The crushing sanctions of Europe, the USA, Japan, Australia, Canada and other countries of the world after the military invasion instantly affect the economy of the Russian Federation, while the effect of them will increase daily. At the same time, the Russian authorities have claimed and continue to misinform that they have been preparing for all possible sanctions for a long time and the Russian Federation has a plan of action and response in such a situation, but in fact the collapse of the entire financial and economic system of the country is nearing.
The Russian authorities themselves are no longer able to hide this, as the chairman of the Central Bank of the Russian Federation, Elvira Nabiullina, said: “The conditions for the Russian economy have changed dramatically. New foreign sanctions have led to a significant change in the exchange rate of the ruble and have limited our ability to use our gold and foreign exchange reserves. The financial system and economy of Russia are now facing a completely non-standard situation.”
What are the main sanctions already received by Russia?
- Disconnection of Russian banks from SWIFT. Important Russian banks are disconnected from the SWIFT payment system, the leaders of the EU, Great Britain, Italy, Canada, Germany, the USA and France agreed on this. On March 2, 2022, the EU was the first to disconnect seven Russian banks from SWIFT: VTB, Russia, Otkritie, Novikombank, Promsvyazbank, Sovcombank and VEB.
- Mastercard and Visa blocked access to the payment system for Russian banks that fell under EU and US sanctions. Blocking means that the cards of these payment systems will only work in Russia. It will be impossible to use them abroad and in foreign online stores. Most likely, cardholders at VTB, Otkritie, Sovcombank, Promsvyazbank, Novikombank and others will fall under these restrictions.
- All EU countries, the USA, Canada, the UK and a number of other countries have closed their airspace to Russian aviation. 36 countries have closed the sky for the citizens of the Russian Federation. Now Russian planes can neither land on the territory of the EU, nor take off from it, nor fly over it. This will apply to any aircraft owned, leased by, or under the control of a Russian individual or legal entity. On the night of March 1-2, 2022, the United States also announced that it was closing its airspace to Russian civil aviation. Russian airports are overcrowded with Russian citizens trying to leave the country en masse.
- Personal sanctions against senior government officials, among them: Russian President Vladimir Putin, Defense Minister Sergei Shoigu, Prime Minister Mikhail Mishustin, Chief of the General Staff of the Russian Armed Forces Valery Gerasimov, Foreign Minister Sergei Lavrov, Interior Minister Vladimir Kolokoltsev, Security Council Deputy Head Dmitry Medvedev, Dmitry Chernyshenko, Deputy Prime Minister of the Russian Federation, Irek Fayzullin, Minister of Construction and Housing and Public Utilities of the Russian Federation, Vitaly Savelyev, Minister of Transport of the Russian Federation and a number of other officials and politicians.
- Personal sanctions against Russian oligarchs and businessmen, among them: Igor Sechin, CEO of Rosneft, Nikolai Tokarev, CEO of Transneft, Alisher Usmanov, owner of USM Holdings, Pyotr Aven, co-owner and president of Alfa-Bank, Mikhail Fridman, co-owner of Alfa-Bank, Sergey Roldugin , childhood friend of Vladimir Putin, Alexander Ponomarenko, oligarch, Gennady Timchenko, oligarch, owner of Volga Group, Alexei Mordashov, oligarch, owner of Severstal and shareholder of TUI Group, Petr Fradkov, head of Promsvyazbank, Denis Bortnikov and others.
- The European Union banned the listing of securities of Russian state-owned companies on its exchanges, and also expanded restrictions on raising debt in euros.
- Boycott Russia's main exports - oil and gas. The United States allows the imposition of an embargo on Russian oil. The USA and Canada refused to import Russian oil and oil products. Germany announced the "final closure" of Nord Stream 2 and a complete renunciation of the purchase of Russian gas. Recall that due to the artificial restriction of gas supplies to the EU market during the 2021/22 heating season, the Russian Federation reduced its share in supplies from 42% to 14%, achieving a price increase in the EU spot market to $1000+ and planned to take advantage of this after the launch of the Northern flow-2 last fall. To all this, Switzerland has announced sanctions against Rosneft, Gazprom and Lukoil, whose main trading structures are under its jurisdiction. The operator of the Nord Stream 2 project, Nord Stream 2 AG, a subsidiary of Gazprom, filed for bankruptcy on March 1, 2022.
