Russian economy towards default: from GDP to the stock market, here are the effects of the sanctions for the war in Ukraine

Runaway companies, closed stock market and plummeting stocks in London, ruble at historic lows, GDP in free fall. The effects of the war in Ukraine on the Russian economy have only just begun.

The Russian economy begins to pay dearly for the cost of the nefarious war in Ukraine. Despite Vladimir Putin's propaganda and the Kremlin's attempts to convince the population that "the bad guys" are the others, the specter of default hovers over Russian debt: an effect of the harsh sanctions imposed by Western countries that falls directly on Russian citizens, while investors run away from the invading country before the losses (and the fall in image) become too difficult to bear.

Russian debt is garbage

A shower of downgrades is hitting Russian debt. For the second time within a week, S&P cuts sovereign ratings long-term in foreign and local currency on Russia, bringing them both to "CCC-" (from "BB+" and "BBB-"), a level that corresponds to "Vulnerable", in which "the solvency of the obligations assumed mainly depends on conditions favorable economic and financial conditions”, indicates the US agency. The rating however remains in “credit watch negative on growing risk of default, as indicated on February 25th.

According to the well-known rating agency, the war in Ukraine and the consequent sanctions imposed by the G7 countries, including those that target the foreign currency reserves of the Central Bank, have made "a large part of these reserves inaccessible, undermining the capacity of the Central Bank to act as lender of last resort” and compromising the net external liquidity position of the country.

S&P isn't the only agency to have taken countermeasures on Russia. Twenty-four hours ago, also the other two rating sisters, Fitch and Moody's agencies, have downgraded Muscovite government bonds to "junk", decreeing Russia's entry into the category of countries that risk not being able to repay the debt. In detail, Moody's reduced its rating on long-term debt from Baa3 to B3, keeping it under observation given the sanctions imposed by Western countries on Russia. Fitch downgraded its rating from BBB to B, with a negative outlook. These ratings place Russia's debt at the 'speculative' level.

The reaction of the Central Bank

The Bank of Russia has announced the cut of the commission that brokers must charge to those who buy foreign currency. From today the commission is reduced from 30% to the previously applied 12%.

JP Morgan forecasts on Russian GDP

In the meantime, the first forecasts about the future of the Russian economy are starting to arrive. Investment bank JP Morgan estimates that in the second quarter of 2022 Russian GDP will register a contraction of 35%, while for the whole of 2022 the forecast is still equal to -7 percent, with a drop in economic output comparable to the 1998 crisis.

“A peak-to-trough decline in Russian GDP is now expected to be around 12%,” analyst Anatoliy Shal explained to clients, comparing the situation to the crises of 1998 (-10%) and 2008 (-11%) and to the Covid-19 shock (-9%).

Finally, JP Morgan expects exports this year to decline by about 13%, domestic demand by about 10% and imports by about 30%. “What is clear, however, is that Russia's growing economic and political isolation will lead to lower growth in the long runShal added.

From the Moscow Stock Exchange to the ruble: rain of negative records

It is not yet known what will happen on Monday, but for the moment an historical record has already been set. With the stop on Friday, the Moscow Stock Exchange was closed for 5 consecutive days. It had never happened before that the Russian square remained at a standstill for so long. On closer inspection, it had never happened to any price list. Suffice it to say that after September 11, Wall Street was closed for four days.

"The Central Bank of Russia has decided not to resume trading sessions on the Moscow Stock Exchange on March 4, 2022 with regard to the stock market, except for repurchase operations negotiated with settlement in rubles," the institution said on the morning of March 4. March. The purpose is clear: given the dramatic declines registered by shares in the first days of the war, the central bank wants to avoid (or perhaps postpone) an unprecedented financial meltdown.

In the meantime, Russian groups listed on the London Stock Exchange through depositary receipts, certificates representing the shares of foreign companies, they have practically eliminated their value. Based on its March 3 closing prices, energy giant Gazprom fell 97,2%, from $5,58 on Friday to $0,021 on Thursday. The fall of Sberbank, the main Russian bank, fell from 4 to 0,01 dollars (-94%). Lukoil scores -97,6% to 0,25 dollars, Rosneft -68,5% to 0,85 dollars.

It is no better on the currency market, with the Russian ruble at historic lows. On February 24, the exchange rate with the greenback was just over 80 rubles to the dollar. Today it is above 112.

Companies fled from Russia

The flight of large companies from Russia continues. The latest, in order of time, is Generali which he announced today the closure of its office in Moscow and the decision to leave the board of Ingosstrakh, the Russian insurance company in which the Leone company holds a minority stake of 38,5%.

Yesterday it was the turn of Ikea to announce the suspension of its activities in Russia and Belarus. But the list of companies that are fleeing Moscow is getting longer every day. We mention a few: