Russia`s reserves are not infinite

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Question: What economic damage is caused to Russia by the sanctions imposed against it? Are these sanctions enough to bring down the Russian economy?

Answer: After Russia's invasion of Ukraine on February 24, the great  majority of the world's leading economies joined the sanctions against it. Currently, Russia is the country against which the largest number of sanctions have been applied. In this regard, Russia even outstripped such countries as Iran, Syria and North Korea. The volume of losses that can be caused by sanctions will increase over a long period. However, some figures can already be voiced. For example, one of the sanctions against Russia was related to the freezing of assets of the country's Central Bank. According to the latest published data, the assets of the Central Bank of Russia exceeded $630 billion. From the latest statement of the Central Bank of Russia on the geographical structure of the placement of assets, it follows that 21.7% of the country's foreign exchange reserves are stored in gold, about 25% in such countries of the European Union as France, Germany and Austria, 13.8% in China, 10% in Japan, about 10% in the US and Canada. That is, almost half of the country's funds are in countries that have imposed sanctions against Russia.  The talk is about 300 billion dollars. For comparison, this is by  six times more than the reserves of both the Central Bank of Azerbaijan and the State Oil Fund. Since sanctions against Russia also affect the private sector, large Russian companies also suffer heavy losses. This year alone, the fall in the shares of Russian companies led to the loss of the owners of these companies by about $100 billion.

The increase in the price of imports will also have an impact on the decline in private sector income. Because the main directions of the Russian economy are seriously dependent on imports. In different sectors, this dependence varies from 30 to 70%. The Russian dependence on high technologies is especially great and, naturally, the complication with the import of products will serve to reduce the competitiveness of the Russian economy in other industries, which will lead to a decrease in the country's income. As another factor that reduces the competitiveness of Russia, one can note the disconnection from SWIFT of the country's leading banks. Because it will complicate the calculations of Russian companies and banks. All these difficulties will reduce interest in Russian products.

Restrictions on the Russian economy will also prevent investment from flowing into the country, at least in the near future. Because in the current situation, no one is willing to start a new business in Russia because of the sanctions and the state of the financial sector. Confidence in the country's economy, as well as in the financial sector, has decreased not only among foreign investors and the population. Only on February 24, that is, on the day the war began, clients withdrew 111 billion rubles from Russian banks. At the exchange rate for that day, this is over 2 billion manats. On the other hand, along with the financial losses of Russia, this process will also be seriously affected by the loss of human capital. Because in addition to foreign companies that are already leaving the country, Russian businessmen seem to want to move their business to other countries. In addition to businessmen, many specialists working in the country are also leaving Russia. In this regard, it can be assumed that if Russia does not abandon foreign policy that threatens the sovereignty of other countries, the economic crisis in Russia will worsen. Already, according to some think tanks, this year the Russian economy is expected to double-digit decline.

Question: Simultaneously with the sanctions, there is an increase in the world market prices for oil, gas and aluminum. One of the main producers of these products is Russia. Can we say that Russia, while suffering losses on the one hand, earns money on the other hand?

Answer: As you have already noted, energy prices on world markets have risen so much for the first time since 2014. However, it should be borne in mind that Russia cannot benefit from rising prices for all types of products. Despite the fact that these days Russian oil is sold on exchanges at more preferential prices than the average market price, it is experiencing difficulties in finding buyers. Because, due to the war, there are serious risks and difficulties in transporting these products, as well as in making payments in connection with the imposed sanctions. On the other hand, in my opinion, it is possible that in the short term these price hikes will contribute to a relative increase in the incomes of resource countries, including Russia. But, on the other hand, it should be borne in mind that the problem that has arisen in connection with Russia has led European countries that are seriously dependent on Russian natural gas to pursue a more decisive policy to change this situation. Many European countries have already begun to take steps to overcome energy dependence on Russia.

Recently, the International Energy Agency also unveiled a 10-point plan to reduce the EU's energy dependence on Russia. In this plan, along with the replacement of Russian gas with alternative energy sources, there are such points as the acceleration of projects related to wind and solar energy, as well as the postponement of the shutdown of nuclear power reactors, the construction of new biomass power plants. In this regard, we can assume an acceleration of the "energy transition" in Western countries, when the share of alternative energy sources in the energy supply will increase in a shorter time than expected. And this, of course, in the near future will lead to the fact that resource countries will receive less income, and Russia will become one of these countries. There is an increase in prices for other products that you mentioned, especially for precious metals, as well as for grain, where Russia has a large market share. However, these increases are also related to psychological factors, caused to a greater extent by the war, and it can be expected that after the normalization of the situation, some reduction in prices will follow.

Question: What other tough sanctions, in your opinion, should be taken against Russia in order to force it to stop the war?

