According to moderate estimates by Western analysts, the war in Ukraine costs Vladimir Putin at least ten billion dollars a day. In fact, Riho Teras, an MEP from Estonia and former head of his country’s armed forces, estimates the cost at twenty billion dollars in a recent post on Twitter, citing estimates by the British secret services. That is why Putin alone has every reason to be unhappy, as seven days have passed since the invasion of Ukraine and the Russian military machine has not achieved its goals, unlike what happened in the so-called “Five Day War”. in Georgia in 2008.
But perhaps even more troubling is the isolation to which the Russian economy is headed during the invasion of Ukraine. Earlier in the week, after new EU sanctions were announced over the weekend, developments were cataclysmic: Within hours, the ruble lost up to 40% of its value against the dollar, slipping to new all-time lows. Analysts estimate that only this “dive” can burden inflation in Russia with an additional + 5%. The Moscow Stock Exchange did not open on Monday and it remains unknown when it will reopen. Many of those who have Russian bonds have tried to “chase” them, but this is not easy. A few days ago, the rating agency Standard & Poor’s downgraded Russia’s credit rating to BB +, ie in the “junk” category. This means that the house no longer recommends to institutional investors to buy Russian government bonds, unless it is a targeted high-risk move. A similar warning for degradation has been sent by Moody’s.
But there is also the controversy that says the collapse of the bond market benefits Russia: “The rapid fall in bond prices is the best thing for Russia, because it can buy back its bonds at much lower prices, preventing the risk of bankruptcy, “Arthur Bruner, an analyst at ICF Bank, told ARD. Something similar, he recalls, happened in the financial crisis of 1998, when Russia recovered old series of government bonds at 30% of their nominal value, accelerating the repayment of its debt. The situation would be different, of course, if the Russian government were now turning to the markets to refinance the debt, but that is not the case, Bruner points out.
Intervention of the Russian Central Bank
At noon on Monday, Russia’s central bank was forced to almost double interest rates in a bid to support the national currency. Specifically, the key interest rate increases from 10.5% to 20%. In addition, the central bank imposes controls on the movement of funds and prohibits the sale of Russian bonds to foreigners. At the same time, the Russian Ministry of Finance obliges Russian companies to market part of their foreign exchange reserves in order to support the national currency. According to German television (ARD), Russia has foreign exchange reserves totaling $ 640 billion, which it has invested not only in dollars but also in euros, Chinese yuan, gold, government bonds and other assets. However, it is not easy to “mobilize” to support the ruble, as part of the reserves remains abroad. Economist Friedrich Heinemann, a fellow at the Center for European Economic Studies (ZEW), told ARD that “it will not be easy for the central bank to end the currency slide. “After the latest sanctions, the ruble has virtually ceased to be a freely convertible currency.”
At the same time, partly due to sanctions, large companies around the world are beginning to withdraw from the Russian market with all that entails. The British oil giant BP, to date the largest foreign investor in Russia, has announced that it will sell its stake in Rosneft, leaving the Russian market after 30 years of continuous presence. The example of BP was followed very quickly by Shell, which terminated its cooperation with Gazprom and its participation in the Nord Stream 2 pipeline, as well as the Norwegian Equinor, which terminated its strategic cooperation with Rosneft. “In the current circumstances, it is impossible to continue,” said Equinor chief Anders Oppental. The Danish Maersk, the world’s largest shipping company, has also announced that it is suspending its services to and from Russia.
The imposition of sanctions also has serious consequences for Russian banks operating in Europe. The European Banking Authority is already talking about the “imminent bankruptcy” of Sberbank Europe AG, a European subsidiary of the Russian bank Sberbank based in Vienna. Following this, the Austrian banking supervisory authority imposed a withdrawal limit of 100 euros per day from the specific bank, while the Czech central bank announced that it is launching a procedure for the revocation of the banking license. In Germany, the trading of Sberbank shares on the stock exchanges is suspended, while the same happens with other Russian companies, such as Lukoil. However, European sanctions do not affect the Russian banking sector as a whole. Russia’s gas continues to flow to Europe, Gazprom said at the weekend, while Europeans continue to pay for Russian gas and raw material exports, a spokesman for the German Economy Ministry said in Berlin on Monday.
Switzerland also promises cooperation
On Monday, the Swiss government announced that it itself endorses and implements the trade sanctions imposed by the EU and the US against Russia. On Sunday night, President Ignacio Cassis said for the first time in a television interview that he was prepared to consider a “freeze” on Russian assets, as long as it was done with respect for his country’s “traditional neutrality regime.” “What happened was the most blatant violation of international law since the end of World War II, no one was prepared for that,” Cassis said.
“No Swiss bank is taking the risk of violating US sanctions law,” said Urs Chulauf, an analyst with the Swiss regulator until 2013, speaking to the Zurich-based Handelszeitung. According to estimates by the Swiss central bank, the assets of Russian citizens in Swiss banks are close to a value of 15 billion francs (14.5 billion euros). Many Russian oligarchs also live permanently in Switzerland. These include Gennady Timchenko, head of an investment firm in Luxembourg that is closely associated with Vladimir Putin and has a personal fortune of $ 20 billion, according to Forbes. The Swiss sanctions list includes 363 individuals as of last Friday, as well as three Russian banks: VEB Bank, Bank Rossiya and Promsvyaz Bank.
DW – Giannis Papadimitriou
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