A few weeks ago, Putin recorded calling the war in Ukraine a “tragedyand claiming that the economic sanctions imposed on his country had “failed”. Turns out he wasn’t exactly bluffing.
Three months after the start of the toughest and most coordinated sanctions by Western governments, the Russian economy is proving to be a tough nut to crack. Continued oil and gas exports as well as a buoyant ruble have enabled Moscow to weather sanctions from the West much better than expected.
In a note to customers dated last week and made public on Monday, JPMorgan Chase according to the country’s business climate surveys “signal a shallow recession in Russia, and therefore imply upside risks to our growth forecast. The available data therefore does not point to a sharp drop in activity, at least for now.”
JPM also reversed its earlier forecast of a 35% contraction in Russian GDP in the second quarter and 7% for the whole of 2022, now predicting that the recession will be much less severe.
The bank, however, noted that Russia will certainly feel the impact of current and potential sanctions, adding that the Russian economy would be in much better shape if the country had not invaded Ukraine.
The ruble returns to pre-war levels
Perhaps an even more impressive demonstration of the resilience of the Russian economy is how quickly the country’s currency has recovered from its crash at the start of the year. Braving a plethora of energy and financial sanctions, the rouble, Russia’s national currency, rebounded surprisingly and even managed to recover to pre-war levels.
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The ruble crashed dramatically in the days immediately following President Vladimir Putin’s order to invade Ukraine on a large scale, dropping as much as 30% against the US dollar. The currency appeared doomed as Western countries hit Moscow with an increasingly severe set of sanctions, including measures to restrict the Russian Central Bank’s ability to access its vast pool of foreign exchange reserves. Indeed, a cross-section of analysts warned against a unavoidable defect while Russia was short of dollars.
However, the ruble was not down for long and started rebounding just weeks after its biggest crash. At the end of March, the ruble began to gradually recover; by mid-April its value reached 1 RUB = 0.013 USD, a level last seen on the eve of the invasion. Currently, the ruble is trading for USD 0.016, a level it last reached in January 2020.
What explains this recovery?
Putin’s demand that Russian gas buyers pay in rubles was a masterstroke. After initial resistance, Western gas buyers are increasingly toeing the line, with one of Germany’s largest natural gas importers, VNGrecently opened an account with Gazprombank for payments for Russian gas on Moscow terms.
According to Maria Demertzis, deputy director of Bruegel, a Brussels-based economic think tank, EU payments for the Russian gas pipeline played an important role in supporting the currency.
Despite all the harsh rhetoric about giving up Russian energy commodities, Russia still manages to sell a good amount of its oil and gas, thanks to some of the world’s biggest commodity traders not hesitating fund Putin’s war machine.
Indeed, Oleg Ustenko, economic adviser to Ukrainian President Volodymyr Zelensky, has written to the four companies to demand that they immediately cease the trade in Russian hydrocarbons since the export revenues finance the purchase of arms and missiles by Moscow.
According to ship tracking and port data, Switzerland Vitol, Glencore, and Gunvor as well as Singapore Trafigura, all continued to transport large volumes of Russian crude and products, including diesel.
Vitol has pledged to stop buying Russian crude by the end of this year, but that’s still a long way off today. Trafigura said it would stop buying crude from Russian state-owned Rosneft by May 15, but is free to buy shipments of Russian crude from other suppliers. Glencore said it would not enter into any “new” business activity with Russia. But the reality is that while the G7 has pledged to ban or phase out imports of Russian oil, and while the US, Canada, UK and Australia have imposed outright bans , the EU is still unable to move forward with Hungary holding a ban. hostage. Meanwhile, India and China are making up much of Russia’s losses.
Switzerland’s golden calf
A large part of the responsibility lies with Switzerland. The lion’s share of Russian commodities is traded through Switzerland and its nearly 1,000 commodity companies.
Switzerland is an important global financial hub with a thriving commodities sector, despite being far from all global trade routes and having no access to the sea, no former colonial territories and no significant raw materials of its own.
Oliver Classen, media manager at the Swiss NGO Public Eye, says that “This sector represents a much larger share of GDP in Switzerland than tourism or the mechanical industry”. According to a 2018 Swiss government report, the volume of commodity trade reaches nearly $1 trillion ($903.8 billion).
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Deutsche Welle reported that 80% of Russian raw materials are traded through Switzerland, according to a report from the Swiss Embassy in Moscow. About one-third of the raw materials are oil and gas, while two-thirds are base metals such as zinc, copper and aluminum. In other words, the agreements signed on the Swiss offices directly facilitate Russian oil and gas to continue to flow freely.
With gas and oil exports As Russia’s main source of income, accounting for 30-40% of the Russian budget, Switzerland’s role cannot be ignored in this war equation. In 2021, Russian state enterprises earned around $180 billion (€163 billion) from oil exports alone.
Once again, unfortunately, Switzerland has managed its commodity trade with kid gloves.
According to DW, commodities are often traded directly between governments and through commodity exchanges. However, they can also be traded freely, and Swiss companies have specialized in direct selling thanks to an abundance of capital.
In commodity transactions, Swiss commodity traders have adopted letters of credit or L/C as their instruments of choice. A bank will grant a loan to a merchant and, as collateral, will receive a document making it the owner of the goods. As soon as the buyer pays the bank, the document (and ownership of the goods) is transferred to the merchant. The system gives traders more lines of credit without the need to check their creditworthiness, and the bank has the value of the merchandise as collateral.
This is a great example of transit trade, where only money passes through Switzerland, but the actual commodities do not usually touch Swiss soil. Thus, no detail on the magnitude of the transaction lands on the Swiss customs office leading to very inaccurate information on raw material flow volumes.
“Commodity trading as a whole is under-recorded and under-regulated. You have to dig to collect data and not all information is available,Elisabeth Bürgi Bonanomi, lecturer in law and sustainability at the University of Bern, told DW.
Clearly, the lack of regulation is very attractive to commodity traders, especially those dealing with commodities mined in undemocratic countries such as the DRC.
“Unlike the financial market, where there are rules against money laundering and illegal or illegitimate financial flows, and a financial market supervisory authority, there is currently nothing like this for commodity trading. ,“David Mühlemann, financial and legal expert at Public Eye, told German broadcaster ARD.
But don’t expect things to change anytime soon.
Calls for a commodity watchdog modeled after the financial market by the Swiss NGO Public Eye and the Swiss Green Party’s proposal have so far failed to bear fruit. Thomas Mattern of the SVP spoke out against such a decision, insisting that Switzerland maintain its neutrality, “We don’t need even more regulation, and not in the commodities sector either.”
By Alex Kimani for Oilprice.com
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