Keynote points of the discussion and abridged expositions of speaker reports are published below.
Keynote Points:
International capital markets are fully closed for the Russians. The Rouble convertibility that has long been the pride of Russia is no longer there.
Some 2-3 million of unemployed are expected.
The real consumption levels and its quality are in a catastrophic dive, particularly for the poor groups.
Jewellery exports, among the first to fall under embargo, have been cut.
Exports of russian agrarian commodities will be gradually reduced.
Russia’s metal exports may drastically dwindle due to imposed sanctions. Russia will not be able to re-orient itself even on the large Chinese market.
Ukraine has destroyed quite a number of tanks and navy vessels so the aggressor will have to restore its military potential and limited arms exports thus losing markets.
The stock market is completely dead as the current trades at Moscow stock exchange are only about local volumes and local traders. Foreign investors have been practically disconnected from the russian stock market.
Companies and countries want nothing in common with bloody crude or metals from russian oligarchs. A number of russian investment banks have already been disconnected as a preventive measure.
Sanctions have been imposed not only on banks but also on all the related infrastructure, specifically, on investment units.
Russia’s central bank’s response to the sanctions has been the classic textbook one for external shocks.
Foreign reserves as an indicator. If we disregard the blocked assets, the reserves slumped at the beginning of sanctions then stabilised owing to continued exports and unsubstantial imports.
Sanctions is a long story; the russian economy has now adapted to them so new sanctions are needed.
The sanctions that limit current consumption hitting the pockets of the Russians, their buying capacity and the money turnover inside the economy are no less efficient. From the economic standpoint, sanctions against lay russians are, at least, as efficient as those on crude and natural gas.
Transcript of discussion (for the full video of discussion please follow the link)
– What is the current condition of the enemy’s economy? Which number do we need to look for to understand what is happening now and in which direction it will go?
Serghiy Boodkin
How long do wars last?
The statistics for the past 170 years has it the median duration of a war has been about 15 months. Most of the wars – we are talking here about the wars with high-intensity active hostilities – ended in under a year. We have to be prepared for a war lasting for months though chances are high it may go for a year and a half to two years. This is the horizon that has to be accounted for during planning.
What will not disappear in Russia in the nearest future?
✔ Money
✔ Basic foodstuffs
✔ Vodka and basic alcohol beverages
✔ Petrol
✔ Furniture
✔ Cigarettes of mass cheap brands.
Money will never dry up in Russia. The state can print as many as it likes.
The basic foodstuffs – bread, vegetable oil, salt, buckwheat – will remain. Russia has used to grow and export food commodities enough to feed 500 million.
Before the war, the RF was importing only a third of the products it consumed. Those were predominantly the goods it could not produce. The Russians will be left without them. Their diet will be limited but it surely won’t let them go hungry.
Vodka won’t stop to be produced and drunk. Its production only requires sufficient amount of rye and a quality moonshine still. Beer will stay too: Russia has enough hops and malt, if of questionable quality.
Petrol will not end as the RF is a big manufacturer of refined oil products. Same goes about cheap mass-market cigarettes.
There will be furniture given Russia has lots of raw materials and furniture-making plants practically disconnected from the outer world.
The Russians will be able to smoke, drink, refuel and provide for their own basic needs for quite some time so no hunger strikes in sight yet.
Where is Russia losing now and where it will further
Russia’s economy will be catastrophically simplified due to the sanctions. Many professions used to bring added value will become unnecessary.
The russians have been fully cut from international capital markets. The convertible rouble, the long-time pride of Russia, is also gone.
As there will be no financial markets in Russia for quite some time, financial services will lose their relevance. It will take some time until the knowledge of Eurobond placement rules and shares handling as well as that of issuing international letters of credit become relevant again.
To support the financial sector, 10-15 retirees who had worked at Soviet banks will be required.
The constellation of educated and experienced managers who were brought up in modern Russia and worked to attract more people onto the market will cease to be necessary.
Russia will lose IT companies and restaurants. These are already closing and leaving the country. The closing of McDonalds alone will result in 92,000 jobs lost.
Professional journalism will become redundant. With Russian freedom of speech standards, only the Krasnaya Zvezda newspaper will be in demand with a few loyalist journalists to make it.
