Swedbank’s Chief Economist Nerijus Mačiulis says that the announced partial mobilization is negative news for Russia in every sense.
“It is clear that productive resources are being diverted not to where the most value is created, not to economic activities, but to military activities. This is a bad trend in both the short and long term, both in the economic, social and humanitarian sense,” says N. Mačiulis.
Forecasts for consumer sentiment and the ruble exchange rate
Economist Alexander Izgorodin says that Russia’s chosen path of escalation of the war in Ukraine may result in the fall of the Russian ruble, whose exchange rate was artificially supported by the central bank.
“The escalation is bad news for the Russian ruble exchange rate (…). There will be greater mistrust of Russia as an investment country in the markets, so the ruble exchange rate may decrease due to these decisions,” said A. Izgorodin.
Prospective Russian companies that have the option to transfer business from Russia, I think they will definitely do so by the end of the year
If the ruble falls, the central bank may have to change its monetary policy and raise its key interest rates to support the exchange rate, he said.
“This is bad news for Russian residents and companies that take loans in rubles, because higher base rates primarily mean that the final interest rates rise: a person who took out a consumer loan, a home loan, or a company that borrows from banks will pay more for their loans. Which will automatically pass through consumption, through the investments of Russian companies,” the economist explains.
From his point of view, the announcement of partial mobilization will also affect the consumption of the population.
“This will cause a huge panic among the Russian population, among families, which automatically means that the mood of the Russian population will deteriorate and people will once again return to the mass savings mode, start buying and consuming only the most necessary goods and services,” says A. Izgorodin.
According to the Moscow Stock Exchange, the ruble rate fell to more than 62 rubles per US dollar on Wednesday morning. Currently, the exchange rate is about 60 rubles to the dollar.
An impetus to attract local and foreign business
According to N. Mačiulis, one would like to hope that the Russian regime’s decision will become the last test of patience for both Russian citizens and foreign businesses, which may have been hesitating whether to withdraw from the country.
“We would very much like it to be so, that it would be the last drop in the sea of patience and push all the companies of the West and other countries of the world towards a complete withdrawal, and we would like to hope that the Russian population itself will somehow critically evaluate such an absurd step,” says N. Step-son.
In the short term, the announcement of mobilization may negatively affect consumer expectations, consumption, and business decisions, both domestic and foreign.
A. Izgorodin, when asked whether partial mobilization will encourage foreign companies that have hesitated so far to make a decision, said that it will definitely happen, because it is clear that Russia does not want peace.
“If, let’s say, they planned to return the business to Russia, it is clear that this is a signal that it should not be done, because there is a very high probability that Russia will bleed even more after such a decision,” says A. Izgorodin.
According to him, Russian people will also try to leave the country or, if they have already left, not to return.
“Another very bad news is the risk that a part of the working-age population will make a decision to quickly leave the territory of Russia, or those men of working age who are already abroad will decide not to return to Russia and stay abroad, since, in my understanding, mobilization is forced, it will not be volunteering,” says A. Izgorodin.
He says that this is bad news for Russia’s business climate, as it becomes obvious to local and foreign businessmen that the country is very unstable, where decisions that radically change the business environment can be made in an instant.
“In most cases, those people who go on business trips, who, let’s say, are currently away, are usually business representatives who have a certain amount of capital, and this will be a signal to them that they need to raise capital abroad and create business in territories outside of Russia , which means worse news for the Russian labor market. It is possible that the number of jobs will start to decrease again, as companies will bring their employees abroad,” said A. Izgorodin.
A country with an uncertain future
Thus, according to the economist, more and more companies will move their business abroad permanently, and Russian businessmen already established abroad will not return to Russia either. And such a gloomy prospect awaits the country regardless of whether a peace agreement is reached: Russian businessmen who have seen the world will no longer believe in opportunities in their country.