- Agencies Standard and Poor's, Moody's Fitch IBCA unprecedentedly downgraded Russia's credit rating. In just three days, Russia's ratings immediately dropped by 4-6 points, from "investment" to "default", which extremely severely limited Russia's external borrowing not only from the US and the EU, but also from investors in other countries of the world, making them excessively expensive. On March 4, 2022, due to Russia's attack on Ukraine, S&P lowered the credit rating of the Russian Federation from BB+ to CCC-, and already on March 8, S&P downgraded the credit ratings of 52 Russian companies, including Gazprom, Rosneft and Lukoil, " ALROSA, Severstal, NOVATEK, SIBUR, X5 Group, Magnit, Russian Railways and MTS and others. The CCC- parameter is awarded to companies close to default, with a low chance of recovering funds. On March 5, 2022, Moody's downgraded Russia's rating to pre-default Ca. Following Moody's, Fitch Ratings has downgraded Russia's credit rating from B to C, i.e. to pre-default. "The 'C' rating reflects Fitch's view that a sovereign default is inevitable."
- The United States, Great Britain and the EU blocked the international reserves of the Central Bank of Russia in the amount of more than $500 billion.
- Restrictions on the Bank of Russia (Central Bank of the Russian Federation). Individuals and legal entities from the EU cannot make transactions with the Bank. According to Borrell, as a result, more than half of the reserves of the Central Bank will be blocked - this is the money that the Bank of Russia holds in credit institutions of the G7 countries. The Office of Foreign Assets Control of the US Department of the Treasury (OFAC) has banned US individuals and legal entities from conducting transactions with the Central Bank of the Russian Federation, the National Wealth Fund and the Russian Ministry of Treasury.
- The UK freezes Russian assets of banks: VEB, Sovcombank, Otkritie Bank, and also plans restrictions on Sberbank.
Maritime and logistics restrictions. In accordance with the Montreux Convention, Turkey restricted the passage of Russian warships to the Black Sea through the Bosporus and Dardanelles. - Article 19 of the Montreux Convention states that in time of war, when Turkey is not a belligerent, warships enjoy the right of complete freedom of passage and navigation. But the warships of the warring states do not have the right to pass through the Bosporus and the Dardanelles, with certain exceptions.
- The UK has also banned all Russian ships from entering its ports. Canada also banned all Russian ships and fishing schooners from entering its internal waters and ports. DHL has suspended all incoming shipments to Russia and Belarus.
The ban on the export of high-tech goods to the Russian Federation, in particular computer technology and equipment for oil and gas production by the United States. Deliveries to Russia have already been stopped by such giants as Intel, AMD, Dell, Ericsson and TSMC. Japan plans to limit the export of advanced technologies, including semiconductors. The sale of aircraft, parts and aviation equipment to Russian companies is completely prohibited (75% of Russia's current commercial fleet are aircraft built in the US, EU and Canada, and therefore are very dependent on it). Boeing and Airbus have stopped the maintenance and technical support of Russian airlines. The Russian airline Aeroflot uses Boeing 737 and 777 aircraft. The American company Apple has terminated its Apple Pay payment service and stopped sales of Apple products in Russia. Technogiant Oracle announced the termination of all operations in the Russian Federation. - The world's largest automakers stop working in Russia, while stopping the supply of both new cars and spare parts, among them: BMW, Audi, Volkswagen, Jaguar, Land Rover, Mercedes-Benz, Citroen, General Motors, Skoda, Porsche, Toyota, Honda , Volvo, Scania and many other automakers. If AvtoVAZ is left without French parts, the plant will be able to produce only the old Niva model.
