Russia’s Economy Heavily Wounded By 4 Weeks Of War – Cryptovibes.com – Daily Cryptocurrency and FX News
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Sweeping sanctions sparked by Russia’s invasion of Ukraine on February 24 have ripped the country out of the global financial fabric and sent its economy reeling.
A month later, Russia’s bonds and stocks have been ejected from indexes and its currency has lost a large part of its value. Economic pain being experienced by its people is likely to last for years to come.
The five charts below show how the past month has changed Russia’s economy and its global standing:
ECONOMIC PAIN
According to the World Bank, Russia was the world’s 11th-largest economy in 2021. However, according to Jim O’Neill, the former Goldman Sachs economist who coined the BRIC acronym to describe the four big emerging economies Brazil, Russia, India, and China, it may rank no higher than No. 15 by the end of this year, based on the end-February rouble exchange rate.
A recession seems inevitable. The central bank polled economists who predicted an 8% contraction this year and believe that inflation would reach 20%.
Economists outside Russia have even gloomier forecasts. The Institute of International Finance (IIF) foresees a 15% contraction in 2022, followed by a three percent contraction in 2023.
In an official note, the IIF said:
“Altogether, our projections mean that current developments are set to wipe out the economic gains of roughly fifteen years.”
INFLATION BUSTING TURNS TO DUST
Central bank governor Elvira Nabiullina’s biggest triumph since taking office was curbing inflation from 17% in 2015 to just above 2% in early-2018. In the post-pandemic months, as price pressures rose, she raised interest rates eight months straight, defying industrialists.
Following the annexation of Crimea, Nabuillina also resisted calls in 2014-2015 for capital controls to halt outflows. However, in less than a month, those achievements have been torn to shreds.
Annual price growth has sped up to 14.5% and should exceed 20%, five times the target. For the year ahead, the household’s inflation expectations are above 18%, which is an 11-year high.
Even though ruble weakness may keep price pressures elevated, panic-buying accounts for some of this occurrence.
On February 28, Nabiullina was forced to more than double interest rates and introduce capital controls, with Russia’s reserves war chest frozen overseas. In 2024, inflation is expected back at target only by the central bank.
INDEX ELIMINATION
Index providers are forced by sanctions to eject Russia from benchmarks used by investors to funnel billions of dollars into emerging markets.
Both MSCI (.MSCIEF) and JP Morgan (.JPMEGDR) are among those that have announced they are removing Russia from their stock and bond indexes respectively.
Following the first set of Western sanctions in 2014 and then in 2018, after the poisoning of a former Russian spy in Britain and investigations into alleged Russian meddling in the 2016 U.S. elections, Russia’s standing in these indexes had already taken a hit.
Nearly all major index providers will dial Russia’s weighting to zero on March 31st.
RATINGS RUPTURE
Russia had coveted “investment grade” credit rating with the three major agencies S&P Global, Moody’s, and Fitch when its troops stormed into Ukraine.
That let it borrow relatively cheaply and a sovereign debt default seemed a distant possibility.
Russia has suffered the largest cuts ever made to a sovereign credit score in the past four weeks. Flagging an imminent risk of default, it is now at the bottom of the rating ladder.
ROUBLE TROUBLE
The rouble’s one-year average exchange rate sat at 74 per dollar. Ample liquidity and tight bid/ask spreads expected for a major emerging market currency were exhibited when trading on different platforms.
That has all changed. The rouble dropped to record lows of more than 120 per dollar locally, with the central bank bereft of a large portion of its hard currency reserves. It fell as low as 160 to the greenback in offshore trade.
Pricing the rouble has become haphazard as liquidity dried up and bid/ask spreads widened. Still, the exchange rate has not yet found a balance on- and offshore.
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