Last week we tried to put the Russian economy in perspective relative to the rest of the world and some of the countries that it neighbors, especially in Europe. Our conclusion was: “What we are looking at here in terms of Russian actions is an effort by a relatively small country trying to use military action and threats, backed up by a nuclear arsenal that can in no way compare in terms of resources to those it is threatening. At some point things will have to give, and strong political and economic sanctions will have an impact.” (See Russia – In Perspective Economically: https://www.cumber.com/market-commentary/russia-perspective-economically)
The world, and in particular the US, Europe, Australia, Canada, and Japan, are continually adding to a wide range of sanctions on Russia. Many pundits have argued that the sanctions were too little too late, even as more sanctions were imposed on Russian oligarchs, Putin, and Russian financial institutions over the weekend. The evidence now is that sanctions are already having a devastating impact on the Russian economy, not only on the oligarchs but also on the average Russian citizen. For example, the value of the ruble has been in free fall, from about 83 rubles per dollar at the start of the invasion to as low as 112 rubles on Wednesday. It takes about 112 rubles to buy one dollar or nearly 5 million rubles to buy one bitcoin.
The interesting thing is how quickly the sanctions have begun to have an impact on the average Russian. For example, Visa, Mastercard, Google Pay, and Apple Pay are no longer available in Russia; and the result has been runs on Russian banks and long lines at cash machines to obtain currency. Withdrawals of cash from Russian banks have resulted in some banks imposing limits on cash withdrawals. The central bank has raised interest rates to over 20%, making interest payments extremely painful for borrowers. Russia’s second-largest lender raised mortgage rates by four percentage points to 15.3% and has temporarily stopped certain processing operations. The government has required exporters to exchange 80% of their foreign exchange to rubles, banned external transactions by residents, and suspended transfers abroad from the accounts of outside corporate entities and individuals. The Russian stock market has been shut down the entire week. That closure, along with the freeze on international transactions and their holdings of deposits and sovereign debt, has had a crimpling impact on Russia’s major banks; and it looks as though the European subsidiary of Sberbank will fail. Fearing that those wealthy oligarchs and other wealthy Russians with foreign passports through residency might exit Russia, Moscow has placed restrictions on taking more than the equivalent of $10,000 out of the country.
While energy is the main asset that Russia has, major international companies like BP and Shell have begun liquidating their investments in joint projects, and this will likely have an impact on both production and ability to ship oil and natural gas, since restrictions have been placed upon Russian shipping. Other major companies such as Boeing, Airbus, Nike, VW, and Harley Davidson have stopped doing business in Russia. Two major shipping companies, DHL and Kuehne+Nagel, have now joined FedEx and UPS in stopping shipments into Russia, making it difficult to get delivery of goods from outside. Additionally, global container giants Maersk, MSC, Hapag-Lloyd, and Ocean Network Express have stopped service to Russia, which accounts for about 3% of container trade; and these firms account for about half of the world’s container shipping capacity. Imports to Russia include cars and parts, medicines, clothing, liquor and wine, toys and furniture — everyday items that will negatively impact consumers.
Finally, it appears that the hacker group Anonymous claims to have launched a cyber-attack on more than 1500 Russian sites, including news websites, governmental websites, and the control center of the Russian Space Agency, cutting off access to Russian spy satellites. Anonymous has also supposedly disabled the Russian Vehicle Monitoring System and dumped more than 40,000 files from the country’s Nuclear Safety Institute. The group has also apparently knocked the Ministry of Labor and Social Protection offline, breached a maritime trafficking site, and changed Putin’s yacht ID to a vulgar set of characters. Finally, hacker groups have also attacked railway systems in Minsk, Orsha, and Osipovichi, disrupting military movements, just to give a brief view of what private-sector groups are doing. (“Anonymous vs. Russia: Hackers Say Space Agency Breached, More Than 1,500 Websites Hit,” https://www.hstoday.us/subject-matter-areas/cybersecurity/anonymous-vs-russia-hackers-say-space-agency-breached-more-than-1500-websites-hit/)
On the military front we are learning more about that 40-mile line of vehicles set to approach Kyiv. It is largely confined to the roads because the weather is moderating and mud is becoming more and more prevalent. Tanks don’t do well in mud, as history has demonstrated. It also appears that fuel and food are becoming a problem for the Russian Army, and resupply will be difficult if vehicles are stalled three abreast, as satellite images suggest they are. Finally, reports are that a significant portion of the troops in that column are young, inexperienced, and barely trained. Some have reported that they were not told why they were in Ukraine and are questioning whether they should fight.
We will learn more in the next few days, but right now it is clear that plan A isn’t working and Putin will need to come up with a plan B. Regardless, the pain at home is not only large but is impacting the entire populace and will last long after the fighting is done. In addition, establishing and maintaining control of a couple of cities is not the same as subduing the entire country, and costs of doing even that will dwarf the costs incurred so far, not to mention the Russian causalities. Russia has again signaled a willingness to negotiate, and we can only hope that this time they can find a way out.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