- Russia is excluded from all major world sports competitions, championships and global cultural events. FIFA and UEFA have excluded Russian teams from all international tournaments. The decision affects the national team of the country, as well as clubs representing Russia in European competition. The decision is valid "until further notice". UEFA also decided to terminate the contract with Gazprom. Moreover, Russia was officially disqualified from the playoffs for the 2022 FIFA World Cup. The International Skating Union (ISU) has suspended skaters representing Russia and Belarus from competitions held under its auspices. The International Volleyball Federation has postponed the World Championship from Russia. The International Beach Soccer Organization has decided to deprive Russia of all beach soccer competitions. World Rugby has suspended Russia from international competition. Boxing organizations WBO, IBF, WBC and WBA have decided not to recognize boxing tournaments held in Russia. The International Judo Federation (IJF) has announced that it is suspending the powers of Russian President Vladimir Putin, who had the status of honorary president of the organization. The European Language Union (EBU) has announced that no Russian band will participate in the Eurovision Song Contest this year.
- The Joint Committee of the Council of Europe suspended Russia's participation in all bodies of the Council of Europe.
Restriction of Russian imports. Canada stops importing Russian goods. Difficulties with deliveries will be created by logistics companies. Thus, the Danish shipping company Maersk decided to stop all container traffic to and from Russia. The only exceptions will be food, medicines and humanitarian supplies. Earlier, a similar decision was made by the Singaporean Ocean Network Express, the German Hapag Lloyd and the Swiss MSC. Shell is phasing out all Russian hydrocarbons, including crude oil, petroleum products, gas and liquefied natural gas. Shell will also close its gas stations throughout Russia. British Petroleum will also stop making new deals to buy oil and gas from Russia.
The Russian government creates sanctions for Russian business and its citizens
In response to external challenges, the Russian Federation banned foreign exchange transfers under loan agreements in favor of non-residents of Russia from March 1, 2022, which means a virtual default on corporate debts.
Russian residents are prohibited from transferring foreign currency to bank accounts outside of Russia, effectively blocking most export-import operations, since buyers of Russian goods usually have accounts in their own jurisdictions, and not in Russian banks.
The rule of 100% sales of foreign exchange earnings by exporters has been introduced.
A possible freeze, write-off or partial write-off of household deposits in Russian banks to a special war fund is also being discussed.
From March 2, 2022, the export of cash foreign currency and monetary instruments in foreign currency from the Russian Federation is limited to $10,000.
It should be noted that the Russian government has prepared a draft presidential decree on temporary restrictions on the withdrawal of foreign business from Russian assets, which further exacerbates the attitude of foreign investors to investing in the Russian Federation. Foreign investors owned about $86 billion of Russian shares at the end of 2021. Most of them are currently unable to withdraw or properly trade their assets after the Russian Federation banned brokers from selling securities held by foreign funds.
On March 8, 2022, the Central Bank of the Russian Federation banned the sale of foreign currency at the bank's cash desks, and only dollars can be withdrawn from deposits and only in amounts up to 10 thousand.
Russian business is becoming toxic on a global scale
- Shell plc intends to withdraw from joint ventures with Gazprom, including 27.5% of the Sakhalin-2 LNG project, 50% in Salym Petroleum Development and Gydan Energy JV with Gazprom Neft, and also terminate participation in the project Nord Stream 2 gas pipeline
- The board of directors of the Norwegian state-owned energy company Equinor (formerly Statoil) has decided to stop new investments in Russia and begin the process of withdrawing from Equinor's Russian joint ventures
The board of directors of the British BP announced that it would withdraw from the share capital of the Russian Rosneft (BP owns a 19.75% stake in Rosneft) - The European Bank for Reconstruction and Development (EBRD) is going to suspend the access of Russia and Belarus to their resources.
- Film companies Warner Bros., Walt Disney Co. and Sony Pictures are suspending the release of their films in Russia.
The two largest state-owned banks in China have limited transactions for the purchase of Russian raw materials - Bank of China and ICBC. - The French company TotalEnergies (which owns 19.4% of NOVATEK) said on Tuesday that it would stop investing in new projects in Russia.
- The American ExxonMobil announced the end of work in Russia and the termination of investments in Russian projects, including large enterprises in Sakhalin.
- The Austrian company OMV refused to develop deposits in Siberia.
Italy's Eni plans to withdraw from the Blue Stream project. - All major international auditors and consultants of the Big Four left Russia: EY, KPMG, PwC and Deloitte. Without the opinion of an auditor from the Big Four, a Russian company will not be able to enter the international capital markets. An IPO without a financial advisor for EY, KPMG, PwC or Deloitte is possible only in the “junk” sections of the market, and M&A, even with a ready investor from China or Asia, is several times lower in cost.
What is the direct effect of sanctions on the Russian economy:
The collapse of the ruble against the dollar and other currencies.
Since the outbreak of hostilities on February 24, 2022, the ruble exchange rate has been losing ground on a daily basis with record demand in the interbank market both from foreign investors wishing to exit Russian securities, and from the Russian banks themselves, who bought foreign currency to meet the rush demand from side of the population.
The exchange rate of the ruble against the dollar on February 28, 2022 is 109 rubles per US dollar against 88 before the start of the war. In order to somehow stabilize the exchange rate of the ruble, the Central Bank of the Russian Federation sharply raised the interest rate from 9.5% to 20% and introduced the mandatory sale of 80% of foreign exchange earnings by exporters. However, on the "black market" and in exchange offices, the exchange rate was almost twice as high, in the range of 150-170 rubles per US dollar.
Every day, the ruble continues its rapid fall: on March 7, 2022, the Russian ruble fell by 10% to 138 rubles per dollar in international currency trading, and reached 190 rubles per dollar in the cash market. On March 8, 2022, not all exchangers opened in the Russian Federation, and some of them are empty.
A crushing drop in the value of shares of Russian companies.
The Russian stock market was closed on 02/28/2022 and never opened on 03/01/2022, but the shares of large Russian companies traded on stock exchanges around the world flew down.
The value of dollar-denominated securities of Russian companies on the London Stock Exchange fell sharply on Monday 02/28/2022. Within the first hour after the start of trading, securities of Sberbank fell by 77%, Gazprom by 69%, Lukoil - by 58%, Rosneft - by 45.51% (after BP announced its withdrawal from the company), Gazprom Neft, an oil producing subsidiary Gazprom - by 25%, PhosAgro - by 55%. NOVATEK shares fell 54%, X5 Group - 36.25%, Surgutneftegaz - 19%.
Literally a day later, on March 2, the price of Sberbank shares on the London Stock Exchange fell to one cent!
There was a real rout on the Russian sovereign Eurobond market. The value of ETF VenEck Russia (RSX), which reflects the dynamics of Russian depository receipts, collapsed by 30%. Many depository receipts in London fell by more than 50%.
The New York Stock Exchange and Nasdaq have suspended trading of Russian-related companies, including: Yandex, Mechel, QIWI, MTS, Ozon, HeadHunter, Cian and others
"Even more sanctions. The New York Stock Exchange and Nasdaq have suspended trading in shares of Yandex, Ozon and many other Russian companies,"
Millions of Russians have blocked accounts in foreign banks. The decision to close the accounts of millions of Russians was made by Western banks, in particular in the US, EU, UK and Switzerland. At the same time, banks do not issue cash in excess of the allowed limits, but ask for an account to transfer the balance outside of European and American jurisdiction. Many banks, on their own initiative, blocked card payments for Russian residents as early as February 28, 2022.
Russians are henceforth limited in investing in shares of foreign companies and cryptocurrencies. In particular, the world's largest InterBroker (IB) banned the withdrawal of funds from Russian clients, freezing their accounts. BTC-Alpha, KUNA, CEX IO and Qmall blocked the withdrawal of funds from the accounts of clients from Russia and Belarus. Similar solutions are on the way from the largest crypto exchange Binance and others.
