In 2014 Russia Invaded Ukraine, the market rally on Wall Street faded, the Ruble fell to a record low against the euro, five-year low against the dollar, the German DAX which had heavy exposure to Russian gas fell 3.3%, its biggest fall at the time since May 2012.
Russian stocks tanked 10.8% that same day. Elsewhere, companies with high exposure to Russia and Ukraine fell over 5%.
But now in 2022 the scenario changed, it seems like Russia did homework to face sanctions from the U.S. and its allies.
What U.S. would do if Russia Invades Ukraine
- U.S. could ban the export to Russia – products that use microelectronics based on U.S. equipment, software or technology.
- Western powers could cut Russia out of the SWIFT financial system. This would effectively end Russia’s ability to send and receive money from abroad.
- The US could cut Russian banks’ access to the dollar as 56% of Russian Export is in the US dollar
- Possible sanctions on Russian energy exports as 12% of global crude oil is exported by Russia.
Russia’s Readiness on U.S. and Euro Sanctions
- According to IMF data, the Russian government has run a conservative fiscal policy and kept its government debt under 20% of GDP, compared with 133% in the U.S.
- Russia has also amassed a significant financial buffer, with international reserves, including gold holdings and foreign currency, reaching a high of $630 billion in December.
- In 2019, Russia opened a major gas pipeline to China and trade between the two countries has grown to over $100 billion a year.
Possible Russian Retaliation on the U.S.
- Russia in 2014 barred most Western food imports such as fruits, vegetables, meat and dairy products, and French cheeses.
- Later expanded to other industries, including medicine and technology which stimulated domestic production.
Russia’s’ Real Weakness
- One sector Russia hasn’t been able to sanction-proof is technology.
- The global chip industry is largely dominated by companies from the U.S. and its allies in Europe, Taiwan and South Korea.
- Russia has only a few, mostly outdated semiconductor factories and is dependent on parts and patents from Western companies.
- The export controls of microelectronics under consideration by the USA
- Russia’s ability to buy machine tools, smartphones, and other consumer electronics from Europe will get affected.
Effect on Russian Assets
- Russian assets tumbled this week as investors weighed the sanctions threat.
- The Ruble and local stock markets have sunk to their lowest levels in months while Russia’s credit default swaps, a measure of financial risk, rose to their highest since the beginning of the pandemic.
Conclusions
Globally the capital market is not in good shape due to liquidity tightening and rising crude oil prices. Adding to the fuel expected Russian invasion will raise LNG price globally which will be a hurdle for India to achieve its target of 15% of LNG in its energy mix from the current 6.3% as it should fight on price with Europe. As Russia & Ukraine export over 30% of wheat, the price of wheat is expected to raise benefiting Indian wheat exporters.
PhiGrowth Capital and Consultants 