The first consequences of the sanctions

On Monday in some stations of the Moscow Metro, long queues of people used to pay for tickets at the access turnstiles with Apple Pay, or other forms of electronic payment, formed. Their transactions were denied due to the blockade of the bank that usually manages them, which ended up on one of the economic sanctions lists imposed by the West on Russia for the invasion of Ukraine. For many the unexpected code in the subway were the most tangible proof of the consequences of the sanctions, together with news of the collapse of the ruble – the Russian currency – against the dollar.

Less than a week after the start of military operations in Ukraine, Russia is facing enormous difficulties in managing its economic activities, including Western companies that have decided to suspend their business in the country, the impossibility for Russian airlines to fly over Europe and the big restrictions on banks to carry out money transfers and other operations abroad.

On Monday, the ruble lost nearly 12 percent of its value against the dollar, reaching a rate of 95 rubles to buy one dollar. Some drastic interventions by the Russian central bank prevented a much more marked collapse.

The Bank has announced an increase in interest rates, taking them from 9.5 percent to 20 percent in one day. At the same time, it prohibited banks from accepting divestments from foreign investors and decreed the closure of the stock exchange, with trading that will also be suspended on Tuesday.

Since the weekend, the Russian central bank has been severely restricted following the decision of the European Union and other Western countries to block its funds abroad. The Bank cannot access a large part of the 643 billion dollars, owned in various currencies, accumulated over time precisely to contain any economic problems or counter new sanctions.

The Russian state media provide rather partial information on the economic problems facing Russia, but the trend of the ruble has not gone unnoticed, also considering the history of great instability of the currency in the past. Long queues of people worried about losing their savings or running out of cash have formed at ATMs for withdrawing money.

Queue at ATMs for withdrawing money in Moscow, Russia – February 27, 2022 (AP Photo / Victor Berzkin)

The televisions showed the Russian president, Vladimir Putin, intent on managing a meeting with some government officials to assess the economic situation, attributing all responsibility to the West and its “lies” about Ukraine.

Moreover, the sanctions decided against Russia do not have many precedents in the recent history of international relations with the country, especially in terms of sharing by the numerous countries that have decided them. Among these is Switzerland, which has abandoned its traditional neutral position by adhering to the economic sanctions imposed by the European Union. The Swiss government has placed restrictions on numerous Russian banks and has in turn issued sanctions against Putin and his foreign minister, Sergei Lavrov.

The heavy sanctions decided by Western countries are also having repercussions on some large companies and multinationals, which are obliged to interrupt their relations with Russia or to deeply review them. The isolation of the Russian financial system will have increasing repercussions in the industrial sector, judging by the growing number of Western companies that have announced divestments and the suspension of their activities in the country.

Shell, one of the largest oil companies in the world, announced a review of its commitment to the consortium of Western companies that was working on Nord Stream 2, the pipeline that connects Russia directly with Germany, whose certification for the opening was recently suspended by the German government. In 2017, Shell together with other financial partners had agreed on an investment of around 950 million euros for the construction of the pipeline, the management of which is under the responsibility of a company under Gazprom, the large hydrocarbon company controlled by the Russian government.

In addition to the abandonment of the Nord Stream 2 project, Shell has confirmed that it intends to exit from other holdings with Gazprom. The company has resources invested for about 3 billion dollars in Russia: the suspension of most of its initiatives could have serious economic consequences for the country. Shell executives said they took such a hard line after witnessing the violence in Ukraine, but the company could hardly have done otherwise, given that the sanctions also affect Western companies’ relations with Russia.

After receiving strong pressure from the British government, the oil company BP announced the sale of its stake in Rosneft, a large oil company controlled by the Russian government. The initiative has an estimated value of around $ 25 billion, considering that BP gets about a third of the oil from Rosneft. The company has so far not given much guidance on how it will leave its position.

Equinor, the large oil company controlled by the Norwegian government, has suspended its investments in Russia and has initiated the exit from various holdings. The government of Norway has also announced that it plans to divest from Russia through its giant $ 1.3 trillion investment fund. Current investments will be frozen, pending a more detailed plan on exiting the Russian market.

In addition to the oil companies, several auto companies have announced the suspension of sales and production activities in Russia. Sweden’s Volvo confirmed that it had paused production of cars and trucks, explaining that it could not continue due to economic sanctions. French company Renault has closed a production plant in Moscow, saying it has problems with logistics. The German Volkswagen has stopped selling its Audi brand cars, citing problems related to the sharp devaluation of the ruble.

There are also the first repercussions in the food sector, given that some large multinationals control hundreds and sometimes thousands of local brands. Danone, whose main office is in France, has a strong presence in Russia and is working to verify the maintenance of production activities in its factories. The multinational employs about 8,000 people in Russia, plus thousands more related to related industries.

Carlsberg, the large Danish company that owns dozens of beer brands around the world, gets about 10 percent of its revenues from Russia. Like other multinationals, Carlsberg is also working to understand any limits to its business activities imposed by sanctions. The company operates several Russian beer brands, which are produced locally and for consumption in the country, so there should be no need to suspend business.

According to analysts, the closure of the stock exchange in Moscow, the blockade of banks and restrictions on financial transactions are meanwhile making investments in Russia practically impossible. The arrival of new capital in the short term is not imaginable, as is the possibility for large foreign investors to draw on their investments in the country, blocked by Russian financial institutions. The market blockade could affect Russia’s economy with unpredictable consequences, as the governor of the Russian Central Bank, Elvira Nabiullina admitted: “Our financial system and our economy have hit a totally anomalous situation.”

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About Alex Marcell

He likes dogs, pizza and popcorn. Already a fanboy of Nintendo and Sony, but today throws anything. He has collaborated on sites and magazines such as GameBlast, Nintendo World, Hero and Portal Pop, but today is dedicated exclusively to Spark Chronicles.

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