11bn worth of iron in the sea and investors’ goodbyes: outcomes of economic warfare

Yaroslav Vinokurov – Tuesday, 1 March 2022, 22:00

On the morning of 1 March, Ukraine’s Minister of Defence Oleksiy Reznikov summed up Ukraine’s achievements on the economic front of the fight against the aggressor state: "Russia has endured severe losses on the economic front. Russian currency is turning into worthless paper."

The Russian economy is, in fact, steadily approaching crisis or even collapse. Foreign businesses are rapidly severing economic ties with Russia, even in the energy sector. The Russian currency is depreciating and the value of the shares of Russia’s largest international banking groups are precipitously approaching zero.

Earlier, Western countries imposed tough sanctions on Russia following its aggressive invasion, including:

• sanctions against several of Russia’s largest banks, including VTB and Sberbank, including disconnecting them from the SWIFT system. However, VTB had an opportunity to remove its Cyprus-based subsidiary from sanctions; the latter was not included in the final list on the US Treasury website;
• sanctions against the Central Bank of the Russian Federation (which blocked about 2/3 of the country's international reserves).

The Central Bank of Russia imposed its own ‘sanctions’ against Russia. In particular, it sharply raised the interest rate from 9.5% to 20%, and introduced currency restrictions, forcing exporters to sell 80% of foreign exchange earnings (at the official rate of the Central Bank, not at the market rate).

As a result, Russian firms, which lost opportunities to raise funds in foreign markets, also lost the domestic market (due to high interest rates).

Against the backdrop of sanctions and the escalation of the war against Ukraine, foreign firms began to sever their business ties with Russia. For example, the international corporation British Petroleum has decided to sell its stake in Russia’s largest oil company Rosneft.

Russia’s international isolation continued on 1 March

Visa and MasterCard payment systems blocked access to sanctioned Russian banks. Domestically, Russians can still pay with these cards, but not abroad and in foreign online stores.

Russian companies are experiencing a devastating decline in Western stock markets. Shares of Sberbank fell 73% on Monday 28 February during the first hours of trading. Since the beginning of February, the share price of this bank in Western markets has fallen 66 times.

VTB shares have stopped trading on the London Stock Exchange due to the termination of contract. In addition, a number of Russian non-financial firms, against which the United States and Europe have not imposed sanctions, have lost access to Western markets. Shares of Yandex, Qiwi PLC, Nexters Inc, HeadHunter Group PLC, Ozon Holdings PLC stopped trading on Nasdaq and the New York Stock Exchange.

Due to the falling quotations of Russian companies, the National Wealth Fund of the aggressor country decided to support the economy and spend $10 billion to acquire shares in Russian companies.

The capitalisation of the largest Russian issuers fell by 80% and in some cases even 90% in a few days, and the Moscow Stock Exchange index fell by 30% between 21 and 25 February. Moscow Stock Exchange has not opened for trading since February 25, a decision made by the Russian Central Bank.

Russia is gradually but surely becoming a source of toxic assets. Western businesses are already hurrying to withdraw all of their investments from the aggressor country in order not to fall under sanctions and not to suffer reputational losses. And while it is still possible.

For example, Wise, a fintech service for cross-border payments, has announced the termination of work in Russia, and so did the betting agency Parimatch.  Austrian Raiffeisen [banking group] is considering leaving the Russian market, despite the fact that its Russian subsidiary brings almost the largest share of profits of the whole group.

Ukrainian business also no longer cooperates with Russia. For example, the manufacturer of alcoholic beverages Nemiroff revoked the license to manufacture its products in Russia. Meanwhile, Adidas has stopped cooperating with the Russian Football Association. This is not surprising after UEFA excluded Russian national teams and clubs from participating in any competition under its auspices.

Finally, AG, one of the operators of Russia’s Nord Stream 2 gas pipeline [designed to supply gas from Russia to Europe while bypassing Ukraine] had to declare itself bankrupt due to sanctions. Now the pipeline, which has already cost more than $11 billion, is officially worth nothing.

The ruble closed trading on 1 March having depreciated from 105 rubles per dollar to 111 rubles per dollar. At the beginning of the day, the Central Bank of the Russian Federation tried to save the ruble from falling, but this did not stop its depreciation. In the cash market, the dollar is sold for 140-150 rubles.