Sanctions Russia’s economy is now being severely tightened: “The outlook is very bleak,” says the economist

Companies and investors are likely to alienate Russia for a very long time because of the war of aggression in Ukraine.

Western states are imposing exceptionally severe sanctions on the Russian economy.

The ruble has collapsed, and few companies want to buy Russian crude oil even at a discount. A large number of foreign companies have suspended or closed down their operations in Russia altogether.

The financial system has been paralyzed, with central bank foreign investment in Europe and the United States seized. Russian companies already have a shortage of important semiconductors, which is why their production is stagnant.

The question therefore arises as to how much economic difficulties Russia can sink into.

“The economy is closing significantly and the outlook is very bleak. There is no long-term return to the economic reality that Russians living in cities have become accustomed to over the past 20 years, ”says a senior adviser to the Bank of Finland specializing in the Russian economy. Laura Solanko.

Citizens the plight is exacerbated in particular by the collapse of the ruble. As a result, goods and services become significantly more expensive. In other words, the people are falling into poverty.

This week, the ruble depreciated by 30 percent against the dollar. Normally, a central bank could alleviate a currency weakening by buying ruble-denominated securities, but due to sanctions, the means are limited.

The central bank has roughly $ 630 billion worth of foreign investment. Of this, more than $ 400 billion has been seized due to sanctions.

The central bank also has more than $ 130 billion worth of gold bullion, but it can be very difficult to sell them, at least in euros or dollars, because of sanctions. It is also unclear to what extent the central bank can sell Chinese securities worth about $ 70 billion.

“The collapse in consumer purchasing power is forcing people to compromise on their standard of living and buy more modest products. Citizens’ problems are starting to get worse if the state or companies can no longer afford to buy medicines abroad due to a shortage of foreign exchange, ”says Nordea’s chief economist. Wind Birch.

“Russia has the ingredients for a widespread financial crisis and a deep investment recession, the recovery of which will take a very long time.”

Consumer prices In addition to households, investors and companies also suffer from higher prices.

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A currency collapse usually results in an escape of deposits that no bank can withstand over time. In addition to the escape of deposits, the plight of the largest banks is exacerbated by the fact that their access to international financial markets has been blocked by sanctions.

Chief Economist Koivu considers it clear that the Russian economy is shrinking sharply due to sanctions, although it is not yet possible to make an accurate estimate. So far, at least to some extent, raw materials are sold from Russia abroad, but plenty of natural gas is sold to Europe.

“The research institute Bruegel estimates that Europe is pumping 600 million euros a day into the Russian economy by buying natural gas. As long as this backbone remains, I do not believe that the economy will actually collapse, because with these foreign exchange earnings, the Russian state will be able to maintain domestic demand and finance companies, ”Koivu says.

Solanko also does not believe in the actual collapse of the economy if the collapse is defined as a short-term collapse in GDP in a short period of time and a large-scale famine.

“Instead, Russia has the ingredients for a widespread financial crisis and a deep investment recession that will take a very long time to recover. The state will be able to keep the Russian ruble economy afloat for quite some time, ”says Solanko.

U.S. banks JP Morgan and Goldman Sachs estimated on Friday that Russia’s GDP, which measures living standards, will collapse seven percent this year, according to news agency Bloomberg.

Different it is then who, regardless of the sanctions, want to deal with Russian companies at all.

Consumers around the world have already begun to boycott Russian goods and services. In addition to sanctions, many companies have voluntarily decided to suspend their operations in Russia.

For example, shipping companies DHL, UPS and Fed Ex have suspended all shipments to Russia except food and medicine. Oil companies BP, Shell and Exxon Mobile are withdrawing from Russia. Boeing and Airbus will stop servicing aircraft and selling spare parts.

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Software companies Google and Facebook, as well as mobile phone maker Apple, are restricting the use of their services. Volkswagen, Toyota and Mercedes-Benz, which manufacture cars, have suspended production in Russia or stopped exporting. Ikea, which sells furniture, has closed all its stores in Russia.

A number of textile and fashion companies have decided to close: Zara, Hermès and LVMH, which owns a number of luxury brands.

“Companies are certainly relying on the fact that doing business in Russia is doing a lot of damage to their reputation.”

Catalog The number of companies away from Russia is very long, it covers numerous industries and is growing all the time. Hundreds of thousands of Russians are likely to lose their jobs.

“Companies are certainly also relying on the fact that doing business in Russia is doing a lot of damage to their reputation. In addition, due to the attack, many companies consider that continuing to do business in Russia is against their values, even if sanctions do not necessarily hinder trade, ”says Solanko.

He considers it unlikely that many of the companies that have withdrawn from Russia will be ready to return there in the next few years.

“For example, large international oil companies are used to operating in politically very difficult and undemocratic states. That is why their departure from Russia is downright startling and says that their size has now been met, ”says Solanko.

“The general assessment is that the current sanctions will not be lifted as long as President Vladimir Putin is in power,” says Tuuli Koivu, Nordea’s chief economist. Described by President Putin on March 3 in Moscow.

Sodat are not eternal. They can still last unpredictably long.

At some point, economic reconstruction in Russia will inevitably begin. It will be very difficult if the Russian state and Russian companies do not have foreign partners to whom they can sell their abundant raw material resources as much as before the attack.

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It will also be very important for economic recovery when Russia succeeds in attracting new investment again.

“The general assessment is that the current sanctions will not be lifted as long as the president Vladimir Putin is in power. Companies and investors will hardly forget this attack for decades. Therefore, the acquisition of significant foreign investment in Russia has been destroyed for decades, ”says Koivu.

If Russia’s policy changes in a completely different direction and the administration changes, Koivu considers it possible that at some point companies and foreign investors will start to be more favorable to Russia.

Solanko also believes that foreign companies and investors will remember Russia’s invasion of Ukraine for a long time.

“Those planning to invest in Russia in the future must be prepared for the fact that the risks of investments may outweigh the returns for political reasons. There are probably countries in Southeast Asia other than China that want to take advantage of the opportunities that are opening up, but they are no way to compensate for the loss that the EU and the United States are causing to the Russian economy, ”Solanko says.

What about then China’s second largest economy? It is already suffering from slowing economic growth, high indebtedness and overheating of the real estate market. There is also a risk of an exacerbation of the coronavirus pandemic.

Koivu thinks China needs to think very carefully about which camp it will settle in. There is a danger of a deterioration in trade relations, especially with the European Union. On the other hand, Western countries are also highly dependent on China.

“Democratic states are always a great threat to the Communist Party that rules China. That is why I do not think that China will stand firmly alongside the West against Russia and President Putin. It is very difficult to even predict the extent to which China wants to show even cautious support for the sanctions imposed on Russia, ”says Koivu.

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