A few weeks ago, Putin called the war in Ukraine a “tragedy” and said economic sanctions imposed on his country had “failed”. It turned out that he did not bluff exactly.
Three months after the toughest and most coordinated sanctions by Western governments, the Russian economy is proving to be a tough nut to crack. Continued exports of oil and gas, as well as the maintained ruble, have allowed Moscow to withstand Western sanctions much better than expected.
In a note to customers last week and released publicly Monday, JPMorgan Chase said business sentiment surveys in the country “signal a not-so-deep recession in Russia and therefore suggest increased risks to our growth forecasts.” Therefore, the available data do not indicate a sharp decline in activity, at least for now.
JPM has also abandoned its earlier projections of shrinking Russian GDP by 35% in the second quarter and 7% for the whole of 2022, and now predicts that the recession will be far less severe.
However, the bank noted that Russia would certainly feel the impact of current and potential sanctions, adding that the Russian economy would be in a much better position if the country had not invaded Ukraine.
The ruble is recovering to pre-war levels
Perhaps an even more impressive demonstration of the resilience of the Russian economy is how quickly the country’s currency has recovered from its collapse at the beginning of the year. By repelling a host of energy and financial sanctions, the ruble, Russia’s national currency, made a surprising recovery and even managed to return to pre-war levels.
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The ruble fell spectacularly in the days immediately after President Vladimir Putin ordered a full-scale invasion of Ukraine, falling by as much as 30% against the US dollar. The currency seemed doomed as Western countries imposed a tougher set of sanctions on Moscow, including measures to limit Russia’s central bank’s ability to access its vast foreign reserve fund. Indeed, some analysts have warned of imminent bankruptcy as Russia runs out of dollars.
However, the ruble did not fall for a long time and began to recover only weeks after its biggest collapse. By the end of March, the ruble began to recover gradually; by mid-April, its value had reached 1 RUB = 0.013 USD, the level last seen on the eve of the invasion. The ruble is currently exchanged for 0.016 USD, a level that last touched in January 2020.
What explains this recovery?
Putin’s demand that Russian gas buyers pay in rubles was a masterpiece. After initial resistance, Western gas buyers are increasingly sticking to the line, with one of Germany’s largest natural gas importers, VNG, recently opening an account with Gazprombank for payments for Russian gas under Moscow’s terms.
According to Maria Demercis, Bruegel’s deputy director of the Brussels-based economic think tank, EU payments for Russia’s pipeline gas play a major role in maintaining the currency.
Despite all the talk of abandoning Russia’s energy resources, Russia still manages to sell a good amount of its oil and gas, thanks to the fact that some of the world’s largest commodity traders are reluctant to finance Putin’s military machine.
In fact, Oleg Ustenko, an economic adviser to Ukrainian President Vladimir Zelensky, wrote to the four companies asking them to immediately stop trading in Russian hydrocarbons as export earnings finance the purchase of weapons and missiles from Moscow.
According to ship and port tracking data, Switzerland’s Vitol, Glencore and Gunvor, as well as Singapore’s Trafigura, have continued to pick up large quantities of Russian crude oil and products, including diesel.
Vitol has promised to stop buying Russian oil by the end of this year, but that is still a long way off today. Trafigura has said it will stop buying oil from Russia’s state-owned Rosneft by May 15, but is free to buy cargo of Russian oil from other suppliers. Glencore has said it will not enter into any “new” trade business with Russia. But the reality is that while the G7 is committed to banning or phasing out Russian oil imports, and while the United States, Canada, the United Kingdom and Australia have imposed strong bans, the EU is still unable to move forward, with Hungary holding a hostage ban. . India and China, meanwhile, are making up for much of Russia’s losses.
The golden calf of Switzerland
Much of the blame falls on Switzerland. The lion’s share of Russian raw materials is traded through Switzerland and its nearly 1,000 raw materials.
Switzerland is an important global financial center with a thriving raw materials sector, despite the fact that it is far from all world trade routes and has no access to the sea, no former colonial territories and no significant own raw materials.
Oliver Klassen, a media official with the Swiss NGO Public Eye, said that “this sector accounts for a much larger share of Switzerland’s GDP than tourism or engineering.” According to a report by the Swiss government in 2018, the volume of trade in goods reached almost 1 trillion dollars (903.8 billion dollars).
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Deutsche Welle says 80% of Russia’s raw materials are traded through Switzerland, according to a report by the Swiss embassy in Moscow. About a third of the raw materials are oil and gas, while two thirds are base metals such as zinc, copper and aluminum. In other words, the deals signed with Swiss bureaus directly make it easier for Russian oil and gas to continue to flow freely.
As gas and oil exports come as Russia’s main source of income, accounting for 30 to 40 percent of Russia’s budget, Switzerland’s role in this wartime equation cannot be overlooked. In 2021, Russian state-owned corporations earned about $ 180 billion (163 billion euros) from oil exports alone.
Again, unfortunately, Switzerland is handling its trade in children’s gloves.
According to DW, raw materials are often traded directly between governments and through commodity exchanges. However, they can also be traded freely, and Swiss companies specialize in direct sales due to the abundance of capital.
In commodity transactions, Swiss commodity traders have accepted letters of credit or letters of credit as their preferred instruments. The bank will give a loan to a merchant and as collateral will receive a document that makes it the owner of the goods. As soon as the buyer pays the bank, the document (and ownership of the goods) is transferred to the merchant. The system gives merchants more credit lines without having to check their creditworthiness, and the bank has the value of the goods as collateral.
This is an excellent example of transit trade, in which only money passes through Switzerland, but the real raw materials do not usually touch Swiss soil. Thus, no details of the scale of the transaction fall to the Swiss customs office, which leads to very inaccurate information on the volume of the flow of raw materials.
“All trade in goods is under-registered and unregulated. You have to dig to collect data, not all the information is available,” Elizabeth Burgi Bonanomi, a senior lecturer in law and sustainability at the University of Bern, told DW.
Obviously, the lack of regulation is very attractive to traders – especially those who deal with raw materials extracted in non-democratic countries such as the DRC.
“Unlike the financial market, where there are rules to deal with money laundering and illegal or illegitimate financial flows and a financial market supervisory authority, there is currently no such thing as commodity trading,” said David Eye, a financial and legal expert. Muleman pred. German television operator ARD.
But don’t expect things to change anytime soon.
Calls for a supervisory authority for the commodities sector modeled on the financial market by the Swiss NGO Public Eye and the proposal of the Swiss Green Party have so far failed. Thomas Matern of the Swiss People’s Party (SVP) spoke out against such a move, insisting that Switzerland should maintain its neutrality: “We don’t need even more regulation, not in the raw materials sector.” By Alex Kimani for Oilprice. com
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