“It will affect the Russian economy more through panic, uncertainty among the population and business, and perhaps most importantly through the flight of the intelligent, working-age population from Russia, which means that those Russian entrepreneurs who are young and who have been a little hesitant, whether to take business abroad or not – I think that the decisions announced yesterday and today clearly say what the direction should be,” said the economist.
He predicts that “promising Russian companiescompanies that have the option to move their business from Russia, I think they will definitely do it before the end of the year.”
It will cause great panic among the Russian population, among families. People will once again go back to mass austerity mode
The issue of sanctions: not only the role of the West is important
A. Izgorodin does not exclude the possibility that the West will adopt even stricter economic sanctions against Russia.
“Now I certainly do not rule out that at the end of this year a decision may be made to limit the price of Russian oil, perhaps decisions will be made to limit the import of Russian oil in the West.” The escalation of the war may mean quite large budget revenue losses for Russia at the end of the year,” says A. Izgorodin.
Swedbank economist N. Mačiulis says that the wider impact on the economy, both in the short and long term, will depend more not on this decision of the Kremlin, but on the reaction of the West and other countries. Even non-Western action on the sanctions front is particularly important, because a lot has already been done here.
“In this environment, it is much more important how China and India will react, that is, those countries that still actively trade with Russia, buy energy resources and export technologies,” says N. Mačiulis.
According to him, there have already been signs recently that the Asian giants are not satisfied with Russia’s military actions, so time will tell if this was just a temporary expression of disapproval.
“It will be interesting to see if this is just short-term public finger-wagging, or if there could be other solutions that would further damage the Russian economy,” he says.
It is much more important how China, India will react, that is, those countries that are still actively trading with Russia
Speaking about Western sanctions, N. Mačiulis says that a large part of them will have a long-term effect: “In the long-term perspective, many decisions have already been made that will paralyze Russia’s economic progress and lead to stagnation and degradation.”
“This was already “secured” by the Kremlin for the Russian economy. In the short term, the very announcement of mobilization may negatively affect consumer expectations, consumption, and corporate decisions, both local and foreign. We will probably see that,” said N. Mačiulis.
“It is difficult to expect more economic measures from Western countries. What can be expected is greater military aid to Ukraine,” said the economist.
Economist: Lithuanian companies have already reduced their ties with Russia
A. Izgorodin sees a big upheaval in the Russian financial exchange as another negative effect.
“Russian financial markets are very worried about the impact of such a decision on the economy. Because 9.4 percent the fall of the stock market means total panic and catastrophe in the Russian financial markets. Which is essentially a very bad signal for investors – both Russian and foreign,” said A. Izgorodin.
He added that when such decisions are made, company assets depreciate by a tenth, and may depreciate by 20-30 percent, so investors will eventually start avoiding Russia as an investment jurisdiction.
When asked whether the Russian regime’s decision will have an additional negative impact on the European economy as well, A. Izgorodin said that Western business has been living in a state of war since February 24, and this decision by the Kremlin only shows that the uncertainty and the circumstances of the war will continue and business will continue to live in such an uncertain context.
“It basically doesn’t change anything. The second thing is that Western and Lithuanian companies have already greatly reduced their dependence on the Russian market since the beginning of the war. Thus, Russia’s share in the export structure of goods of Lithuanian origin fell twice during the year,” said the economist.
This will affect the Russian economy more through panic, uncertainty among the population, businesses and, most importantly, through the flight of the intelligent, working-age population
He predicts that even if the price of oil were to rise somewhat now, the worse economic situation in the world should not allow prices to rise further.
“We see an escalation, which means that in the short term the price of oil may increase a little, but on the other hand, we see that narrative of crisis and recession in Western economies, so this will be a signal to oil prices that the economic situation in the world is getting worse and this will lead to a fall in the price of oil.” , said A. Izgorodin.
Russian President Vladimir Putin announced a partial mobilization in the country in an address shown on Wednesday. He explained the decision by the fact that the West is allegedly “trying to divide and destroy Russia”, and Kyiv is planning to transfer hostilities to Russian territory. Seven months ago, on February 24, Russia launched a military invasion of Ukraine.
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