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Economic impact of the Russian invasion of Ukraine

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A ongoing financial crisis began in the Russian Federation in late February 2022, in the days after the 2022 Russian invasion of Ukraine and the subsequent economic sanctions targeting the Russian banking sector, Vladimir Putin, and his government.

Background

Since 2014, Russia had been facing sanctions over its annexation of Crimea which hurt its economic growth. In 2020-2021, the COVID-19 recession and the 2020 Russia–Saudi Arabia oil price war also affected the Russian economy. Additional sanctions occurred in the lead-up to the invasion, and there was a stock crash merely from the military buildup.

Financial, economic, and social impact

Stock markets and the ruble

In Russia, the first round of economic sanctions in response to Russia's 2022 invasion of Ukraine had an immediate effect. The Russian stock market crashed, falling 39%, as measured by the RTS Index, on 24 February, the first day of the invasion, recovering over 26% in the following day; however, on Monday 28 February the Moscow stock exchange closed for the day because of the “developing situation.”

The ruble fell to record lows as Russians rushed to exchange money. Moscow and St Petersburg Stock Exchanges were suspended. The Central Bank of Russia announced its first market interventions since the 2014 annexation of Crimea to stabilize the market. It also raised interest rates to 20% and banned foreigners from selling local securities. The sanctions put Russia's sovereign wealth fund at risk of disappearing. Long lines and empty ATMs have been reported in Russian cities.

The second round of sanctions which saw various Russian banks removed from SWIFT and direct sanctions on the Russian Central Bank saw the value of the ruble fall 30% against the U.S. dollar, to as low as ₽119/$1 as of 28 February. The Russian central bank raised interest rates to 20% as a result, in an attempt to balance the sinking ruble, it temporarily shut down the Moscow Stock Exchange, mandated that all Russian companies sell 80% of foreign exchange reserves, and prohibited that foreigners liquidate assets in Russia.

Crude oil

As a result of the invasion, prices for Brent oil briefly rose above $100 a barrel for the first time since 2014 before losing some of its gains. In total from February 22 when sanctions started to February 28 when sanctions on Russia's Central Bank were applied the price of West Texas Intermediate and Brent rose by roughly $5/bbl.

On 27 February, BP, one of the world's seven largest oil and gas companies and the single largest foreign investor in Russia, announced it was divesting from Rosneft. The Rosneft interest comprises about half of BP's oil and gas reserves and a third of its production. The divestment may cost the company up to $25 billion and analysts noted that it was unlikely that BP would be able to recover a fraction of this cost. The same day, the Government Pension Fund of Norway, the world's largest sovereign wealth fund, announced that it would divest itself from its Russian assets. The fund owned about 25 billion Norwegian krone ($2.83 billion) in Russian company shares and government bonds.

Broader economic impact

Wheat prices surged to their highest prices since 2008 in response to the attack. Ukraine is the fourth-largest exporter of corn and wheat and the world's largest exporter of sunflower oil, with Russia and Ukraine together exporting 29% of the world's wheat supply and 75% of world sunflower oil exports. The benchmark Chicago Board of Trade March wheat futures contract reached its highest price since 2012 on 25 February, with the prices of corn and soybean also spiking. The American Bakers Association president warned that the price of anything made with grain would begin rising as all the grain markets are interrelated. The chief agricultural economist for Wells Fargo stated that Ukraine will likely be severely limited in their ability to plant crops in spring 2022 and lose an agricultural year, while an embargo on Russian crops would create more inflation of food prices. Recovering crop production capabilities may take years even after fighting has stopped. Surging wheat prices resulting from the conflict have strained countries such as Egypt, which are highly dependent upon Russian and Ukrainian wheat exports, and have provoked fears of social unrest. On 24 February, China announced that it would drop all restrictions on Russian wheat, in what the South China Morning Post called a potential "lifeline" for the Russian economy.

Kristalina Georgieva, the managing director of the International Monetary Fund, warned that the conflict poses a substantial economic risk for the region and internationally, and added that the Fund could help other countries impacted by the conflict, complementary to a $2.2 billion loan package being prepared to assist Ukraine. David Malpass, the president of the World Bank Group, said that the conflict would have far-reaching economic and social effects and reported that the bank was preparing options for significant economic and fiscal support to Ukrainians and the region.

Corporate boycotts and removals of service

  • UPS and FedEx announced that they will no longer be working in Russia.
  • Disney will no longer release films in Russia.
  • Netflix will no longer stream 20 Russian "propaganda" channels.
  • Fonterra, one of the world's largest dairy producers, suspended shipments of all its dairy products to Russia.

References

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