Will the West Destroy Russia's Economy?

Will Russia's Economy Collapse?

The Group of Seven, or G-7, major economies have imposed unprecedented punitive sanctions against the Central Bank of Russia along with widespread measures by the West against the country’s oligarchs and officials.

The Ruble will likely experience hyperinflation and many Russian banks and even its most powerful Tech company, the Google of Russia Yandex may collapse.

The Russian economy has been through highs and lows in those years. But the pressure now on the country is unprecedented as the Kremlin faces challenges both in the near and medium term. As the Moscow Exchange opens again (perhaps this week) we’ll know more about the exodus of capital and how bad the initial shock will be.

Most corporations, media and other foreign companies in Russia have begun to pull out during the first two weeks of the invasion of Ukraine in March, 2022.

The Group of Seven, or G-7, major economies have imposed unprecedented punitive sanctions against the Central Bank of Russia and the blunt force trauma to Russia’s economy might be very severe and even lead to a collapse of its entire financial system and Government, maybe with a 15% chance probability of this actually occuring in the near future.

Key Russian banks have been barred from the SWIFT international payments system, preventing them from secure international communication and ostracizing them from much of the global financial system. Interest rates have been raised to 20%, up from 9%. In an emergency move, the Central Bank of Russia today (Feb. 28) raised its benchmark interest rates to an unprecedented 20% from 9.5% earlier amid crippling sanctions from the West in retaliation against Moscow's invasion of Ukraine.

This is not sustainable and won’t likely stop the damage. Europe’s economy is also likely to suffer along with some the rare metals and things associated with the Chip sector from Ukraine and Russia, along with certain food commodities. This will have snowball effects on other countries such as we are seeing with Egypt’s food crisis.

While support for the sanctions are high, the damage will mean millions more people in the world will suffer needlessly.

Russia’s stock market has been closed for five straight days following heavy Western sanctions over its invasion of Ukraine. That has in itself backfired and created a reputation for Russian stocks abroad as being “uninvestable”. Many ETFs have even been frozen, since the Moscow Exchange has been “turned off”, it doesn’t even make sense.

Putin is the least popular person on the planet this month, in March, 2022. The problem is it not only tarnishes his legacy within Russia with his supporters, it could lead to World War 3 as he is acting more or less as a military dictatorship. But he wasn’t always like this. Alternating as both prime minister and president of Russia since late 1999, Putin has been the figurehead of Russia’s economy seeking to attract foreign direct investment, boost a variety of industries and to exploit Russia’s natural resources, particularly the country’s abundance of oil and gas.

We’ve never seen an exodus economic or otherwise from Russia and if migrants from the Ukraine this large and notable in recent memory. Russia’s economy could spiral and drive stagflation throughout the world and create a global recession, but nobody seems to care. They seem to think this effort could save the Ukraine, but that’s unlikely.

Russia has been hit by economic misfortunes both of its own making —such as international sanctions placed on key sectors after its 2014 annexation of Crimea from Ukraine and its meddling in the 2016 U.S. election — and some it had no control over, such as the 2008 financial crash. Russia is pretty used to being crushed by external forces. Putin and his Oligarchs and Oil barons have likely been preparing for this during the better part of the last decade. The leader of the Ukraine is now increasingly asking for unrealistic demands like a No-Fly zone over Ukraine.

A prolonged drop in the value of the ruble would ultimately translate into a lower standard of living for Russians. It is back to the stone ages for many Russians and many have already left while they had the chance to do so. That window is rapidly closing for the majority of the population that will be hostages to a war, they aren’t even allowed to speak about or report about.

Any goods or commodities Moscow imports — from wheat and soybeans to medical supplies — will be magnitudes more expensive, as well as foreign travel. Russia has become the maligned State.

More than 20 years after Putin came to prominence, Russia — a country which spans Europe to Asia and has around 144 million inhabitants — is facing challenges and a major economic crisis that is an impossible situation and could cause significant upheaval, panic and unrest at home in Russia. Many people stand to lose the majority of their wealth and savings. Rule of law and civil war could result in a humanitarian crisis. Humanitarian aid is not likely to come to them, even as money pours into the Ukraine.

Russia’s stock market has been closed for five straight days. By the time it reopens much of the damage will have already been done in that first 2 weeks of the War. And the carnage could be brutal.

These range from the more pressing matter of living standards and the specter of inflation that could hit Russian consumers at a time of vulnerability, to longer-term issues such as Russia’s transition away from its energy-dependent, export-oriented economy.

There will be nowhere to turn for the Russian Economy and it could have horrific impacts on the global economy and many countries, including China as one of its bigger trading partners. Russia and China basically announced to the world recently that they are partners.

China has been Russia's largest trading partner for over a decade, according to commerce ministry data, with energy and mineral products making up the bulk of Chinese imports. But bilateral trade and investment remain small relative to China's total shipments. Russia is so weak, China could literally take over some of its assets and help it rebuild with interest, which America perhaps has no carefully foreseen.

Who else after all could accomplish such a task and would be willing to come to Russia’s rescue? China could in some ways expand its empire through such charity. The economic sanctions imposed by the U.S. and its allies have sent Russians scrambling to spend their rubles while withdrawing dollars, euros and other currencies from banks as the value of their local cash plunged. But as Russia’s banks might be defaulted, it is too late. This will likely drive China and Russia even closer together.

As someone interested in the Macro economy this is a case study that will be studied for decades. Russia’s central bank said it will free 733 billion rubles, or $8.78 billion, in local bank reserves to boost liquidity. But as the ruble has already lost 30% of its value, it will keep tumbling. The result is that there could be famines in Russia.

Sanctions against Russia effectively prohibit Western investors from doing business with the central bank and freeze its overseas assets, not least the vast foreign currency reserves the CBR has used as a buffer against the depreciation of local assets. This is almost in my view, a criminal use of financial power where economic sanctions are weaponized in such a horrific way, no matter the atrocities of Putin.

I cannot in good conscience admit this is a legal thing we are witnessing. Nobody should have the power to crush the economic livelihood of an entire nation, no matter the geopolitical risk or behavior of that country. We are witnessing likely a dangerous development in the weaponization of financial and economic tools. Only a few internet providers (the very backbone of internet access) and crypto marketplaces have even managed to say no.

Energy sanctions against Russia could cause a global energy crisis and massive oil prices leading to inflation like the world has never seen, far worse than the 1970s. But nobody seems to be sounding the alarm bells. While a few thousand Ukrainians and Russians have died, it’s nothing compared to the economic pain the world and especially Russia will have to endure. This does not sit well with me considering the economic damage the Covid-19 pandemic caused many of us for the last two years. Many of us are vulnerable to another global shock to the economy.

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