Page 26 - bneMag April 2022 Russia living with sanctions

26 I Cover story bne April 2022
Russia value of economy, share of global economy
US Treasury Department (USTD) had to delay imposing the sanctions before eventually withdrawing them – the only sanctions to be nixed since the regime was introduced in 2014.
A more recent example was Alisher Usmanov, a metals and tech tycoon, who was included in the personal sanctions list, but many of his companies, especially Metalloinvest that is a major iron producer, were given special exemptions by the US authorities thanks to the impact their exclusion would have on metal prices and the chaos it would cause in the markets.
Wheat is another market where the west is very dependent on Russia. Prices for wheat in the global grain market have already soared to decade-long highs as the war in Ukraine shuts down ports and threatens to disrupt this year’s grain harvest. Between them Russia and Ukraine account for a quarter of global wheat exports and an estimated 7mn tonnes of Ukrainian wheat will be taken out of circulation as a result of the war.
Actually the problem is not quiet as bad as it first seems as the total global wheat production in 2021 was 779mn
Source: IMF
However, the real damage to the Russian economy is the shackling of Russia’s growth potential. Since Putin started preparing for the current war in 2012 when he diverted every spare kopek
to modernising the army and building up the CBR’s reserves, the long-term economy growth potential of Russia fell to a mere 2%. Now with the added drag of high interest rates and more punishing sanctions that will be extremely difficult shake off, that growth potential has fallen again to around 1%. Over the coming years Russia’s economic growth will be well below that of the global economy and it will simply fall further and further behind the rest of the world.
Russia’s ability to strike back
The final complicating factor is this
is the first time the developed world has imposed sanctions on such a large country that is so deeply integrated into the global market and able to hit back.
The sanctions regime is full of holes as
a result of the boomerang effect: many sanctions on Russian industry affect markets so badly that they do as much if not more damage to western businesses as they do to Russia.
As bne IntelliNews reported, even before the war started commodity prices started to spike as tensions rose, but they went through the roof once the fighting began. Nickel trading on the London Metals Exchange (LME) had to be shut down after prices rocket to over $100,000 per tonne from the normal levels of just under $30,000 per tonne.
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The exchange ended up cancelling all the super high trades and suspended trading for several days until the prices settled at $48,000 per tonne, still almost twice the regular levels.
Aluminium, steel, iron, copper and a slew of other commodities, all produced in Russia, have similar, if not quite so dramatic, stories to tell.
Indeed, although Russia doesn't hold monopolies in any of these metals (it comes closest to having a monopoly in titanium production, a key component
“The sanctions regime is full of holes as a result of the boomerang effect”
in the aviation industry), it has significant market shares that cause sanctions to rapidly inflate prices and make all the metal exports very hard to sanction without doing significant damage to western economies.
As a result, many of Russia’s biggest companies have been exempted or passed over when it comes to sanctions. Norilsk Nickel that belongs to oligarch Vladimir Potanin is one company
that has yet to be sanctioned. Oleg Deripaska’s aluminium producer
Rusal is another one that has not been included in the lists. The last time Rusal was sanctioned in 2014 the price of aluminium soared 40% in a day and the
tonnes as most wheat is eaten at home, so the missing Ukrainian wheat this
year accounts for only 0.9% of total production. Farmers anticipating problems in Ukraine planted more wheat than ususal four months ago so much of the Ukrainian shortfall will be cover by increases in domestic production.
What problems there are in food distribution will be regional not global and North African is particularly exposed as it relies heavily on Ukraine for its supplies. Egypt is the biggest importer and has been unable to find sellers at
at least two tenders held since the war started. Governments in the region
and international organisations need