The escalation of tensions in Ukraine reached its zenith with the order given on Monday to the Russian army to enter the separatist territories in eastern Ukraine. A Russian military incursion will have certain human consequences, but also an asymmetrical economic impact with variable geometry.
Stock markets fell on Monday. The European indices ended largely in the red: Paris lost 2%, Milan 1.7%, Frankfurt 2.1%, and the Euro Stoxx 50, the European benchmark index, fell 2.2%. London held up better (-0.4%).
The effect was felt more in Russia, where the main index of the Moscow Stock Exchange, the RTS, plunged more than 13%, to accentuate its fall to 24% since the beginning of January. The Russian currency was also unscrewing, with one dollar trading for 79.12 rubles.
In the United States the markets were closed on Monday, due to Presidents’ Day.
This contrasting reaction of the indices seems to illustrate the asymmetrical weight of the sanctions that an invasion of Ukraine would trigger on an economy, that of Russia, ranking 12and world rank according to GDP (compared to 8and rank for Canada), and facing a G7 claiming an economic size 27 times greater.
However, European analysts speak of a variable asymmetry, with Russia exporting more than half of its hydrocarbons. On the other hand, it is the source of some 40% of the gas supplies of the European Union. As for the weight of energy in its trade with the EU, Russia carries out a third of its foreign trade there, but accounts for barely 5% of trade in goods. Thus, Russia mainly exports raw materials, mainly hydrocarbons, while the EU mainly supplies it with capital goods, processed products and agri-food.
Hence the shock felt on the price of energy materials, which is not without repercussions on the world economy.
In the short term, the Russian economy’s dependence on hydrocarbons allows it to garner strong liquidity with reference prices knocking at the door of US$100 a barrel. And for its imports, nothing prevents Moscow from turning to other countries, such as China, countries which already represented, today, 23.7% of Russian imports in 2020.
Major exporters
Manulife Investment Management offers a global perspective. Globally, Russia is the leading exporter of natural gas (17.1% of world production) and the second largest exporter of crude oil (12.1%). Russia and Ukraine are also major agricultural producers: their combined exports of wheat, barley and maize account for 21% of the world total.
In addition, Russia and Belarus account for around 20% of total fertilizer exports, which is vital for global food production.
At the same time, Russia is one of the world’s largest producers of critical metals. It is the largest exporter of palladium (20.7% of total volume) and ranks second in refined copper (7.1%). The country also holds the third position for nickel (11.2%) and aluminum (9%).
In short, any disruption in the supply of these products will have a global impact. First on supply chains, then on increased price pressure in an already overheated inflationary environment.
Among the serious repercussions, Manulife mentions the rise in food and energy prices. The fiscal situation could also deteriorate if governments increase subsidies to contain inflation and ease the burden on low-income households. Finally, “the risk of a liquidity shock arising from a combination of a demand shock, a supply shock and a flight to safe values would expose highly indebted vulnerable economies to a shock. domestic credit or external financing”.
Prepared for sanctions
Russia has also prepared for sanctions. The central bank has accumulated tons of gold and stored the equivalent of 620 billion dollars of foreign exchange reserves and 190 billion of the sovereign fund, according to figures published in The world. A kitty accounting for almost half of its GDP, enough to allow it to cushion the shock of the sanctions for a certain time.
As for the threat of exit from the SWIFT international transaction system, under American influence, the euro has become the leading currency accumulated with about 32% of foreign exchange reserves. Followed by gold (22%), the dollar (16%) and the Chinese yuan (13%), The cross. Dedollarization has accelerated since the US dollar accounted for 40% of reserves in 2018.
Without Swift, it will be more difficult for Russia to collect foreign currency. It could also result in a major flight of capital. But it could be difficult, if not impossible, for it to honor its commitments to all European countries, which would shake up the European financial system, it is added.
It remains to be wondered whether, in the medium term, Russia has the means for sanctions. “The most terrible would be to exclude it from the global financial system or to impose an embargo. Not sure that the Russian economy, which already shows an inflation of more than 8%, has the backs strong enough to face it”, one reads in The world.