Russia says economy is taking ‘serious blows’ but there is a margin of safety

Russia’s economy is taking “serious blows”, the Kremlin acknowledged on Wednesday, as the country’s growing isolation further puts pressure on its tottering financial system.

Apple, ExxonMobil, Ford, Boeing and Airbus have joined a list of companies that have closed or suspended their operations in Russia in response to the Ukrainian invasion, and the European arm of Russia’s biggest bank has collapsed after a run on its deposits. The ruble weakened again to trade at $112.

“Russia’s economy is taking serious blows,” Kremlin spokesman Dmitry Peskov said in a conversation with foreign journalists. “But there is a certain margin of safety, there is potential, there are some plans, the work is in progress.”

Peskov was responding to a question about US President Joe Biden’s remark in his State of the Union address that the Russian economy had been left “recovering” from Western sanctions.

Sberbank (SBRCY), Russia’s biggest lender, said on Wednesday it was leaving Europe, with the exception of Switzerland, after banking regulators in Austria forced the closure of its Vienna-based EU subsidiary. .

The European Central Bank had warned earlier this week that Sberbank Europe was likely to go bankrupt after depositors rushed to withdraw their money after Western sanctions were imposed on the lender and much of Russia’s financial system.

Sberbank said its subsidiaries faced “an exceptional outflow of funds and various security concerns regarding its employees and offices,” the group said in a statement, adding that it was prevented from bailing them out by an order from the Russian central bank.

The bank sanctions are part of a broader package of measures taken by the West, unprecedented in scale against a key Russian economy, aimed at cutting off funding for Russian President Vladimir Putin’s war effort. France estimates that $1 trillion in Russian assets has been frozen, including about half of the Russian government’s war reserves.

Moscow responded with a series of emergency measures aimed at staving off a financial meltdown, stopping the flow of money out of the country and preserving its foreign currency reserves. The central bank more than doubled interest rates to 20% and banned Russian brokers from selling bonds held by foreigners.

The Russian stock market was closed on Monday and has not reopened since. The central bank said it would remain closed on Wednesday. The government ordered exporters to exchange 80% of their foreign currency earnings for rubles and banned Russian residents from making bank transfers outside the country.

On Tuesday, the government said Putin was working on a decree that would prevent foreign companies from getting out of their Russian assets — an attempt to stave off an exodus that has picked up pace this week. Putin also signed a decree banning people from receiving more than $10,000 or the equivalent in foreign currency from the country, state news agencies TASS and RIA reported.

“Conditions in the Russian financial system and the economy at large are likely to deteriorate further in the coming days and weeks as the already announced sanctions take their toll and future sanctions add to the sustained negative shock,” wrote the senior economist at Berenberg. , Kallum Pickering, in a research note.

“For the foreseeable future, Russia will remain isolated from the Western world and major global markets.”

Oil companies lead corporate exodus

Russia’s energy riches have not been directly targeted by Western sanctions, but many of the world’s biggest oil companies are either leaving the country or halting new investment in projects to explore and develop fields.

Moscow is also finding it harder to sell Russian crude oil shipments to traders and refiners worried about getting caught in the net of financial sanctions. Tanker operators are also wary of the risk to ships in the Black Sea.

ExxonMobil said on Tuesday it was pulling out of its latest project in the country, the Sakhalin-1 – which it billed as “one of the biggest international direct investments in Russia”. An Exxon subsidiary operated the project, and the company’s decision to step aside will end its more than 25-year presence in Russia.

BP (BP), Shell (RDSA) and Norway’s Equinor said this week that they intend to exit their Russian businesses with a likely billion-dollar hit to their balance sheets. France’s TotalEnergies (TOT) halted further investments.

Apple, the world’s most valuable company, announced on Tuesday that it had stopped selling all of its products in Russia due to the invasion of Ukraine. Apple also said it had moved to limit access to digital services such as Apple Pay within Russia and restricted the availability of Russian state media apps outside the country.

Ford said on Tuesday it was suspending its Russian operations, effective immediately. The automaker has a 50% stake in Ford Sollers, a joint venture with Russian company Sollers.

Boeing is suspending support for Russian airlines. A company spokesperson said on Tuesday that Boeing was pausing “parts, maintenance and technical support services for Russian airlines” and also “suspended major operations in Moscow and temporarily closed our office in Kiev.”

Airbus also said it was suspending support services and the supply of spare parts to Russian airlines.