreign politicians have already made a number of statements about the gas pipeline and its possible fate. For example, the French Foreign Minister Jean-Yves Le Drian announced at the end of January that the project «Gazprom», on which the Russian Federation pins hopes of gas transit to Europe, will not be launched. Le Drian noted that blocking of the gas pipeline «Nord Stream-2» — this is one of the measures that is designed to show Moscow that military aggression against Kiev will entail serious risks for it..
The media also published the words of the leader of the Christian Democratic Union of Germany, Friedrich Merz, who said that in the event of Russia's invasion of Ukraine, the gas pipeline «Nord Stream-2» definitely won't work. The same statement has already been made by US Deputy Secretary of State Victoria Nuland, as well as British Foreign Secretary Liz Truss.