Putin is impoverishing Russians for generations to come
Well what a week - from Fortress Russia to Rubble Russia.
If Putin thought that he could get away lightly with an all out invasion of Ukraine he was sorely wrong.
Not only are Ukrainians fighting like gladiators, in a David versus Goliath battle, but Putin has got his sanctions from hell.
I thought that if Iran sanctions are 10/10 and the starting point was 2-3/10, I expected maybe 6-7/10. But what we actually have is 9.5/10. No one, even the Russians, expected CBR and SWIFT sanctions. In addition we have Euroclear and Clearstream suspended mostly, Mastercard, Visa, Apple and I think even Amazon et al suspending all transactions with Russia inc. International shipping companies don’t want to carry freight to/from Russia, and while energy is not sanctioned international companies don’t want to trade even in energy with Russia. Russia is being closed out of international markets and trade. This will be devastating for the Russian economy and markets.
Why such a harsh sanctions response?
Well first, the valour of President Zelensky and Ukrainians in fighting terror and fascism has shamed the world into acting.
Second, I think the Biden team and the West has finally realised that Putin, not China, is the number one threat to our very system of governance - Western Liberal Market Democracy. China is not invading Ukraine, backing far right and far left parties in the West - Russia is. And they realise that if they don’t stop Putin now, China will take that as a green light to roll out its malign agenda. And there is realisation that in order to stop Putin we have to pay a price or cost - higher energy and food prices, more defence spending. So there is now a willingness to hurt Russia hard on the sanctions front.
Putin is responsible for these sanctions and he is bankrupting Russia and Russians because of his brutality in Ukraine.
The impact of sanctions will be higher borrowing costs, limited access to financing, less investment, lower growth - actually deep recession, and lower living standards.
I expect real GDP to contract by at least 10% this year in Russia. The rouble has gone from trading in a 70-75 range to 110-120 now. But that is being artificially maintained by the CBR - but with now limited access to FX reserves after sanctions, I expect the rouble to hit 200 against the USD. The result will be that USD GDP will collapse from $1.8 trillion to maybe $800bn. Per capita GDP will hence fall from $12k to what $5k. Russians will be a lot poorer - they won’t have cash to holiday in Turkey or send their kids to school in the West - and even then because of Putin they will not be welcome.
But their financial wealth has also been destroyed. They believed Putin when he said he would not invade Ukraine, so stayed invested while foreigners significantly exited. So the 90% plus drop in equity prices, OFZ and likely hard currency debt prices will decimate Russia’s middle class. And Russia’s banks may yet collapse and the country go into formal default. Russians will lose their savings, earning power and wealth. This will be devastating.
Now I know people argue well Russians are tough people. Sure, but life is about expectations and for 20 years many Russians have got used to the good life. They will be really unhappy. And life for ordinary Russians will just get brutally hard - unemployment, inflation, shortages of goods.
No one expected social unrest in Kazakhstan this year - I would not rule our similar events in Russia albeit no doubt Putin will meet it with brutal repression.
And the problem here is that it’s not as though there is any light at the end of the tunnel for Russia - as long as Putin stays at the helm. Sanctions will remain in place as long as Russian troops remain in Ukraine. And even should they leave I doubt that international markets will reopen quickly to Russia. Borrowing costs will remain elevated for years to come, and the Russian economy collapsed and stagnant to come.
And on top of all this if Putin eventually wins in Ukraine then Russia will have to bear the huge cost of reconstruction of all the infrastructure he has destroyed. And how is he going to pay for the cost of a military occupation and win hearts and minds of Ukrainians without writing big cheques he simply does not have. The cost will be hundreds of billions of dollars - money Russia can no longer afford.
What about default? Very likely - we might already be there.
The CBR sanction means that Russia lacks the FX to pay or Putin wants to hold on to limited FX reserves by trying to avoid paying foreigners. That said he appears nervous about the impact on locals. So the strategy seems to be to try and segment the market - pay locals as far as possible, but if you can figure out a way to not pay foreigners, then great. So take the OFZ and Rusrail payments this week. Russia paid the Rusrail coupon in full as it settled offshore and Russia was not able to pay locals and not foreigners. On the OFZ it paid the coupon but the national depository is paying locals but not foreigners. The argument is we want to pay, but sanctions means we actually cannot pay foreigners. This is a technicality but in all intense and purposes that is already a default. And given FX liquidity constraints it only seems a matter of time before external debt goes into default. Sense here the Russian approach will be to tell investors: “we want to pay you, honestly, but you need to lobby your governments to ease the sanctions regime.” I cannot see Western governments buckling so default looms.
And this will be worse than 98’ as back then Russia had the IMF and the goodwill of the international community to help them manage thru the crisis. Not this time.
Putin has screwed Russia and Russians for generations to come. Do they realise that and are they able to do anything about it?