Russia and Ukraine's financial fallout


The Russian economy takes a tumble following the early stages of it's war in Ukraine

Article Image

Image by ShareAlike 4.0 International

By Tom Leverett and Josh Cole

Russia’s invasion of Ukraine has triggered a wave of economic consequences that will touch all of us, here in the UK and abroad. The rapid pace of change in the global economy over the past few weeks has been incredible, with previously untouchable subjects becoming the active policies of companies and concerns of consumers around the world. Furthermore, this has been accompanied by an extensive programme of sanctions against Russia, Russian companies and key members of Putin's regime.

On Finance and Commodities...
The rise in the cost of living has been discussed extensively since last summer, however it is difficult to overstate the pressure that the fallout from the conflict will put on people’s incomes. For many of us, the most acute consequence will be the increases in energy prices. In the previous edition, Nouse reported that volatile gas prices have caused the government to increase the energy price cap to £1,971. However there are fears that energy bills could rise further to £3,000 a year. Russia is the major supplier of natural gas and oil into Europe and whilst current sanctions do not affect gas and oil, many companies are abandoning Russian oil due to the toxicity of association with the country.

However this means that there is going to be a supply issue facing all of Europe in the coming months that will lead to increased costs. On 4 March, the price of oil per barrel hit $119 USD, the highest price since May 2012. Although the UK itself receives only 6 percent of its crude oil and 5 percent of its natural gas from Russia, the EU receives close to half of its supplies from Russia, meaning the UK will be competing with more countries for reduced energy supplies. The fear of President Putin actively restricting the flow of energy and European countries imposing their own sanctions on Russian energy imports may mean that households will see further pressure on their budgets.

Adding to these personal effects, Russia’s invasion has triggered wide ranging (if uneven) effects in stock markets across the world. The increasing toxicity around having any association with Russia has seen investors exit any Russian holdings they might have. London’s FTSE 100, a stock index consisting of the UK’s 100 most valuable companies, fell by 3.5 percent during the week of February 28 to March 4, with £133 billion wiped off its value. This has been concentrated in firms with links to Russia, with 17 of these firms now suspended from the stock exchange, including the Russian bank Sberbank whose shares traded at one cent before its suspension. Nonetheless, as many British firms like retailer M&S and clothing brand Burberry suspend their operations in Russia due to the conflict, investors have retreated into safe haven assets in order to protect their money. These kinds of assets are favourites in times of crisis because they offer reduced levels of risk. Gold is one such asset and is consequently trading at its highest price since August 2020 of $1,975 USD per troy ounce.

However, this fairly bleak outlook is not the full picture. Commodity firms such as mining companies, which also have a heavy presence on the FTSE 100, have performed particularly well over the past year as pent up demand from the lockdowns has exploded. Russia’s invasion has caused many of these firms to become even more sought after. Russia is one of the world’s largest exporters of metals like copper, aluminium and nickel and the reluctance of companies to buy Russian oil has been mirrored in the commodity sector too. The absence of Russian resources from global supplies has simply increased prices as more people fight for a smaller number of metals. Whilst it is tempting to see this as a positive, there is a darker side to the commodity crisis caused by this conflict.

As well as metals, commodities also refer to foodstuffs like grain, wheat and corn. Ukraine is one of the largest producers of agricultural exports in the world, a significant proportion of which is grown in the fertile lands of eastern Ukraine, being the area most under attack by Russia. The likely substantial disruption to this year’s planting and harvest will really affect developing countries. Ukraine supplies many countries already suffering from food insecurity and political instability, like Libya, Yemen and Lebanon, with large quantities of food. The absence of Ukrainian foodstuffs could push many into poverty through unsustainable price increases. Given that the Arab spring revolutions in Egypt and Tunisia were triggered by sky-high food prices, there is a real risk that the fallout from Russia’s invasion could spread political instability across Africa and the Middle East.

