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March 3, 2022

Russia pays the price for Ukraine invasion

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Julius Probst
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Spike in global geopolitical risk 

Russia’s invasion of Ukraine has triggered the biggest spike in global geopolitical risk since the September 11 terrorist attacks in 2001.

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Ruble crashes 

A slower than expected advance into Ukraine, economic and financial sanctions by Western nations, and the increasing isolation of Russia are all taking their toll on the country’s currency. The ruble plunged almost 23% on 28 February, the biggest one-day drop since Russia defaulted on its loans back in August 1998. 

Moreover, with Russia’s central bank cut off from global financial markets, it is unable to use its huge store of foreign currency reserves to stabilise the value of the ruble.

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The ruble and Putin’s approval ratings

Now let’s compare the currency’s movement with approval ratings for Russian President Vladimir Putin. 

We can see the ruble has lost more than half its value against the US dollar in the last decade alone – with Russia’s invasion of Crimea triggering the previous plunge, and the push into Ukraine setting off the latest. 

Interestingly, Putin’s approval ratings surged at the start of each invasion. Could Putin be using war to stabilise his political position domestically?

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Russian attitudes to Ukraine  

Meanwhile, public opinion polls of Russian residents show an increase in ‘negative attitudes’ towards Ukraine.

Previous opinion polls also showed a large shift in sentiment against Western nations following the invasion of Crimea, with negative attitudes towards the US and EU increasing substantially.

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US investors shed Russian securities 

Now let’s look at the impact of the Ukraine conflict on Russian securities. 

The following chart displays the bilateral portfolio position between the US and Russia. We can see that US investors are starting to liquidate holdings of Russian stocks and bonds as financial sanctions take hold. 

Meanwhile, US securities held by Russian residents are falling again after already taking a dive in 2018, when a vast majority of Treasuries were sold – partly as a result of US sanctions imposed on Russia that year.

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Russian inflation outlook

This next chart uses some of the high-frequency data we have on Russian inflation. The statistics office provides weekly estimates for consumer prices and a number of subcomponents.

Using slice analysis, we can track changes to Russia’s Consumer Price Index data throughout the year for every year since 2012. While the average price increase has been around 6%, variations have been wide. For example, Russia experienced a much higher inflation rate in 2015 when the ruble depreciated in the aftermath of the Crimea invasion. For 2022, we can already see that the CPI is likely going to increase more quickly than previous years on average.

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Another predictor of Russian inflation 

We can also use rolling regression to calculate the expected inflation rate. 

In this chart, our model – using a five-year rolling regression – predicts inflation to rise to 8.73%. While the regression coefficient was much higher in the 2000s, even with a coefficient of 0.1, a ruble depreciation of about 50% could lead to a 5% increase in the inflation rate in the short to medium term. 

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Dependence on Russian oil   

Russia and Ukraine are not the only economies suffering from the conflict. European countries that rely on Russian oil are also set to struggle. 

The chart below shows Germany is most dependent on Russian energy, which could spell trouble for the German economy as commodity prices surge and trade with Russia is disrupted. The Bundesbank expects Q1 growth to be negative, which puts Germany into a technical recession. 

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Gas shortage 

The energy crisis looming for Western Europe started even before Russia-Ukraine tensions boiled over. Our last chart shows fill levels for two of the largest gas storage facilities in Western Europe: UHS Rehden and UGS Bergermeer, both operated by Russia’s Gazprom, the world’s largest natural gas company. 

As you can see, Gazprom had already stopped re-filling both tanks throughout 2021, and gas storage is now at a record low. Good thing the weather is starting to warm… 

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