Four weeks of war hurt the Russian economy

A Russian ruble coin seen on broken glass and displayed on the Russian flag in this illustration taken, February 24, 2022. REUTERS/Dado Rovich/Illustration/file photo

LONDON (Reuters) – Russia’s invasion of Ukraine on February 24 triggered sweeping sanctions that have ripped the country off the global financial fabric and reeling its economy.

A month later, the Russian currency lost a significant part of its value and its bonds and shares were expelled from indices. Its people are suffering from economic pain that will likely continue for years to come.

Here are five graphs showing how the past month has changed Russia’s economy and global standing:

economic pain

In 2020, Russia was the 11th largest economy in the world, according to the World Bank. But by the end of this year, it might not be higher than 15, based on the ruble’s exchange rate at the end of February, according to Jim O’Neill, the former Goldman Sachs economist who coined the acronym BRIC to describe the Big Four. Emerging economies Brazil, Russia, India and China.

Recession seems inevitable. Economists polled by the central bank had forecast 8% deflation this year and inflation reaching 20%. Read more

The outlook for economists outside Russia is even bleaker. The Institute of International Finance forecasts a 15% contraction in 2022, followed by a 3% contraction in 2023.

“Overall, our projections mean that current developments will undo the economic gains made for approximately fifteen years,” the Institute of International Finance said in a note.

Inflation turns to dust

Since taking office in 2013, Central Bank Governor Elvira Nabiullina’s biggest victory has been to curb inflation from 17% in 2015 to just over 2% in early 2018. With price pressures rising in the post-pandemic months, she has defied industrialists by raising prices. The interest is eight consecutive months.

Nabiullina also resisted calls in 2014-2015 for capital controls to stem outflows following the annexation of Crimea.

But these achievements were torn to shreds in less than a month.

Annual price growth accelerated to 14.5% and should exceed 20%, five times the target. Inflation expectations for households for the next year exceed 18%, the highest level in 11 years.

While panic buying explains some of that, a weaker ruble could keep price pressures high.

With Russian reserves abroad frozen, Nabiullina was forced to double interest rates on February 28 and impose capital controls. The central bank now expects inflation to return to the target in 2024 only.

Index Filter

Sanctions are forcing index providers to take Russia out of the criteria that investors use to funnel billions of dollars into emerging markets.

JP Morgan (.jpmegdr) And MSCI is among those who have announced that they are removing Russia from the bond and stock indexes, respectively (MSCIEF).

Russia’s standing in these indicators has already been damaged in the wake of the first set of Western sanctions in 2014 and then in 2018, after the poisoning of a former Russian spy in Britain and investigations into alleged Russian interference in the 2016 US election.

On March 31st, the weight of Russia will be set at zero by almost all major index providers.

Categories are torn

When Russian forces stormed Ukraine, their country had a coveted “investment grade” credit rating with the three major agencies S&P Global, Moody’s and Fitch.

This allowed it to borrow relatively cheaply and default on its sovereign debt seemed out of reach.

In the past four weeks, Russia has suffered its largest ever cuts to its sovereign credit score. It is now at the bottom of the rating ladder, indicating an imminent risk of default.

ruble problem

A month ago, the average one-year ruble exchange rate was 74 per dollar. Trading on different platforms showed ample liquidity and tight bid/ask spreads expected for a major currency in emerging markets.

All that changed. With the central bank deprived of a large part of its hard currency reserves, the ruble fell to record lows of more than 120 per dollar domestically. In foreign trade, it fell to 160 to the dollar.

With liquidity drying up and bid/ask spreads widening, ruble pricing has become haphazard. The exchange rate has not yet found balance at home and abroad.

Additional reporting by Karen Stroecker, Sujata Rao, Rodrigo Campos and Mark Jones; Editing by Sam Holmes

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