MOSCOW BLOG: Russian sanctions – assessing the damage

MOSCOW BLOG: Russian sanctions – assessing the damage
This is Russia's biggest crisis since 1998. And probably worse. / WIKI
By Ben Aris in Berlin March 2, 2022


Below is the blurb for today’s Editor’s Picks, a free daily email digest of our best articles from the last 24 hours delivered free to your inbox. Click here to see the back issues and to sign up.

In today’s issue here I was speculating about how bad a stock market crash would be. Now we know. Based on Gazprom’s performance the RTS should fall to 22 from the last lowest close of 743 last week. That is worse than the 38 the RTS fell to in 1998.  

Editor’s Picks also carries the best of our extensive coverage of the war in Ukraine and the impact this is having across the whole of Emerging Europe and Central Asia, including the top business news and political & economic analysis of this unfolding story.  

Putin has totally destroyed Russia’s value. In the noughties Gazprom was worth around $300bn so even last week’s $47bn is a poor result. After the so-called ring fence came down in the noughties – special rules that stopped foreign investors buying the locally traded shares – Russia was all optimism and progress. Gazprom CEO Alexei Miller boasted that Gazprom would soon be the most valuable company in the world and the world’s first $1 trillion company. And everyone believed him. It was entirely possible.

Then it all went wrong in 2012 when Putin switched the government’s spending from investment and development to modernising the army, starting the long build-up to last month’s invasion of Ukraine. Growth fell to zero in 2013 despite $100 oil and Gazprom’s share price began to deteriorate. Today’s crash is just the end of that process of value destruction that actually began a decade ago. The share price for Gazprom’s DRs on Friday was $0.76. I remember when it was $10. Right now: $0.03.

What is really shocking is that there is it seems that there is no coming back this time. The blurb below is about a podcast I did yesterday that made me recalibrate: it was clear that things are bad, but yesterday I started to realise we are in a whole new game. The tragedy for the long-suffering Russians is that it could take a generation to come back from this crash. I may be over-reacting as this crisis is only three days old, but I don't think I am. I have lived through a half dozen crises in Russia already, and I just don't see things recovering until Putin dies. We’ll see. The Russian markets will have to open soon. 

In case you missed it I highly recommend you watch our webinar from yesterday “Russian sanctions: assessing the damage” here or listen to the podcast version here.

I was joined by Elina Ribakova, deputy chief economist with the Institute of International Finance (IIF), who is extremely well informed about the Russian economy, and Ivan Tkachev, the economics editor at the Russian daily RBK, who is in my book the top business journalist in Russia.

It was scary. I have had to recalibrate my thinking after this discussion. Things are far worse than they seem. And they already seem to be very very bad.

We have been reporting that the economy will probably go from 2.4% growth this year to around a 5% contraction, but Ribakova says that more likely is a 20% contraction – or more – and Russia will now enter a deep, multi-year recession where all those resources that Russian President Vladimir Putin has built up in his fiscal fortress count for nothing.

He has in effect undone all the progress of the last 20 years and Russia is about to return to the chaos of the 90s. At least in the 90s there was the prospect of growth out of a crisis and joining the global economy. That’s what has changed. The nature of the economy has been fundamentally changed.

These sanctions mean that Russia has gone from an open, capitalist economy, to a closed one, locked in a cage by sanctions. Ribakova (and several other people now that this idea has suddenly gained currency) believes that Russia will become like Iran where the economy is contained inside its own borders but largely cut off from the rest of the world.

I have done two pieces in the last 24 hours, one looking at the history of Russia’s crises and today I post the other, looking at the history of stock market crashes. However, before, because Russia was open, it was always able to climb out of the holes and investors were willing to invest as they knew you can make as much on the rebound as you lose on the collapse. That is no longer true. We are playing a new game here.

That is already evidenced by the exodus of Russia’s long-standing partners. The SWIFT sanctions and the sanctions on the Central Bank of Russia’s (CBR's) gross international reserves (GIR) are bad enough, but already compliance departments are freaking out and just stopping any business with Russia at all. Many companies have already announced they are pulling out altogether. The major foreign oil companies, including BP, Shell, Equinor and others, have already pulled the plug. Car manufacturers have suspended imports to Russia. Uber says it will sell its stake in the taxi joint venture with Yandex. Aeroplane manufacturers have cancelled leases and want their planes back in 30 days. None of this is on any sanctions list, but the effect of those sanctions is cascading outwards and cutting Russia off from the rest of the world. Even if a peace deal is agreed in the Belarus border town of Gomel today (the second round of talks is due today), and even if many of the new sanctions are not implemented, it's already too late to undo most of this damage.

A small hope remains that a deal can be struck at the Gomel talks, but not a big one. The word from the ground in Moscow is the expats are also fleeing the country, including some that have been there for decades. And some Russians are toying with the idea of emigrating. (I remember in 1998 a lot of Russians I knew left for good after that crash, but it seems not so many want to go this time.)

The crisis is likely to step down to an even more bloody stage from here. In 1998 it took about two months to reach the nadir. It takes a little time for people to process all the changes.

The CBR announced a 20% emergency rate on Monday that briefly halted the collapse of the ruble that went from RUB108 to RUB96. That 20% interest rate will kill growth dead and will take years to unwind. (It took five years to unwind the 17% rates imposed in the 2014 crisis.) But the scary thing is it doesn't seem to be enough, says Ribakova. A day later the ruble has slid again and is currently trading at RUB110.4 this morning – worse than when the CBR made the emergency hike to stop its fall.

The stock market is still closed and MOEX is still reporting the RTS index at 937, but it's perfectly obvious that when the markets eventually open the index will crash again. The floor before last weekend was probably around 800, and the previous crisis floor was 500 in 2008, but with no prospect for recovery, who knows where the floor is now? In 1998 the RTS sank to 38 and I think we could be looking at that kind of number now. It’s going to be a bloodbath – and unfortunately there are a huge number of Russian retail investors in the Russian markets now. Their dreams are going to be destroyed and those of the entire business elite who have worked so hard in the last 20 years to build up world-class companies have also been dashed. A dozen owners became billionaires in the last year during an IPO boom, but the hopes of the two dozen owners still in the IPO pipeline have just been dashed.

That is politically dangerous for Putin, who has clearly underestimated the resolve, unity and severity of the response by the West to his hardball tactics in Ukraine. There is a possibility of a palace coup, although given all the time and effort Putin has invested into cultivating the FSB I think that is very unlikely. (The Americans are saying Putin has brain cancer, but I’m sceptical of this too.)

The bedrock of Putin’s popularity is that he ended the chaos of the 90s and brought stability and prosperity to most Russians. Moscow was recently voted one of the three most liveable cities in the world. Given he has suddenly returned Russia to the 90s his support will evaporate. That doesn't mean he will go. Belarus' President Alexander Lukashenko shows that if you maintain the support of the security services then you can stay in power indefinitely. But to do that he will have to go even further down the road of repression and authoritarianism than he already has. The Kremlin is, as I type, already rolling out even harsher repressions and has shut down two of the last liberal media outlets, Ekho Moscow and TV Dozhd, for daring to report objectively on the Ukraine conflict.

I’m painting an extremely black picture here and we are only three days into this crisis. It’s always darkest before the dawn and it may not be quite as bad as this. However, I have personally lived through five of the last six big crises (I missed 1991) and I have a strong impression that, in the classic stock market adage, “this time it’s different” – but in a bad way.