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Markets Shake With Uncertainty Over Russia-Ukraine War

Guerra entre Rusia y Ucrania

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On Thursday, President Biden announced a new set of sanctions on the Russian economy: “I spoke with the G-7 leaders this morning and we are in full agreement, we will limit Russia’s ability to do business in dollars, euros, pounds and yen.”

The American leader warned of further sanctions on technology exports and will impose restrictions on Russian industry to compete in technology sectors. According to Biden, the sanctions are capable of cutting Russian high-tech imports in half.

The Biden administration also announced sanctions on Russia’s largest banks, which together have more than $1 trillion in assets, including Rossiya Bank, Promsvyazbank, VTB and Sberbank, the latter of which is Russia’s largest commercial bank. 

Several members of the Russian elite and Putin’s cabinet will also be sanctioned by the U.S. government, by freezing their bank accounts and personal assets. 

On Tuesday, the U.S. and the EU banned the purchase of Russian government sovereign bonds. Today these sanctions extend to Russian state-owned companies which have assets that exceed $1.4 billion. This would impact Gazprom, Russia’s main gas company.

The war between Russia and Ukraine has markets trembling with uncertainty. The invasion of Donbas has automatically sent the world’s inflation expectations soaring, at a time when nations are just emerging from the pandemic and supply chains are stretched to the limit. 

Shares in European stock markets fell sharply, while the prices of commodities have soared, mainly in Europe, which is greatly affected by the war between Russia and Ukraine.

Los mercados financieros amanecieron volátiles ante la perspectiva de más inflación a causa de la guerra entre Rusia y Ucrania. (EFE)
Financial markets dawned volatile due to the prospect of more inflation as a result of the war between Russia and Ukraine. (EFE)

Oil and gas prices rise due to the war between Russia and Ukraine.

The price of oil has surpassed $100 in view of the fact that Russia is this commodity’s second-largest producer, representing up to 10% of the hydrocarbon supply. Nickel and aluminum prices also soared, as Russia is a major exporter of these metals. Among its main customers are European car manufacturers.

Following the suspension of the licensing of the Nord Stream 2 pipeline, Gas prices have soared by 30%, the highest increase in 2 months. Russia supplies up to 40% of the Natural Gas consumed in Europe. Some countries such as Sweden and Finland depend 100% on Russian gas to satisfy their demand for this hydrocarbon.

Europe is in a dilemma, as it has no way of substituting Russian gas and oil imports in the short term. Although exports of Liquefied Natural Gas (LNG) from the United States have been on the rise, they are still not enough to replace Russian gas. The infrastructure in Southern Europe, where American LNG arrives, is not interconnected with the plants and refineries that demand the hydrocarbon in the north of the continent. 

Higher energy prices have a major impact on the European consumer. From January 2022 to the present, energy prices have risen by 25% in Germany. In 2021, the cost of energy rose by 66.5 %. The escalation in the cost of energy has led the governing parties in that country to allocate €7 billion to help lower-income families with their utility rates.

War between Ukraine and Russia jeopardizes wheat and corn supplies in Europe, Middle East and Africa

Grain prices also jumped following the announcement of the invasion. Ukraine accounts for up to 16 % of the global corn supply and up to 12 % of wheat, which is why it is known as Europe’s “bread basket”. Russia is also another even more important wheat supplier, and together with Ukraine accounts for up to 30 % of the world’s global wheat market.

The Black Sea ports are crucial for exporting grain to the rest of the continent, so the Russian offensive in Odessa and southern Ukraine puts that supply at risk. Wheat in the United States has reached its highest prices since 2012, but the worst crisis could be faced by lower-income countries such as Egypt, Lebanon and Turkey, which buy grain from Ukraine.

Civiles Ucranianos se refugian en la estación del metro de Kiev. La invasión rusa a Ucrania ha comprometido los suministros de grano en el mundo. (EFE)
Ukrainian civilians take shelter in Kiev metro station. The Russian invasion of Ukraine has compromised grain supplies around the world. (EFE)

Wheat prices escalated 20% when Putin announced the annexation of Crimea in 2014. A new escalation could mainly affect Egypt, where more than 60% of wheat imports come from Russia and Ukraine.

The Russian stock market suffered a steep fall and Russian stock indexes are trading for as little as half of what they did before the invasion of Ukraine. The ruble has fallen to record lows against the US dollar, plummeting 10% minutes after Vladimir Putin announced the development of “special operations in Ukraine”.

Russia braces itself for a wave of economic sanctions over Ukraine invasion

According to Jake Cordell, journalist of The Moscow Times, Russia would be “on the verge of an economic crisis” after the beginning of hostilities with Ukraine, due to the economic sanctions that will be imposed by the West. The Russian authorities themselves recognize the impact of the sanctions and, according to Russian officials, have up to $630 billion to cope with the impact of the economic sanctions.

In recent years the Russian government has maintained a fiscal surplus and its external debt barely exceeds 20% of its GDP, so Russia does not depend on international debt to finance its public spending.

On the other hand, the Russian economy is facing the highest inflation seen in six years, with an increase of more than 8.7% per year, so a further devaluation of the ruble would affect the Russian consumer’s pocket even more.

En Moscú, el Kremlin ha anunciado estar listo para afrontar las sanciones económicas que occidente imponga. (EFE)
In Moscow, the Kremlin has announced its readiness to face economic sanctions imposed by the West. (EFE)

In Russia up to 75% of the raw materials and capital goods needed to manufacture the basic basket of consumer goods are imported, so a devaluation of the Russian currency would also affect the productive capacities of the economy.

Several Russian state-owned banks also expect to have their assets frozen and be expelled from the Swift interbank system, as part of the sanctions Russia would face for the invasion of Ukraine.

European Commission President Ursula von der Leyen said last Thursday that the European Union will impose a package of “targeted and massive” sanctions on Russia due to the aggression in Ukraine. The sanctions will range from restrictions on foreign assets of Russian officials to possible quota limits on energy purchases from the country.

Russia obtains up to $90 billion in income a year from energy sales to Europe, so a package of sanctions on energy purchases, or a restriction imposed by Putin himself, could cost the country millions.

According to European Union officials, by Friday there will be an official package of sanctions for the Russian Federation approved by the 27 member nations.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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