Answer: Although in the first days there was an impression of a relatively soft attitude of the Western countries towards Russia, a few days after the start of the war we witnessed more decisive steps. It can be assumed that if Russia's aggression against Ukraine is not put to an end in the near future, then tough steps will continue on the rise. However, the current sanctions against the Russian economy can be called heavy and "unparalleled." I think that the acceleration of the liberation of European countries from Russian gas dependence may also neutralize one of the most effective types of "weapons" in Russia's arsenal. On the other hand, if companies in countries that have not joined the sanctions against Russia maintain economic relations with Russia, trade relations of large companies in countries that have not joined the anti-Russian sanctions may also be limited, which may lead to the fact that Russian products will remain at all. without buyers or will be forced to sell products at the offered price. On the other hand, if large companies from countries that have not joined the sanctions against Russia establish economic relations with Russia, then Western countries may impose restrictions on them, as a result of which Russian products will be left without a buyer at all, or Russia will be forced to agree to any price offered by the buyer.

Question: What will happen if the Russian authorities freeze Western capital in their country?

Answer: The statement of the Bank for International Settlements said that the amount of Russian clients' funds in foreign banks is about $128 billion. The volume of loans issued by foreign banks to Russian clients is about $121 billion. That is, both figures are approximately close to each other. However, it should be taken into account that if the volume of Russia's gross domestic product is about 1 trillion 700 billion dollars, then this figure for the EU countries is 15 trillion dollars, and the largest economy in the world, the United States, is over 20 trillion dollars. For this reason, even if Russia takes such a step, the loss of these funds will not create such serious problems for the economies of the Western countries as for Russia.

Question: The Russian ruble is depreciating very quickly. Most likely, as a result of sanctions, there will be a rise in prices and inflation in Russia. How will this affect the social status of Russian citizens? Is Russia ready for this?

Answer: It must be taken into account that the consequences of economic sanctions will affect all citizens of Russia without exception. Because as a result of these sanctions, the Russian national currency, the ruble, has also undergone a serious devaluation. The data of the Central Bank of Azerbaijan show that since the beginning of the war, the ruble has fallen in price by 40% against the official rate of the manat. It should be taken into account that while the stock exchanges in Russia do not function normally. For this reason, it is increasingly possible to encounter even greater depreciation of the ruble on various operating platforms. The depreciation of the national currency, of course, means a decrease in purchasing power. Over the past two years, problems related to supply chains and other problems in global markets have already led to an increase in inflation. The fall of the national currency, of course, will lead to a further rise in prices in Russia and, as a result, will lead to a decrease in the well-being of the population. It should be borne in mind that about a third of Russia's food supplies come from imports.

As we have already noted, sanctions against Russia cover almost all spheres of the economy. If only because these sanctions seriously restrict financial transactions with Russian companies and financial institutions. For this reason, the restrictions will affect companies in all sectors, regardless of what they trade. Sanctions will reduce the country's income not only from the sale of products, but also from services. This is where the income from tourism comes in. At the same time, Russia's ability to receive loans from international financial organizations or attract investments into the country is limited. Therefore, if energy resources are seriously losing, resource countries are trying to find a way out of this situation by attracting additional income through alternative sectors. However, in this case, Russia will not have such an opportunity. And the country's remaining resources are not unlimited. For this reason, unless there are major changes in Russia's foreign policy and sanctions continue, there will be few opportunities for Russia to improve the social situation of the population affected by the sanctions.

Question: More than 2 million Azerbaijanis working in Russia provide their families in Azerbaijan with money earned in Russian markets. The depreciation of the Russian ruble, as well as the decline in the social status of the inhabitants of Russia, of course, will not bypass these people and their families. In short, how will the sanctions against Russia and the weakening of the economy of this country affect the economy of Azerbaijan?

Answer: The figures released by the Central Bank of Azerbaijan also show that most of the money through money transfer systems in Azerbaijan comes from Russia. According to the results of the first 9 months of last year, the volume of funds sent to Azerbaijan amounted to $772 million. Of these funds, 409 million dollars, that is, 53%, came from Russia. And this, of course, means that the income of tens of thousands of families in the country comes from Russia. Naturally, therefore, the fall of the Russian ruble and the weakening of the Russian economy will reduce the incomes of those who live in Russia and send money to their families, and this will reduce the social well-being of these families. These families, and especially those living in the regions, may face difficulties. I also note that over the same period, Azerbaijan also received about $21 million from Ukraine from abroad. According to this indicator, Ukraine is one of the six countries from which most money is sent to Azerbaijan. The situation in the Russian economy may lead to a decrease in income not only for people living in Russia, but also for some people operating in Azerbaijan. It should be taken into account that Russia is the main buyer of Azerbaijan's non-oil products. In particular, these are vegetable products. In Russia, a decrease in the purchasing power of the population, a decrease in well-being, will naturally lead to a reduction in their expenses. In this regard, the income of entrepreneurs who supply their products to the Russian market may decrease. At the same time, Russia is the country from which Azerbaijan imports the most. Last year, Azerbaijan's total imports amounted to $11 billion 705 million. Of this amount, $2 billion 74 million, that is, about 18% of our total imports, comes from Russia. In connection with the depreciation of the Russian ruble, there is also a possibility of lower prices for some goods imported into the country.

Kamran Mahmudov