Russian economy will be hardest hit by Russia-Ukraine war: Report

After the Russian President announced a special military operation in Ukraine in a televised address, US President Biden said the US would proceed with harsh sanctions against the country. The European Union, a bloc of 27 member states, has already announced that it will ban the Russian government from raising finance in European markets, which will limit Russia’s ability to issue hard-currency sovereign debt.

New Delhi: Russian economy will bear the heaviest impact of a full-fledged war between Russia and Ukraine as economic sanctions imposed by the affluent western countries and self-imposed international isolation will hit the Russian businesses and industry particularly hard, showed an analysis.

However, several other major European economies will not remain untouched from the adverse economic impact of the Russia-Ukraine war as these sanctions will cut both ways. Several European nations have deep economic and energy linkages with Russia which will be under great pressure in the coming days.

After the Russian President announced a special military operation in Ukraine in a televised address, US President Biden said the US would proceed with harsh sanctions against the country.

The European Union, a bloc of 27 member states, has already announced that it will ban the Russian government from raising finance in European markets, which will limit Russia’s ability to issue hard-currency sovereign debt.

According to the European Commission Chair Ursula von der Leyen, the sanctions will target Russia’s strategic sectors and impact Russia’s ability to modernise its economy. In addition, the EU is looking to block Russia’s state assets and to ban Russian banks from European financial markets.

Experts believe that Russia’s sovereign debt is now at risk of a downgrade. Sovereign credit rating agency Moody’s has already announced a review of ratings of both Russia and Ukraine after the war began.

What will happen to banking sector?

Like other economies, Russian banks are also integrated with the global banking network known as SWIFT which operates out of Brussels. But economists at Oxford Economics do not expect Russian banks to be blocked from SWIFT, other tough measures could now be implemented.

These measures may include banning US banks from executing US dollar transactions with Russian banks, and measures aimed to cripple the development of Russia’s industries (such as bans on technology imports).

Impact on energy supply

While the EU’s biggest economy, Germany, has already announced that it will halt the certification for Russia’s Nord Stream 2 gas pipeline in a bid to financially punish the country for attacking Ukraine, Russian authorities seem unconcerned as they believe that the EU countries need Russian gas anyway.

“Nord Stream 2 is likely to be mothballed, perhaps indefinitely. We see gas continuing to flow but recognise a considerable risk of disruption in Russia’s gas supplies to the EU in response to EU’s sanctions,” said Innes McFee, Global Chief Economist at Oxford Economics.

Russian GDP set to decline by over 1%

In a report jointly authored with the think tank’s Lead Economist Tatiana Orlova, McFee wrote that of all the major economies, Russia will bear the heaviest impact due to the impact of its self-imposed international isolation.

“We intend to lower our baseline for Russian GDP growth by 1.2% by 2023. We will also lower our forecasts for European economies, but by around only half that amount,” the economists said in the report.

Impact on stock markets

Russian attack on Ukraine also rattled global stock markets, including India, but its worst impact can be seen on the Russian stock market.

On the day of the start of the attack, Russian markets plumbed to further depths in the morning trading. The MOEX Russia index plunged below 2000 whereas it was trading around 3,500 at the start of this month.

Authors of the report said further market volatility may be ahead when the US and EU announce their responses to Russia’s actions.

“Risk premium on Russian assets are spiking and will stay high,” they concluded in the report.