The major index providers have eliminated Russian companies from their global and regional indices for the most part, Russia has essentially completely blocked the trading of Russian equities by foreign investors, and Western sanctions aimed at the trading and ownership of Russian equities, bonds, and other assets are further exacerbating the situation. At the same time, no one knows what the situation will look like a few months from now, and the events in Russia and Ukraine naturally have potentially far-reaching consequences for virtually every nation of the world. Therefore, we will continue to monitor and discuss the developments in Russia.
Growth despite sanctions and war
According to World Bank data, last year Russia overtook both Germany and Japan in terms of economic output (gross domestic product, GDP, by purchasing power parity) and thus advanced to rank as the 4th largest economy in the world, albeit with a healthy gap to China, the USA, and India. (Calculation according to purchasing power parity generally offers a more realistic picture of actual economic strength rather than the typical calculation in US dollars at the prevailing exchange rate.) According to the International Monetary Fund (IMF), Russia’s economy is set to grow at a rate of 3.2% in 2024, which would exceed growth in all of the industrialised Western countries.
Wartime economy and import substitution
The main reason for this is the war in Ukraine and production of the arms needed for it. However, another aspect that should not be forgotten is the ongoing growth in areas where Russia has replaced or is trying to replace imports that used to come from the West with its own production. Many analysts in the West believe that Russia’s economy will run into major problems, regardless of whether the war (soon) ends or drags on for a long time. While this is an understandable view, it is possible that it underestimates how quickly and sustainably draconian sanctions can lead to the development of viable, independent industries and economic sectors. It is certainly conceivable that the strength of the Russian economy is being reinforced yet again. On the other hand, one should also not underestimate the ongoing, constantly tightened sanctions by the USA and its allies.
New sanctions with increased impact?
In this regard, secondary sanctions have been introduced or tightened in particular, i.e. threats of measures against non-Russian companies that maintain business ties with sanctioned Russian firms or individuals. The objective of this is primarily to keep banks in China, Türkiye, India, and the Gulf region from financing Russian exports and imports or from handling payments for such. These kinds of sanctions can have an acute impact on Russia’s economy, but they are not unexpected. It remains to be seen to what extent Russia has been able to devise evasive measures or alternatives. As of the editorial deadline, the US Treasury announced new sanctions, including ones affecting the Moscow equity exchange and other financial institutions.
Exchange trading in EUR and USD suspended in Moscow
In response, trading in EUR and USD on the Moscow exchange was suspended, along with trading in financial instruments denominated in EUR and USD. The Russian central bank reacted calmly and tried to reassure companies and households. Nor did the Russian rouble initially show much reaction. However, in view of the stubborn inflation (7.4% yoy, with an inflation target of 4%) and possible renewed weakening of the rouble, the Russian central bank mentioned the possibility of rate hike in July (from the current level of 16% to 17% or 18%).
In May, the equity market in Moscow fell sharply, dropping more than 7% (in roubles) and 4% (in US dollars). In early May, the energy giant Gazprom reported its first loss in a business year in the last 22 years, which surprised almost all market observers. The company has come under massive pressure, mainly due to the loss of the European gas market.