The ruble is the lowest in history and Russia’s economy could fall 7%

The financial crisis has spread to the economy, and financial circles predict that GDP will shrink by 5-7% in 2022.

“I toast the death of the Russian Stock Exchange and work as” Santa Claus “.” Economist and trader Alex Butmatov has created a sensation on Russia’s non-stop news channel RBK. Market experts took out a bottle of alcohol live to drink a shot from the neck, leaving the presenter speechless for a while.

This intervention reflects the pain of investors, and more generally of the financial world, where the system has recently collapsed.

“Causes the collapse of the Russian economy.” The Bruno Le Mer official, announced this Tuesday in Amfo, France, toured the planet. Russia’s economy is beginning to suffer serious damage as sanctions fall on Vladimir Putin and his allies.

The ruble, the first victim of economic warfare by Japan and South Korea as well as Western nations, fell by more than 10% on Thursday and continues to descend to hell. Russian currencies fell to historically lows against the dollar and euro after rating agencies Fitch and Moody’s decided to downgrade Russia’s sovereign rating to the speculative category.

117 rubles per dollar

At 11:30 am on Thursday, it took more than 117 rubles to earn $ 1 compared to 75 rubles on January 1. The exchange rate is equivalent to the dollar on Thursday morning (1 euro for 117 rubles), although it has not fallen so sharply against the euro.

The Central Bank of Russia has imposed a 30% commission on individual purchases of foreign currencies and foreign exchange transactions to support its own currency, but the depreciation of the ruble has not been hindered so far. At the beginning of the week, the agency suddenly increased its key rate by 10.5 points to 20%. This only temporarily delayed the decline in the medium-term borrowing capacity of rubles and disabled companies to invest in the country’s economy.

What are the consequences of this historic depreciation of the home currency? First, of course, a surge in strong inflation. Russian companies need to adjust more rubles to buy foreign products they depend on, passing it on to prices. Therefore, Goldman Sachs Bank has raised its inflation forecast at the end of 2022 to 17% year-on-year, compared to the initially expected 5%. However, this estimate does not take into account the possibility of further increases in key rates by central banks.

“The West dismantles Russia’s finances in one day and observes Swedish economist Anders Asland, a member of the Atlantic Council of Thinktanks and the author of a book on the Russian economy. All Russian capital markets It seems to have been wiped out and is unlikely to come back with anything other than deep reforms. “

Economists refer to Russia’s financial crisis of 1998. In the crisis, the economy shrank 6.8% that year and inflation was 84%. The crisis that led to the inauguration of the government, which embarked on economic reforms to make the country’s production system more competitive by seriously damaging the purchasing power of Russians and promising the stability of the people. In particular, it was Vladimir Putin, then Prime Minister, who led the reform.

GDP between -5 and -7%

However, the decline in activity could be even more severe this year. Goldman Sachs, who previously estimated GDP to grow by 2%, sees a 7% reduction in the Russian economy in 2022.

Russia’s oligarch Oleg Deripaska, the founder of the aluminum giant Rusal, believes the consequences could be even worse.

“We have never faced such a challenge […] When people tell you: they lower the Iron Curtain, they don’t lower the Iron Curtain. It has already been lowered, it is already a fact … he commented during the Russian Economic Forum currently being held in Krasnoyarsk. We will experience a serious economic crisis. You can multiply the 1998 crisis by 3 to get an idea of ​​the scale. “

According to the millionaire, he saw his fortune melt nearly $ 2 billion in a year. Forbes Call for the end of Russia’s state capitalism. And while he may exaggerate the consequences of current sanctions, the financial crisis should soon spread to other parts of the economy.

“We expect domestic demand to shrink by more than 10% as financial conditions are tightened to the same level as in 2014 (Russia’s annexation of Crimea),” he said. CNBC Clementsgraf, Russia’s Chief Economist at Goldman Sachs.

The pessimistic forecast from research firm Capital Economics is rather low, yet it is expected to decline by 5% (against the initial estimated 2.5% growth) and inflation by about 15%.

According to economists, the most impediment to Russia’s financial system is that it is impossible to use foreign exchange reserves, which reached $ 500 billion in 2021, to support the currency.

China with the help of Russia?

If Russia’s financial system is at stake, further sanctions may be considered to accelerate the collapse of the economy. Start with Russian export restrictions. Oil and gas flows account for almost half of Russia’s exports and more than 30% of government exports. Some banking institutions are excluded from the Swift system, but most other companies have no restrictions on the flow of funds.

CNBC Liam Peach, an economist at Capital Economics, said, “Restricting these puts pressure on the major dollar revenue sources for energy companies that have foreign currency-denominated debt and could cause a much larger financial crisis in Russia. I will do it. “

The stubbornness of the Russian government in Ukraine can lift the last taboo of the Western nations by assuming the cost of their population at soaring prices.

“The G7’s willingness to bear costs is increasing, which could ultimately mean limiting Russia’s exports and accepting higher commodity prices could be politically feasible. “Clements Graf said.

Russia, which was denied access to western financial markets, deprived of foreign currency and restricted exports, could only seek help from China. The country has already begun to transfer its foreign exchange reserves to the yuan, integrating its equivalent of China’s Swift and moving its payment system to Chinese banks.

If Russia relies on China, China’s diplomacy seems to be moving away from Vladimir Putin. Beijing has sought hours to respect Ukraine’s territorial integrity and the departure of Russian troops. Russia seems to be increasingly isolated.