Vladimir Putin says Russia sanctions are weakening the West

Western sanctions against Russia have been tightening for several weeks. But for Russian President Vladimir Putin, these actions against Russia have produced a result “Economic Decay in the West”.

The statement comes as European Commission President Ursula von der Leyen said yesterday that the sixth wave of retaliatory measures against Moscow’s invasion of Ukraine could this time target Russian banks, particularly Sberbank, as well as oil.

“We are looking more at the banking sector, especially Sberbank, which represents 37 percent of the Russian banking sector. There are also energy issues,” Ursula von der Leyen told the Sunday newspaper Bild am Sonntag, who asked her for details on key points of the new sanctions.

The European Union has spared Russia’s biggest bank for now because, along with Gazprombank, it is one of the main payment channels for Russian oil and gas that the bloc countries are buying despite the conflict in Ukraine.

Rising inflation in Russia

In a speech on the state of the Russian economy, Russian President Vladimir Putin added that inflation in his country is stabilizing and demand has returned to normal. Western countries have imposed unprecedented sanctions on Russia, its corporations and its financial system since February 24, which is what Moscow portrays as such “military special operation” which Kyiv sees as an invasion.

“The official forecast should result in a more than 10% contraction. (of GDP)“, in 2022, warned last week Alexei Kudrin, Vladimir Putin’s former finance minister between 2000 and 2011, quoted by Russia’s Ria Novesti news agency.

Ahead of Vladimir Putin’s speech on Monday, the governor of Russia’s central bank, Elvira Nabiullina, said she was considering another rate cut and said it would take about two years for inflation to return to the 4% target the authorities had set themselves . Consumer price inflation in Russia reached 17% in March.

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Today, Russian citizens spend an average of 40% of their disposable income on food, about twice as much as before the war, Reuters the director of the liaison office of the United Nations Food Safety Authority in Russia. Data from the Russian government shows that annual food inflation hit 18.75% on April 1st.

Amid inflation, Russia’s central bank had raised its main interest rate to 20% on February 28, up from 9.5% previously after the ruble fell from the start of the conflict and the first Western sanctions, but it fell back 17% on February 8. April.

“We need to be able to lower interest rates faster”, said Elvira Nabioullina in a speech to MPs on Monday. “We need to create the conditions to increase the availability of credit in the economy.”

Danger of default of the Russian economy?

So far, sanctions have primarily hit the financial markets, she said “But now they will affect the economy more and more.” She said Moscow plans to take legal action against the freeze on Russian assets, including gold and foreign currency, owned by Russian residents.

For the time being, Russia has ruled out the risk of default despite the sanctions imposed on Russia. And this because the US Treasury Department allowed the use of foreign currencies that Moscow held abroad to pay off foreign debts. Recently that is no longer the case. In fact, in early April, the US Department tightened sanctions and stopped accepting dollars held by Moscow in American banks.

A decision made when Russia had to pay a debt of almost $650 million, namely two bonds maturing in 2022 and 2042. It therefore paid them off on April 4, but in rubles and not in US dollars like the Russian Finance Minister Anton Siluanov announced. For the agency Moody’s this payment in rubles “changes the payment terms compared to the original contracts and can therefore be considered as default” if Moscow does not pay off this debt by May 4, ie by the end of the grace period.

The minister pointed out that Russia’s foreign debt is about 4,500-4,700 billion rubles (about 52 billion euros at the current rate), or 20% of the total national debt.

According to several analysts, a national bankruptcy now seems imminent, even inevitable. As a reminder, defaulting on its external debt cuts a country off financial markets and makes it difficult to return for years.

“Suffocating the Russian Economy”

Last Thursday before the Duma, the Russian Prime Minister Mikhail Mihoustin, admitted that the sanctions are causing Russia a lot of trouble. “The current situation can undoubtedly be described as the most difficult for Russia in three decades,” he said and addedsuch sanctions had never been applied [contre la Russie]even in the darkest hours of the Cold War”.

That’s what the American President estimated last Thursday, April 7th “Our sanctions [américaines] will surely wipe out fifteen years of economic progress in Russia” and “we will stifle (his) ability to grow for years”, he said at a union conference. European Commission President Ursula von der Leyen predicted a bleak future for Russia during a visit to Kyiv last week. According to her, the country led by Vladimir Putin is under threat “Decomposition” because of ever tougher sanctions, unlike Ukraine, which has one “European Future”.

A costly war for western economies

On the Western side, it is true that the war in Ukraine is costing the developed countries. In France, more than a month after the start of the conflict, the blinkers are flashing red. In their latest economic report, published on Tuesday, March 12, economists at the Banque de France revised their GDP growth forecasts for the first quarter below, from 0.5% to 0.25% (-0.25 points).

For their part, the Allianz economists have also revised their growth forecasts downwards, but this time by 1 point for 2022 from 4% to 3% in their central scenario. If the war worsens, the French economy could fall into recession at -2.3%.

At the European level, the war in Ukraine could amputate “one point to one and a half points” Growth spurt to Europe depending on length of conflict while inflation could continue to rise”from two points to two and a half points”said OECD chief economist Laurence Boone last week.

When the Frenchwoman states that “the level of uncertainty is high” As for these estimates, she considers it necessary to “an in-depth reflection on fundamental issues including food, energy and digital security and the organization of trade”.

What is certain is that the war in Ukraine and the sanctions imposed on Russia are disrupting international trade. The World Trade Organization (WTO) warns that it will fall by half as early as 2022. In the longer term there is actually a threat of the world trading system “collapsing”. Then there would emerge two blocs based on geopolitical issues – one around the United States and another around China – whose exchanges between them would be extremely limited. Such a scenario would reduce global welfare by 5% in 2040.

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