Russian oligarchs are starting to get nervous
Russian billionaire, co-owner of Rusal Oleg Deripaska spoke sharply about raising the key rate by the Russian Central Bank from 9.5% to 20% per annum and the order of the Ministry of Finance for companies with foreign exchange earnings to convert 80% of their income into rubles.
“Raising the rate, the mandatory sale of foreign currency (now they will still remember that at the rate set by the Central Bank on the date of the settlements) is the first test of who will really pay for this banquet. I really want clarifications and intelligible comments on the economic policy of the next three months. Since this is a real crisis, then real crisis managers are needed, and not science fiction writers with a pack of presentations. Now, as in 2014, it will not be possible to sit out. It is necessary to change the economic policy, it is necessary to end all this state capitalism,” said Oleg Deripaska.
One of the richest people in Russia, co-owner of Alfa Bank Mikhail Fridman, condemned Russian aggression against Ukraine.
“While a solution seems terribly far off, I can only join those who ardently desire to end the bloodshed. I am sure that my partners share my point of view. I was born in western Ukraine and lived there for the first 17 years of my life, and my parents still live in Lviv, which is my favorite city. But most of my life I have been a citizen of Russia, building and developing a business. I am deeply attached to the Ukrainian and Russian peoples and consider the current conflict a tragedy for both of them,” said Mikhail Fridman.
The founder of the Russian Tinkoff Bank Oleg Tinkov also spoke out against the war in Ukraine
“On myself, having almost been on the other side of life twice in the last two years, I was convinced how fragile life is. And it is the only one we have! Now innocent people are dying in Ukraine, every day, this is unthinkable and unacceptable! States should spend money on treating people , for research on victory over cancer, not for war. We are against this war! ”Oleg Tinkov noted.
One of Russia's richest oligarchs, Roman Abramovich, who is considered one of the sponsors of the Putin regime, has put up for sale not only his Chelsea club, but also luxury real estate, which he owns in London. He intends to use the proceeds from the sale of the Chelsea football club to help the victims of the war in Ukraine.
The 512-foot yacht Dilbar, worth nearly $600 million, by European Union-sanctioned Russian billionaire Alisher Usmanov has been confiscated by German authorities in the northern city of Hamburg, and the German government has frozen the asset.
What will happen to the Russian economy in the near future?
Leading Western and Russian analysts do not rule out the onset of a partial or complete default of Russia on external payments already this week. It is also possible the actual shutdown of SWIFT. The domestic banking sector of the Russian Federation will most likely remain solvent in the coming weeks, but only with the introduction of partial restrictions on the withdrawal of deposits by the population and the preservation of liquidity for corporate settlements within the country.
The trade embargo of the Russian Federation, including the blocking of international payments, especially for oil and gas, which form 70% of the income of the federal budget of the Russian Federation, is capable of inflicting an irreparable blow to Russia's income over the next month.
The crisis in payments and the blocking of Visa / Mastercard issued by Russian banks can lead to an irreversible crisis in settlements and domestic trade over the next week.
The most likely is the refusal of the Central Bank of Russia from foreign exchange interventions and the establishment of an artificially high exchange rate of the ruble, which in the cash / black market will overcome the mark of 200-250 rubles per US dollar this week.
The combination of all sanctions against Russia and its own internal restrictions will undermine its efforts to support its rapidly depreciating currency by limiting the global supply of rubles and access to the reserves that Russia can try to exchange to support the ruble.
In Russia, we should expect an uncontrolled fall of the national currency, which will lead to an increase in inflation in the country.
The events of recent days now mean that no G7 bank will be able to buy Russian rubles, which will lead to a free fall of the currency, and eventually we may see a huge inflationary shock unfold inside Russia - Michael Hewson, chief market analyst at CMC Markets UK.
Meanwhile, panic begins among the population, Russians massively withdraw cash from ATMs and buy dollars. Analysts say that depositors will try to secure their deposits and will continue to massively withdraw cash from ATMs, which will further aggravate the situation.
Summing up, we can summarize that the war between Russia and Ukraine will lead in the short term to economic collapse, general poverty of the population, global isolation and degradation as a nation, followed by the collapse of the country.
