Russia: invasion would wreak havoc on economy, as well as Ukraine

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Russian troops massing on the Ukrainian border are pointing their weapons in the wrong direction. Jittery markets represent a greater threat to Russia than its neighbour’s mooted membership of Nato.

As an emerging economy, Russia is already exposed to disinvestment triggered by US rate rises. An invasion of Ukraine would accelerate that trend and trigger US and European sanctions.

Not that Vladimir Putin cares a jot what foreign investors think. Politics trumps economics, Lex believes. An invasion could bolster the strong-man credentials of the Russian president even as it impoverished his country further.

Local inflation, rising 8 per cent annually, is already at a six-year high. No wonder the Bank of Russia has doubled its key lending rate in the last year to 8.5 per cent.

Russia has prepared for some of the risks. It has bolstered its foreign exchange reserves with hefty purchases of gold, now at a 15-year peak of more than $630bn. Savings-poor emerging economies often rely on foreign sources of capital. Putin has been keen to stop this dependency recurring in Russia. Between 2014 — when Russia annexed Crimea — and 2020, the country bought an average of 180 tonnes of gold annually. Few nations rival this — or would aspire to do so.

Russia’s strong trade position is another buffer. The positive balance nearly tripled to $21bn by November. Exports of oil and natural gas have soared, bolstering Russia’s stock of hard currency. But the rouble has fallen a tenth against the dollar in the past three months.

The local stock market index Moex, dominated by natural resource producers, has fallen 31 per cent in the same period in dollar terms. At about 10 times estimated earnings the market valuation is nearing the lows of 2015. The dividend yield has hit 7 per cent.

Might that tempt contrarians? The world’s precarious macro situation weighs against bargain hunting. The Fed’s insistent message is that rates must rise and its balance sheet must shrink. Wall Street is in retreat. If a conflict cut off Russian oil and gas flows, the risk-off switch would become a rout.

A cessation of sabre-rattling would merely mean another impasse. Only a few brave foreigners bought Russian assets in the past. Even they should stay clear when nationalism rather than national prosperity propels events.

The Lex team is interested in hearing more from readers. Please tell us your analysis of the financial dimensions of the Ukraine situation in the comments section below

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