A socially active, educated population is leaving Russia with adherents of questionable national ideology and military mythology remaining. This society could only be compared with the Gaza Strip.
Some 2-3 million unemployed are expected. The totalitarian states have not been able to invent another way to ‘process’ the unemployed but for using them in paramilitary formations. The Russians will have a choice of either living in poverty or joining the army for salary and social benefits.
The sanctions have affected many goods on sale. One of the most painful strikes to have hit Russia was spares for vehicles: the brake shoes that used to cost 7 thousand Roubles now have a price tag of 20 times the earlier price.
The last shipment of spare parts was by Volkswagen before the company exited the russian market and it was at Rub220–Rub230/USD. The current official Fx is around Rub80/USD.
Telly vs. fridge
Prices will be rising not just for spares. The battle between a telly and a fridge continues to rage on in the invading country. The past two years have seen prices on some products rise two- or threefold. Most of the price rise has happened in the past month.
The food inflation is not calculated based on Rosstat data as the service is regularly changing its food basket computations. This way the russian government creates an illusion of controlled inflation (which is about 20%).
The real consumption levels and quality indicators are catastrophically down, particularly with poorer groups.
The rouble exchange rate is also a story to tell: in the 1990ies, the official Fx rate of two years was at Rub12,610/USD. It had to be used for all clearing settlements. The more settlements, the farther would the rate go from the real one.
At some point the real Fx rate was Rub176,000/USD – but the official one remained at 12,610.
It seems the situation is repeating itself now. The current official exchange rate is far from the real one, and the economy will feel it at some point.
Exports are not like they used to be
In the first half of 2021, crude accounted for 37% Russian exports while natural gas had 19%, metals – 11%, chemical products – 8%, jewellery and agricultural products – 7% each, with 6% taken by armaments and 7% more by other exports.
Now, jewellery exports have stopped being among the first to come under embargo. Jewellery products were supplied on the external markets mostly by the Almazy Rossii Company. Its shares have plunged twice on the Moscow Stock Exchange and even deeper at more respectable exchanges.
Russia’s agricultural exports will gradually shrink owing to logistical isolation because of the sanctions and increased insurance premiums for vessels from Russia.
A decrease in food exports will be also linked to degradation of the Russian seed fund, which will be considerably smaller from 2023. The reason? All the top suppliers of elite seeds have discontinued work with the RF.
Moreover, Russia will lose access to pedigree (pure breed) agricultural animals it used to import from Austria and the Netherlands.
The RF will not be able to buy brood laying hens: the four key breeders have refused from cooperating with the aggressor.
Russian metal exports might plummet as well due to the imposed sanctions. They can be easily substituted on the western markets.
Russia will be unable to re-orient itself on the large Chinese market because the Celestial empire itself has extra capacities to produce steel and other metals besides platinum and nickel.
In 2021, Russia sold USD30 billion-worth of armaments. The key importers are gradually refusing from new contracts; e.g., Greece, which has been among the top ten biggest buyers of Russian weaponry, plans to stop buying them from Russia in 2023.
The russian war against Ukraine has demonstrated the real field characteristics of invader’s military equipment are far from what is being showcased at international exhibitions. This makes an adverse publicity for the RF on the world arms market.
As Ukraine has destroyed a lot of Russian tanks and navy vessels, the aggressor will have to restore its military potential thus limiting exports and losing markets.
Crude makes for about a third of Russia’s exports. It is expected that the sanctions and the proactive position of Western nations will substantially harm Russian crude supplies by 2023.
Russian crude is already trading in 2021 prices despite this year’s hike. The discount on Russian ‘black gold’ has reached 35%.
Drawing the line
As regards the anti-russian sanctions, one has to think not about tomorrow but about developments in a year to year and a half.
Most limitations are not able to hit Russia immediately. It will take some time before it becomes clear what commodities Russia is still able to export and what it will not be able to produce even domestically.
The Central Bank of the RF expect sanctions to come in full force in July. In this case, time plays for Ukraine. The longer Ukraine is able to withstand, the more weight will economic sanctions gain and the more they will contribute to a breaking point in the war. ватимуть на злам у війні.
– What is happening on financial markets? When the sanctions were imposed, the Russian shares market actually flopped with a serious devaluation shock.
