This is how sanctions are affecting Russia

Globalization has offered Russia three main benefits: freedom of movement of goods, capital and people. The war has started and the response that has been given to date by the developed countries comes from restrictions of the last two benefits mentioned.

It seeks to attack the ruble and Russian funding sources to cripple the Russian economy and limit its ability to pay for the deployment of the invasion.

Nevertheless, there is no strong response in goods movements. In this case, Russian gas is necessary to cover the energy dependence of countries like Germany. Without that gas, supply problems are created for the operation of your economy.

The change of provider is not a feasible operation in the short term but it implies costs and less competitiveness in an energy environment that was previously already in tension.

Financial weapons are blocked to promote the fall of the ruble

The European Union, the United States, the United Kingdom and Canada have agreed this weekend prevent the Russian central bank from deploying its international reserves. Since then, the EU has said it is banning all transactions with the institution, which has 640 billion euros in reserves.

But why is this measure being taken?

The strong devaluation of the local currency is a problem for any country because it reduces the purchasing power of foreign goods and services and high inflation rates emerge that devalue savings.

In this point, Russia’s annual inflation rate had already accelerated to 8.73% in January and it will probably skyrocket in the coming months.

In the most extreme cases of devaluation, we can see supply problems of products that are not produced by domestic industry, promoting a shortage. A great element of destabilization for any country.

To prevent the occurrence of this scenario, you must avoid or offset the sale of local currency capital market participants.

To do this, the country’s central bank can raise interest rates and make the remuneration of deposits in local currency more attractive or also use foreign currency reserves to materialize purchases in the market or try to offset sales of the local currency.

With the current sanctions, Russia does not have a great capacity to access foreign currency reserves Except for China.

For now, the financial war is won by the West. If the dollar was paid at 84 rubles per dollar on Friday, now it is paid at 105.27. The ruble has plummeted 26% after the decision.

But the Russian central bank has struck back with a rise in interest rates, from 9.5% to 20%.

At the same time, the Russian government has announced the decision that requires companies to sell 80% of their export earnings: sell dollars to try to control the USD/RUB pair.

But the rise in interest rates is a double-edged sword: it can reduce capital flight but credit becomes more expensive. The most immediate consequence is that the national economy cools down to the point of entering a recession..

In order for credit not to contract, the central bank has recommended that banks meet the needs of their customers approving the restructuring of loans without imposing sanctions or fines on said loans.

Kill Russian banking so that Russia cannot finance itself

Russia has a very low public debt to GDP ratio of 21.6%, so from the starting point its margin of maneuver to get into debt is wide.

Because the coin is sunk it should request debt in dollars for access to financingand Russian banks act as a transmission belt in it is operational.

For that reason, a number of Russian banks have been excluded from the Swift international payment system and they have taken other measures such as that the shares of Russian state entities can no longer be listed on EU stock exchanges.

Block financing by debt and capital that is the objective.

The existing fear is leading to Russian depositors are demanding your cashfrom Russia it is recognized that due to the “great demand for cash, the banking sector is now experiencing a structural liquidity deficit”.

This banking instability, together with the collapse of the ruble, would end up leading to the bankruptcy of Russian entities if they do not impose internal capital controls.

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