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What’s happening in Russia?

What’s happening in Russia?

Western sanctions against Russia were predicted to cause Putin’s government unbearable pain. The E.U.’s reliance on Russian energy has prevented that from happening, and the outlook for Russian exports remains positive in the near term.

Since February 23, the day before Russia invaded Ukraine, the European Union’s Council has adopted six rounds of deterrent in order to “impose clear economic and political costs” on the government of Vladimir Putin and to “wipe out the Kremlin’s ability to finance the war.”

Western governments, including the United States and the United Kingdom, have cut off major Russian banks from SWIFT, the interbank messaging system that facilitates cross-border payments. As of January 1, they had frozen about $315 billion out of the $550 billion in foreign exchange reserves that is held in currencies and gold within their command by the Central Bank of the Russian Federation (CBR).

 The White House stated on April 6 that the “most impactful, coordinated and wide-ranging economic restrictions in history” would lead Russia’s GDP to “contract by 15 percent this year, wiping out the last 15 years of economic gains”.

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Despite the war being over four months old, the plot hasn’t followed the West’s script exactly. 

Between the two surveys, the median forecast of consumer price inflation for the year has fallen from 22% to 17%.

Initially, sanctions caused the ruble to fall to a low of 158.3 to the U.S. dollar on March 7, from 76 to the U.S. dollar in mid-February. In response, the CBR raised its key interest rate from 9.5% to 20% on February 28, which aimed at bolstering the currency, which President Joe Biden had mocked as “rubble,” and reining in inflation risks.

Although the ruble bounced back to 75-76 levels towards the second week of April, it is currently trading at over seven-year highs of 53.4 to the dollar. The central bank decreased its key rate from 17% on April 8 to 14% on April 29, to 11% on May 26, and to 9.5% on June 10.

The ruble has appreciated, inflation has trended downward (rather than upwards as predicted by the White House), and the GDP has not shrunk quite as much as predicted, so the sanctions have not had the intended effect.

Neither has Russia’s external trade suffered. Between January-May 2021 and January-May 2022, the surplus of goods and services exports over imports increased from $44.5 billion to $124.3 billion, as did the overall current account surplus the went from $32.1 billion to $110.3 billion.

The main reason for this is the dependence of E.U. countries on Russian energy imports. Russia supplied 25.7% of the petroleum oil, 44.5% of the natural gas,and around The most recent median forecast of GDP decline for 2022 – based on a survey of 27 economists from different institutions (such as Credit Suisse, Goldman Sachs, and JP Morgan) conducted by CBR between May 25 and 31 – stands at 7.5%. In the previous survey conducted between April 13-19, the average growth forecast was -9.2% and around 52.3 percent of coal was imported by total 27 countires block in the year 2021. 

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The CREA that stands for Centre for Research on Energy and Clean Air which is located in Finland estimates that Russia’s revenues from fossil fuel exports totaled 93 billion euros ($98 billion) during the first 100 days of the war.

A total of 46 billion euros was generated from crude oil, 13 billion euros from refined oil products, twenty four billion euros from pipeline gas, 5.1 billion euros from natural gas in the liquid form, and 4.8 billion euros from coal. A total of 93 billion euros, or 67 billion euros, went to the European Union alone.

During its sixth “package” of sanctions on June 3, the E.U. decided to phase out bring in of crude Oil and refined products from Russia over six and eight months, respectively. There was a temporary exemption granted to countries such as Hungary and Slovakia that import crude Oil by pipeline and “, “it has not other valid option.

As part of the fifth round of sanctions on April 8, Russian coal imports were outright prohibited from August.

The success of these import phase-out plans depends on their implementation on the ground. During the winter, when energy demand peaks, the test will be conducted.

In a recent report, Fatih Birol, executive director of the International Energy Agency, warned that Europe faces the risk of energy rationing in the event of a harsh winter and resurgent Chinese demand after the lifting of Covid lockdowns.

As of now, the E.U. has not announced a ban on natural gas imports from Russia. The Russian state-owned energy giant Gazprom has cut gas supplies to nearly a dozen E.U. countries, including Germany, France, and Italy.

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The fact that China and India have emerged as major buyers of Russian fossil fuels is significant. Since February 24, Russia has exported around 64.4 billion euros worth of Oil, gas, and coal to the E.U., according to CREA’s latest tracker.

China (16.6 billion euros) has overtaken Germany as the largest importer from Russia among individual countries. The eighth place goes to India. During this period, it imported 3.7 billion euros of goods, including 3.2 billion euros of Oil and the balance of coal.

While the E.U. tries to wean itself from Russian energy, Moscow has aggressively diversified its exports to China and India. India ranked third behind the U.S. as the world’s third biggest crude oil importer in 2021.

As of May, Russia was China’s leading crude supplier, overtaking Saudi Arabia. Russia was the ninth largest crude exporter to India in 2021-22. As of May, it had jumped seven places to displace Saudi Arabia and become the second most popular country after Iraq.

Russia has effectively blunted Western sanctions by continuing to sell to the E.U. while increasing exports to China and India through steep discounts on international prices.

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As per the reports, Oil and gas are expected to account for more than half of Russia’s merchandise exports in 2021. The figure was 66% between 2011 and 2014 when crude oil prices averaged over $100 per barrel. Russia is again benefiting from high oil prices, although its average oil production has declined to 10-10.1 million barrels per day (mbd) from 11-11.1 mbd in February-March.