Ivan Uhlianytsia
The shares market is now fully dead as the trades on the Moscow exchange are about only local volumes and domestic traders. Foreign investors have been actually disconnected from the Russian market, that is, no trade in promissory notes.
Trade volumes, if by shares, have declined almost tenfold, even despite the Central Bank and government institutions buying shares of some biggest Russian companies. That did not help.
Regarding prices of some assets (with a view this may tell something more or less substantial about the situation): Russian corporate and sovereign bonds are currently being traded at prices around 17% of the nominal ones. That is, usually they would be traded with a premium greater – far greater – than 100%. This is actually a default. The price is the same regardless of the retirement year – 2025 or 2035.
On the crude market we see a 35–40% difference in prices on Brent and Urals (Russia), the former going higher. This is also related to both direct and ‘ethical’ sanctions. The advanced adequate world feels for Ukraine and assists it.
Companies and nations want nothing in common with bloody dirty crude or metals from Russian oligarchs. Many Russian investment banks like Renessans, Aton, have been pre-emptively disconnected by foreign banks preventing them from selling their products, doing simple and complex trades with their agents – even supporting the existing trades.
A comparison with manufacturing companies shows it is like cutting access to all production resources when a company simply cannot operate any more. They have also been cut from Bloomberg – same as cutting power supply to the factory.
The sanctions have been imposed not only on banks but also on all the infrastructure related to them, specifically, on investment units. Lease sanctions have been imposed on important assets like airplanes, vessels and tankers affecting also physical exports and imports.
– What was Russia’s Central Bank’s reaction to counteract sanctions’ negative effect on the economy?
Yevhen Dubohryz
The Cental Bank of Russia reacted to sanctions in a classical textbook way of reacting to external shocks. The central aftermath of an external shock is panic, the worst one may come across early in the economic situation.
Steps made by RF Central Bank:
1) currency-related limitations (ban of withdrawal or sale);
2) transborder limitations (not possible to wire/carry currency abroad in any way);
3) confiscation/’seizure’ of currency when 80% proceeds in currency must be exchanged for roubles;
4) refinancing option for the banking system. That is, everyone understands the public will respond to sanctions with bank runs so banks are given as much money as they want;
5) the key discount rate is no longer a monetary instrument but simply a market one. The Central Bank raised it from 9% to 20% – more than twice – to incentivise individuals to deposit with the banks;
6) limitations on cash withdrawal imposed in such a way as not to affect most of the public. 80% of the Russians were able to freely withdraw their roubles or exchange dollars into their national currency unit,
7) closure of all the markets – the inter-bank exchange, the currency exchange, stocks, Moscow stock exchange – to prevent Russians from seeing shocks on the Western markets. The shares and bonds plummeted but Russians could not see it.
The last one: negotiations with all financial market players. The Central Bank is telling them who is to buy currency and how, providing stock exchange quotations etc.
What has the result been? A refinancing at the beginning, all the Russians immediately went to banks to withdraw cash money, the Central Bank started printing money for banks. The money supply went up almost eight times to RUB9.8 trillion at its peak.
Then the panic started to give way to people seeing they could still withdraw cash and even earn with deposit rates of 14% instead of 8% because banks’ reaction to the base rate increase was to up deposit rates.
The banks returned the refinanced amounts in a month and a half and we now see there is no problem with liquidity in Russia.
International reserves are an indicator: if we take away these blocked reserves we see a slump in the reserves in the first week, then stabilisation of continued exports and not that much imports. The panic on the Russian market has subsided.
Sanctions is a long game. The Russian economy has already adapted so new sanctions are necessary. There is always a question: which sanctions are we missing? What is the Russian army being funded from?
The largest component, even larger than taxes, is the rent from Gazprom, customs duties and imports. Everything that comes from Gazprom in full – the rent, customs duties, value added taxes, production – is 6.2 trillion roubles. The VAT, i. e., consumption tax, is more than 6.3 trillion roubles.
The oil embargo greatly affects the ability of Russians to fight but it also not in the least the consumption. Therefore, the sanctions that simply limit the current consumption hitting the pockets of the Russians and their ability to buy something and turnover money in the economy, are no less efficient ones. From an economic point of view, the sanctions affect the ordinary Russians no less efficiently than those on oil and gas. Therefore, these sanctions on consumption and money circulation are necessary.