This is a continuation of my previous post about the adverse effects that the Russia/Ukraine conflict has had and will continue to have on the Russian economy. I will elaborate on two more of these negative effects and argue that Russia’s natural resource industry is one of the only bright spots in an otherwise grim view of the future for the Russian economy. As a recent Economist article, “From Bad to Worse,” emphasizes, the three most notable negative effects of the Russia/Ukraine conflict are: (1) Sanction tightening, (2) a cut off of foreign lending + investment into Russia, and (3) a fall in the value of the ruble. Having examined sanction tightening in the last post, I will take a closer look at the last two effects in this post.
2. Cut off of Foreign Lending + Investment into Russia
Political instability in Ukraine is causing foreign investors to doubt whether or not their investments and loans to Russian firms are safe bets. As I have discussed numerous times before in previous posts, availability of credit drives business cycles (both short and long term), so a credit tightening in Russia would have many unfavorable consequences including plummeting asset prices, a drop in productivity, and decreased incomes. Unfortunately, these potential effects are already becoming realities. As the article states,
“With capital flight hitting $60-70 billion in the first quarter of this year alone, investment in domestic production—what the spluttering economy needs most of all—will be even harder to come by.”
It is worth noting that the main concern is not about existing investments and loans, but new ones. Many of the investments into Russian firms are under long term contracts, which make them difficult to get out of, but new financing is unlikely to come rushing in after the conflict in Ukraine. Although Russian banks have expressed enthusiasm in replacing the role of their foreign counterparts, their ability to do so is doubtful because many of these banks rely on western loans. If further sanctions and investor doubt forces these western loans to stop flowing in, Russian banks may be in an even worse position than the Russian firms relying on foreign imports (discussed next).
3. Fall in the Ruble
The ruble has plummeted as a result of the conflict in Ukraine. Although there is some argument about whether or not a weak ruble is good or bad for Russia, I would argue that the costs clearly outweigh the benefits. A weak currency makes imports more expensive, and with many Russian firms not only relying on foreign loans, but also on foreign imports of supplies, a weak ruble is not something to celebrate.
In conclusion, I have laid out a detailed summary of some of the negative consequences the Ukrainian conflict will bring upon the Russian economy (sanction tightening, cuts in foreign lending, and a fall in the value of the ruble). Furthermore, I have argued that Russia’s natural resource industry will likely survive these troubles because of two reasons– Europe’s dependence on natural gas and the prospect of new, long term deals between Russia and China.