Russia economy fears as Ukraine crisis causing ruble to plummet

Russia ‘invasion would be act of insanity’ says Hitchens

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Warnings of a Russian invasion of Ukraine have already had noticeable market impacts with oil prices ticking further towards $100 a barrel. Victoria Scholar, Head of Investment, at interactive investor commented: “Fears about escalating tensions between Russia and Ukraine has pushed oil to fresh seven-year highs.” She predicted: “An invasion of Ukraine would likely push oil prices sharply higher, beyond $100 at a time when the market is already in rally mode driven by an imbalance between demand and supply.” Meanwhile, the Russian ruble has dipped lower against both the dollar and the pound since fears mounted on Friday following warnings from the US.

Companies with exposure to the Russian economy have also suffered.

Ms Scholar explained: “Shares in Evraz are trading at the bottom of the FTSE 100, slumping more than 33 percent as investors flee the company amid the threat of war between Russia and Ukraine.

“The steel and mining giant, which is 29 percent owned by Russian billionaire Roman Abramovich, is down more than 50 percent year-to-date as fears about potential sanctions punish the share price.”

The rapid market reactions pose major questions as to how the Russian economy would fare in the event of military action and any subsequent sanctions.

Economic retaliation against Russia could take a number of different forms with a recent report by the Vienna Institute for International Economic Studies (wiiw) warning sanctions could have negative repercussions for Russia, the EU and Ukraine.

According to the report, Russia’s most vulnerable area to target would be its energy exports market.

US President Joe Biden has already hinted in this direction warning he would “bring an end” to the Nord Stream 2 pipeline in the event of an invasion.

Co-author of the report Artem Kochnev warned though: “Restricting oil and gas trade with the EU is a ‘nuclear’ option, given the huge costs this would inflict on EU members such as Germany, the Baltic states and Central European countries, that are highly dependent on Russian energy supplies.”

Currently, around 40 percent of Europe’s natural gas comes from Russia.

Another option would be cutting Russian banks off from US dollar funding and excluding them from SWIFT, a high-security payments network used by financial institutions for moving funds.

The report suggests this would cause “significant financial disruption in Russia” and damage economic growth, however massive injections of state money into the banking sector could provide stability for at least a year.

Impacts would start to be felt long term though with Russia ending up more isolated creating a drag on future growth.

A key area which could harm the Russian economy would be restrictions on high tech imports such as semiconductors which are currently dominated by the US and allies such as Taiwan and South Korea.

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The report explains: “This would hinder economic modernisation, particularly a much-needed diversification and improvement in competitiveness.

“Russia will partially offset sanctions through stronger ties with China, especially in the energy sector, but limited access to Western capital and technology would exacerbate its already weak growth prospects.”

Simon MacAdam, Senior Global Economist at Capital Economics, predicted Russia would see a long term “decoupling from the West”, regardless of whether an invasion goes ahead.

In a report today he predicted: “This is likely to play out most clearly in relation to Russia’s and the EU’s mutual energy dependence.

“Indeed, not only does Europe have added incentive to speed up its green energy transition, but it is probably fair to say that the chances of the Nordstream 2 pipeline being approved have nosedived.”

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