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Sanctions widen the divide between the ruble and the economy

Depending on the terms of the final deal, the new sanctions proposed by the EU will cause additional damage to the Russian economy; this increases Russia’s prospect of retaliatory action.

The ruble Rebound attributes to two primary sources. First, the continued demand for the Russian currency stems from significant foreign currency inflows from oil and gas exports as energy prices have risen. Second, the Central Bank of Russia’s efforts to stem capital flight through capital controls and higher interest rates are working for now, but at the cost of tighter financial conditions than before the sanctions over widening credit spreads.

Imported components are used in Russia’s primary non-extractive industries, including machinery and electrical equipment, computers, automobiles, and medicines. Foreign added value exceeds 50% in many sectors; with over half coming from the EU, US, UK, Canada and Japan; Therefore, much of it cannot be easily replaced with Chinese imports or local alternatives.

In the absence of significant economic restructuring and assuming sanctions remain in place, Scope Ratings expects Russia’s medium-term growth potential to drop to 1-1.5 percent per year; far below that of most Central and Eastern Europe, where the standard of living is much higher.

In the short term, higher energy prices can help mitigate the effects of an EU embargo Russian oil imports.

Long term one EU The Russian oil boycott is likely to impose heavy costs on the Russian energy sector and real economy in terms of ruble convertibility, pending the details of a final agreement.

Russia is likely to escalate economic retaliation against EU members as it seeks alternative customers for its energy in Asia. However, a complete crowding out of the European market is unlikely due to significant transport and logistics obstacles.

In fact, Russa’s energy infrastructure is centered in the West. Due to capacity limitations, immediate expansion of pipeline oil supply to China will be restricted.

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https://www.financebrokerage.com/sanctions-widen-disconnect-between-ruble-and-economy/ Sanctions widen the divide between the ruble and the economy

Callan Tansill

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