As Russia searches for alternative markets and the world finds ways to trade with it, the country’s exports are unlikely to decline dramatically from $494 billion in 2021.

The problem isn’t limited to fossil fuels. We can expect Russia to increase wheat and fertilizer exports in the coming months. Being the world’s biggest supplier of nickel and palladium – both used in emission control systems and electric vehicle batteries, respectively – as well as ferroalloys, chromium, and vanadium (required for steel production), makes it easier for Russia to comply with sanctions than Cuba, Iran, or North Korea.

It might be that Europe and the West are finding that sanctions hurt them more than they hurt Russia.

When it comes to the impact of debt on Russia, it has some other phases as well. Foreign bonds are worth about $40 billion, about half of them to foreigners. Russia had around $640 billion in foreign currency and gold reserves before the war, much of which was held overseas and is now frozen.

As a result of sanctions imposed over its war in Ukraine, Russia is poised to default on its foreign debt for the first time since the Bolshevik Revolution more than a century ago.

Sunday marked the end of a 30-day grace period on interest payments originally due on May 27. However, a default may take some time to be confirmed.

Despite sanctions, there is a possibility that some magic could occur, and Russia gets its money through financial institutions to bondholders, but “nobody is betting on that,” said Jay S. Auslander, a top sovereign debt lawyer in New York. There is a very high chances that they won’t be able to do so because no bank is going to move the money. Last month, the Federal Reserve stopped Russian banks from paying their billions in debt to international investors. To respond, the Russian Finance Ministry said it would pay dollar-denominated debts in rubles and offer “the possibility of converting into the original currency.” While Russia has the money to pay its debts, sanctions have frozen its foreign currency reserves.

As reported by RIA Novosti, Konstantin Kosachev, a deputy speaker of the upper house of the Russian Parliament, said Monday that it was not a default for our country.

According to Russian Finance Minister Anton Siluanov, the U.S. and E.U. have deliberately created obstacles for Russia to service its sovereign debt.

A second argument is that sanctions caused this, but sanctions were fully within your control, Auslander said. “You were in control of all of this since all you had to do was not invade Ukraine.

About $40 billion in foreign bonds, half of which are issued to foreigners. There were around $640 billion in foreign currency and gold reserves held by Russia before the war began, most of which were held overseas and are now frozen.

Since the Bolshevik Revolution, when the Russian Empire collapsed, and the Soviet Union was created, Russia has not defaulted on its international debts. In the late 1990s, Russia defaulted on its domestic debt, but international aid helped it recover.

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For months, investors have been expecting Russia to default. An 80% likelihood of default has been priced on insurance contracts covering Russian debt for weeks, and ratings like Standard & Poor’s and Moody’s have placed the country’s debt in junk status.

The rating can be decreased to default by rating agencies, or a court can decide the issue. A committee of financial firm representatives can decide whether a failure to pay debt should trigger a payout of bondholders with credit default swaps, which still isn’t a formal default declaration.

The Credit Default Determination Committee – an industry group of banks and investment funds – ruled on June 7 that Russia had not paid the required additional interest.

However, the committee opted to delay further action due to uncertainty about how sanctions might affect a settlement.

By definition, a default occurs when 25% or more of bondholders claim they have not received their money. As a result, all Russia’s other foreign bonds are also in default, and bondholders can then seek a court judgment to enforce payment.

Bondholders and defaulting governments typically negotiate a settlement in which investors get new bonds that are worth less but at least provide some partial compensation.

However, sanctions bar dealing with Russia’s finance ministry. Nobody knows when the war will end or how much-defaulted bonds could be worth.

According to Auslander, declaring default and suing may not be the best option in this case. Since it’s not possible to negotiate with Russia and there are so many unknowns, creditors may decide to “hang tight for now.” Investors who want out of Russian debt have probably already departed, leaving those who bought bonds at knocked-down prices in the hope of profiting from a settlement later. Perhaps they should maintain a low profile for a while in order not to be associated with the war.

In the event of a default, a country may be unable to borrow on the bond market until the default is resolved and investors regain confidence in the government’s ability to pay. Russia is already cut off from Western capital markets, so it will be a long time before it can begin borrowing again.

As of now, the Kremlin can still borrow rubles at home, where it relies mostly on Russian banks to buy its bonds.

Foreign companies have fled Russia due to Western sanctions over the war, disrupting the country’s trade and financial connections with the outside world. A default would be another symptom of that isolation and disruption.

Analysts caution that Russia’s default would not have the same impact on global financial markets and institutions as an earlier default in 1998. Russia’s default on domestic ruble bonds led to the U.S. government bailing out Long-Term Capital Management, a large U.S. hedge fund whose collapse, it was feared, could have shaken the entire financial and banking system.

There is a serious risk of serious losses for bondholders, such as funds that invest in emerging market bonds. Fund investors’ losses were limited by Russia’s relatively small role in emerging market bond indexes.

Despite the damaging impacts of the war on humans and higher food and energy prices, defaulting on government bonds would not be systemically relevant, according to IMF Managing Director Kristalina Georgieva. 

edited and proofread by nikita sharma

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