“this will greatly affect the Russian economy” (Coface)

GALLERY- “Russia is gradually being cut off from the rest of the world, especially in economic terms, and this will have extremely dire consequences,” said Secretary of State for European Affairs Clement Bon earlier this week. What could be the overall impact of the sanctions imposed by Western powers in recent days on the Russian economy and the global economy?

BRUNO DE MORA DE FERNANDES – At this stage, it is difficult to quantify the overall impact on Russia’s gross domestic product (GDP), as the sanctions are still evolving and taking various forms, but the Russian economy will be heavily affected. Europe, Great Britain, USA, Japan decided to block the reserves of the Russian Central Bank. This is one of the key measures, since it reduces the ability of the Russian Central Bank to limit the impact of sanctions on the Russian economy.

This war will also have an impact on the global economy. Some countries have announced the cessation of exports to Russia of certain goods, especially technological ones. Since these countries are importers of intermediate products, their suppliers will also be affected. Because production chains are global, in the end in a large number of countries.

Finally, with regard to raw materials, we are already seeing price increases and therefore production costs for companies. Gas and energy prices generally rose. Rising grain prices affect both the consumer and breeders or even processors. Inflation in Europe is accelerating, in part due to rising commodity prices. This increase in inflation leads to a fall in the purchasing power of consumers and a decrease in consumption. Finally, the current uncertainty may affect investment. Each new sanction will have implications for operations, although Russia has yet to announce reciprocity measures.

Russia: how Western sanctions will affect the daily life of Russians

The ruble collapsed on Monday, and the Central Bank of Russia raised its key rate by 10 points. Does the Russian Central Bank have ammunition to fight galloping inflation? Can Russia compensate for the damage caused by these measures?

The situation for the Russian Central Bank is very difficult. It has sizable foreign exchange reserves of around $640 billion, but the European Union estimates that almost half of these reserves are held abroad and are therefore currently blocked. This limits their use. In addition, most of the reserves are based on gold, which is not very liquid and the massive sale of which can lead to a drop in the price. The question also concerns support for China: will Beijing provide liquidity to Russia? The Central Bank of Russia has two options: the first is to raise rates, which it did. The second solution may be to control the capitals, but this can seriously affect operations.

In Russia, Western sanctions spur rates and collapse the ruble

The exclusion of some Russian banks from the Swift messaging system has already led to the bankruptcy of several institutions in Europe. How vulnerable is the European banking system in Russia?

Some European banks may be affected by this situation because they either have local subsidiaries or significant risks. But the European system is sound, and at this stage we do not see financial risk as one of the most important risks for Europe.

Ukraine: Western countries disconnect Russia from the Swift interbank network (economic nuclear weapons)

In terms of energy, Europe is still heavily dependent on Russian gas. Could this limit the consequences of the sanctions, especially since the energy industry benefits from certain exemptions from sanctions?

The challenge for European states is to effectively impose sanctions on Russia without creating too much hardship for themselves, especially on energy issues. Russia accounts for about 50% of gas imports from Germany and Italy. Therefore, we must avoid a surge in gas prices or supply problems. The whole difficulty lies in finding a middle ground, knowing that Russia must be interested in continuing to export gas or oil in order to fix the inflow of foreign currency.

Russian oil: why doing without it will be a real test

On the European side, economic and financial circles are concerned about the continuation and possible aggravation of the conflict in Ukraine. What could be the consequences of such a war in the short term for the European economy? Faced with all these uncertainties, what can the European Central Bank (ECB) do?

At its March 10 meeting, the ECB will face a serious dilemma. Should we raise rates and withdraw monetary support to rein in commodity-fueled inflation when markets are extremely tight and activity falters? Markets are now expecting a wait-and-see attitude from the ECB, even though there are diverging views among governors. The ECB may decide to support the economy and guarantee financial stability by maintaining its asset purchase program and not raising rates quickly. We must remain vigilant and watch how the situation develops in the coming days.

In your latest barometer, released shortly before the start of the conflict, you mention expanding disruptions in supply chains. To what extent can this conflict exacerbate these difficulties in the eurozone?

In this barometer, we set the continuation of several more months of supply difficulties, but we recognized that these difficulties have reached a peak. They had to be gradually reduced to be absorbed by the end of the year in most sectors. With this conflict, certain flows into or out of Russia will be stopped or brought under control. Russia occupies a strategic position in the world for the production of certain metals such as palladium, aluminium, nickel and copper. Therefore, now we can expect increased tensions regarding these metals. In general, this situation will exacerbate the difficulties in supply chains and will have negative consequences for the global economy.

Even before the war in Ukraine, French companies experienced difficulties with supplies

In the barometer, you also remind that there are real risks of social tension in a pandemic. How can this conflict exacerbate this social pressure?

The Covid-related pandemic has exacerbated social pressures, fueling inequality and frustration. Rising inflation associated with the Russian-Ukrainian situation will increase tensions. It should be remembered that Russia and Ukraine are major producers of cereals and that strong social pressure has already taken place, for example, in Kenya or Malawi due to rising food prices. The more energy and food prices are affected, the greater the risk of social unrest, as this automatically leads to increased poverty and inequality.

Interview with Gregoire Norman