On Sanctions...
Russia is no stranger to international economic sanctions. Putin endured measures against his last incursion into the Crimea region in 2014, triggering a Russian recession. Despite these sanctions, Putin’s Russia has managed to amass an overwhelming financial war chest, in preparation for the president’s recent advance into Ukraine, with around $630 billion USD in foreign exchange and gold reserves. The unprecedented investment in foreign currency and gold, which is the largest since 2014, is Putin’s attempt to bulletproof his economy in anticipation of this new wave of sanctions from the West. These are the most comprehensive set of sanctions that the UK have ever imposed against Russia. The prompt and coordinated efforts of the UK and allies have already begun to rock the Russian economic fortress, directing it towards a full-scale economic collapse.

Rather than going in straight away with troops on the ground, the West is weaponising finance to protect Ukraine, with efforts to target the Russian Central Bank (CBR). The UK has prohibited financial transactions with the CBR and other Russian financial institutions, as well as preventing Russian companies issuing transferable securities, such as UK stocks and bonds. Sanctions are set in place with the goal of devastating the Russian economy as well as Putin’s inner circle. One of the most notable recent measures has been to block Russian banks from using the SWIFT network, which facilitates international financial transactions. The West has been hesitant to take such a bold step, for fear of forcing Russia into closer political ties with China. Talks of China providing Russia with access to their alternative to the SWIFT network have worried analysts, but whether or not China will actually take that risk remains unclear. It would be a move that would surely escalate the situation in Ukraine and perhaps even trigger a global conflict.

Other sanctions that have addressed Russian actions within the UK include those against Russian commercial and private airlines, which have been banned from entering British airspace. Moves have also been made to stop Russian banks accessing Pound Sterling. What has come as a surprise to the UK is just how prevalent Russian investment in the UK is. Since the collapse of the USSR in 1991, Russia’s notorious network of oligarchs have made home in London and the UK, and are now faced with the precarious decision between the luxury they have in the UK and their support for Putin. The government has started to target oligarchs, seizing assets like real estate, pressuring them to abandon their investments. Roman Abramovich, the Chelsea FC owner since 2003, has listed the club for sale in light of British crackdowns. Many politicians and anti-corruption spokespeople have criticised the government for not acting on networks of Russian oligarchs in Britain earlier. Putin needs the support of his inner circle and oligarchs to maintain power and maintain an invasion, so pressuring them into choosing between Putin or their wealth and luxury in the UK is a tough arm-twisting move.

Regardless of whether measures could have been taken sooner in the build up to the invasion, we can generally be proud of our steadfast commitment to protecting sovereign Ukraine in the face of oppression. The Governor of the Bank of England described the sanctions as “a powerful demonstration of the UK’s commitment to the international rule of law”.

The corporate world has followed suit, mobilising to absolve their own ties with Russia. Sanctions make it nearly impossible to conduct business with Russia, but above that, it is hard to imagine that any company would want to be seen putting profits above people in Ukraine. Multinationals like BP, Shell, Visa, Apple and Volvo are just a few of the companies suspending or entirely terminating commercial relations with Russia, delivering another striking blow to its economy.

Fortunately, it appears that sanctions are already going to work on the Russian economy. Putin expected less resistance in Ukraine, and an invasion that should have taken a few days has become a lot more expensive to sustain indefinitely. The CBR has raised the interest rate benchmark to 20 percent in a desperate move to veer off a course towards hyperinflation, and stall the accelerating depreciation of the Rouble. The CBR has also directed Russian companies to sell 80 percent of their foreign exchange reserves to prop up their own currency.

The Russian population will be the unsung victims of this conflict. Targeting Putin and his inner circle of oligarchs is necessary, but their wealth is vast enough to endure sanctions. Putin's investment in foreign currency since 2014 has been at the expense of domestic growth which has averaged around 1 percent since. Within an already stagnating economy, the sanctions will impoverish the Russian population, depreciate savings and spark endemic unemployment. Domestic support of the invasion in Ukraine is unclear, with Putin keeping a firm chokehold on national media sources. Russian anti-war protestors have been outspoken and brave in their condemnation of war, even in the face of arrests. Losing the support of an already dissatisfied electorate might be what brings the conflict to a conclusion.