What is the impact on Russia and the world?

AA / Mohamed Badine El Yattioui

Russia seems to want to overcome the confrontation with Ukraine, but many Western nations are taking steps against it. Russia’s economy should suffer short- and medium-term from this sanctions arsenal, despite Moscow’s recent attempts to reduce fiscal interdependence with Western nations. And its impact will spread beyond the Russian border.

-Armor of sanctions

Russia has a reserve of $ 630 billion in the central bank: $ 130 billion in physical gold and $ 500 billion in foreign reserves (dollars, euros, yuan). This is why the Westerners knew this and decided to freeze his property. As a direct result, Russia will not have access to the savings held by central banks and countries in foreign currencies and gold. RMB and gold reserves allow us to manage about one-third of our reserves. Please note that the currency of China is only 13% of the total.

Russia has also seen exclusions from the Swift interbank messaging system. Therefore, Russian banks are paralyzed because they allow Swift to trade around the world.

When it comes to high tech, the European Union, the United States, Canada and Japan restrict software exports.

-Impact on Russia

The Russian government has decided that the transfer of currency abroad is no longer permitted. In addition, exporters will need to convert 80% of foreign exchange income earned after January 1, 2022 into rubles and maintain this ratio of 80% of the ruble’s monetary assets for the next few months. ..

The ruble collapsed against the dollar and euro this week. As a result, Russian banks are at risk of bankruptcy. The Central Bank of Russia also announced that it would raise the key rate from 10.5% to 20%. Therefore, credit finance is more expensive. Transnational currency transfers are currently banned as many Russians have withdrawn their bank savings.

The dynamics of inflation that exist around the world are particularly strong in Russia in the post-Covid situation. The ruble continues to fall against the dollar and euro as geopolitical conditions have lost confidence in the Russian currency. The inflation problem already existed, as it was 8% at the end of 2021. During the 2021 calendar year, Russia raised major interest rates seven times. This proves a structural vulnerability in the system. Collapse in the process of the ruble adds a problematic price increase to imported goods. Vladimir Putin relied on his reserves to support his currency, but they were frozen. According to economist Ano Kuhanasan, the conflict should slow Russia’s growth in 2022 before the recession in 2023, despite the very high likelihood of rising energy prices.

-Global impact

Of course, all of this has a global impact on globalized and interdependent economies.

According to economist Bruno de Moura Fernandez, “This war will also affect the world economy. Some countries have stopped exporting certain commodities, especially technical commodities, to Russia. Since these countries are importers of intermediate products, their suppliers will also be affected.

Since the production chain is global, its impact will ultimately reverberate in many countries. Steve Schifferes, Research Fellow at the City Political Economic Research Center in London, said the war “is at a crucial time for the global economy, which has just begun to recover from the devastation of Covid-19.

Russia’s war could have significant economic implications while financial markets collapse and oil prices soar. He compares the situation in 1973 after the Yom Kippur War, which caused the oil crisis. The economy was affected globally.

Due to its heavy reliance on Russia’s energy supply, economic implications are a concern, especially at the European level. This country is the largest gas and oil supplier to the EU. If prices can rise, shipping costs and thus the price of goods will rise. This adds to the rise in heating and gasoline prices. Remember that Russia and Ukraine play a major role in the grain market. Russia is the world’s largest wheat producer and Ukraine is the world’s fourth largest corn exporter and third largest wheat exporter. As a result, grain stock prices have skyrocketed since last week.

A prolonged crisis could lead to stagflation in the global economy, which would be the worst scenario. A combination of high inflation and low GDP growth.

-How long can Russia last?

Historian Edward Luttwak argued in 1995 that economic warfare was the transposition of competition between powers into different terrains. Conflicts of interest between nations can now only be found in the economic arena. According to him, the era of conflict related to the conquest of territory is over. What has been happening in Ukraine for several days proves the opposite. In 1992, C. Harbulot, director of the French School of Economic Warfare, explained that economic competition has become a major battlefield for power.

Europe accounts for 45% of Russia’s economic exchanges. Contrary to the discourse of European leaders, they will be reduced, but not completely stopped. Keep in mind that Russia has various economic partners. China is the second partner. There are also important exchanges with India, Turkey and many African countries.

Despite its undeniable geopolitical weight, its economic situation is more vulnerable due to its voluntary diplomacy and strong army. “The three smaller countries of the Benelux (Belgium, the Netherlands and Luxembourg) have higher GDP than Russia,” as Eric Dor, director of economics at the IESEG School of Business in Paris, points out.

There are many causes for its economic vulnerability. Among other things are population decline, low labor productivity, and lack of investment to diversify the economy. Its strength is undoubtedly a strong export of oil and gas. It’s also its weakness somewhere, as it accounts for 40% of national budget revenue and 60% of its exports.

In the event of a stalemate, the Russian economy could become a wartime regime. The state will then undertake most of its economic activity under its wings. Currently, the state accounts for about 40% of GDP. Russia has a $ 185 billion sovereign wealth fund. Can she use some of it? Watch the situation.

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