Russia’s economy was relatively strong in 2021 as it ran budget and trade surpluses aided by high oil prices and a recovery from earlier COVID shutdowns. This allowed Russia to stabilize the ruble and build up exchange reserves, sometimes called a nation’s “war chest,” to an all-time high of $630 billion. However, the invasion in late February, Ukrainian resistance, and the world’s rebuke sent the Russian economy spiraling.
In the early weeks of the conflict, the Russian stock market and ruble lost 40% of their value. A weak currency reduces international purchasing power and raises inflationary pressure. To prop up the ruble and stem banking system withdrawals, Russia raised interest rates from 9.5% to 20%. The ruble had largely recovered by early April. Russian sovereign debt ratings were lowered to junk status and it’s at risk of defaulting. A default will make it more difficult and costly for Russia to raise money and borrow in the future. But a Russian default would have limited effects on international markets as these bonds are not widely held at major banks or in fixed income funds. This is a response that I discuss in my Executive MBA global finance course when we consider foreign investing, exchange rate forecasting, and hedging strategies.
The world’s reaction to Russia’s aggression has been measured. The U.S. and others pledged to ban certain Russian banks from the SWIFT international financial system. The ban will not halt Russian international transactions, but it will make it more costly for Russian banks to operate and make it more costly for multinational companies to do business with Russia. In my undergraduate financial modeling class, we evaluate how companies in a situation like this might optimize their global investment portfolio.
Switzerland, Japan, Australia, the United Kingdom, and other nations are freezing the assets of Russian oligarchs, the central bank, and Putin himself. Countries are also banning technology exports to Russia that it needs to support oil refineries. The U.S. is now banning imports of Russian petroleum – the country’s largest export. However, European nations are more hesitant to do so due to self-interest and pragmatism. Europeans rely on Russian petroleum to heat their homes and run their cars. A ban on Russian petroleum could cause shortages and would immediately drive oil and gas prices up further at a time when oil prices and inflation are at painful levels. Different approaches to the global economic environment are key learning goals for the MBA Global Immersion and undergraduate study abroad programs I lead, but they are now evident in this rapidly evolving crisis.
The conflict and sanctions will make it harder for the U.S. to navigate the post-pandemic economic environment. The ban on Russian imports will hamper the efforts to moderate oil and gas prices. High prices continue to raise production costs and overall inflation. The conflict is also a source of uncertainty for the stock market.