Emigration & economic collapse

Hello! This week we continue to look at the economic and political fallout for Russia — and Russians — of the fighting in Ukraine. The four stories we focus on are: the emigration of journalists, IT specialists and other professionals; the collapse of the ruble after Western sanctions on the Central Bank; ongoing turmoil on stock markets; and the growing list of Western businesses that have announced they are leaving Russia.

A statement from The Bell: The risks for journalists working in Russia rose exponentially last week after a law was passed that punishes the spread of ‘fake news’ with up to 15 years in jail. It’s already well known that Russian officials refuse to describe events in Ukraine as a ‘war’, preferring the term ‘special military operation’. As a result, we are halting all direct coverage of Russia’s ‘special military operation’ in Ukraine until further notice — although we will, of course, continue to report on its far-reaching economic, political and social consequences. If you notice that we’re being circumspect about our choice of language and topics — you’re right. We are. At the moment we believe that’s the only way we can protect our journalists, and continue to function as a media outlet.

A new emigration

Fearful of the economic and political consequences of fighting in Ukraine, possible conscription, and rumors of martial law, thousands of Russians are thinking about leaving. As European airspace is now closed to Russian aircraft and some coronavirus travel restrictions remain in place, exit options are limited. Western sanctions mean most of Russia’s civilian aircraft will soon be grounded, and plane tickets are changing hands at prices that would have been unthinkable just a few weeks ago.

• “My colleagues bought one-way tickets from Moscow to [the Armenian capital] Yerevan for 135,000 rubles ($1,400). This is the new reality,” said Pavel Smirnov, a relocation expert at Hello Move. Such a ticket would previously have likely cost no more than 10,000 rubles. Prices for air tickets have risen as much as 30 percent over the last week, according to the Association for Russian Tour Operators.
• The most popular destinations for Russians exiting the country are Turkey and the South Caucasus countries of Armenia, Georgia and Azerbaijan. Russians do not need visas to enter any of these states, and Russian is widely spoken in the South Caucasus. The founder of the Retomagic app, Mark Krasotin, is one of those who re-located in recent days. “The decision to move was a no-brainer because our app is international and has users all over the world. We were worried that they would begin to block the App Store and Google Play and our work would become technically impossible,” he said.
• But it’s not only IT professionals who have fled: hundreds of journalists have also left the country fearing political persecution as the Kremlin imposes wartime censorship. Over the last week, a series of prominent independent media outlets — including television channel Dozhd and radio station Ekho Moskvy — have announced a suspension of their activities, or been forced to shut-down entirely. The Russian authorities have also begun blocking major social networks, including Twitter and Facebook.
• However, most journalists left because of a law passed Friday by the Russian parliament that includes draconian punishments for those found guilty of spreading ‘fake news’ — including up to 15 years in prison. For the moment, it’s unclear how the law will work in practice, but, immediately after the start of Russia’s ‘special military operation’ in Ukraine, journalists were officially warned to report on events using only official Russian sources. In theory, any other information that was reported could be defined as ‘fake news’. Of course, the law is likely to be used selectively — but everyone in Russia has reason to be afraid.
• Those who are still in Russia have little time left to decide whether they will leave. The Western sanctions imposed on Russian airlines mean there will soon be few planes left able to fly (most of the aircraft used by Russian airlines are Airbus or Boeing and are leased from European Union countries, or insured by European companies). Russia’s Federal Agency for Air Transport said Saturday it was recommending all Russian airlines halt international flights because there was a growing risk that their planes would be seized when abroad. By Tuesday, the only way to leave Russia by air is likely to be on foreign carriers like Turkish Airlines that continue to operate in Russia.

Sanctions on Central Bank send ruble into tailspin

The Russian ruble is experiencing a record collapse. It ended last week down 20 percent against the dollar and the euro, at one point Thursday hitting 117 to the U.S. dollar (before the beginning of Russia’s ‘special military operation’ in Ukraine it was less than 80 against the greenback). Moscow Stock Exchange halted trading until March 9, but in the international forex market the ruble on Monday hit 153 to the dollar.

Major currency moves began Monday following the imposition of sanctions on the Russian Central Bank — which meant it could no longer support the ruble by selling its reserves.

Unlike its counterparts in Iran and Syria, the Russian Central Bank was not added to Washington’s SDN-list (which means total isolation from the U.S. financial system), but the U.S., European Union, Canada, United Kingdom and Japan have all banned it from operating. That meant the Central Bank’s reserves of U.S. dollars, euros, pounds sterling and Japanese yen became inaccessible almost overnight, depriving it of one of its main tools to influence the exchange rate.

After the announcement of sanctions on the Central Bank, one by one, the credit rating agencies began announcing that Russia would be downgraded:

• S&P on Monday lowered Russia’s rating from the investment-grade BBB- to junk rating BB+ (below investment level). Four days later it downgraded Russia again – this time to CCC- (indicating a significant risk of default).
• Moody’s downgraded Russia on Thursday by 6 notches, from Baa3 to B3 (below investment grade). Then, on Sunday, it downgraded Russia again to Ca, the second lowest rating possible, citing a growing risk of default.
• Fitch gave Russia the junk B rating Wednesday.

“It was previously thought that it was practically impossible to sanction the Central Bank —particularly because of the extent to which the [Russian] economy is integrated into world financial markets and the size of the Central Bank’s gold reserves,” said Sofia Donets, the chief economist at investment bank Renaissance Capital.

Russia’s international reserves — including gold — were last month valued at $643.2 billion. Of that, the Central Bank’s gold holdings were $132.3 billion. Less is known about the breakdown of the currency reserves, but the latest available data (from 1 July) shows that the Central Bank held $96 billion, $189 worth of euros, $38 billion worth of pounds sterling and $33 worth of Japanese yen. EU foreign policy chief Josep Borrell said last weekend that the G7 (U.S., Canada, France, Germany, Italy and Japan) was able to freeze about half of the Central Bank’s reserves as “they are in the banks of G7 countries”. In this way, the Central Bank has lost access to about $250 billion of its currency reserves — leaving just $77 billion worth of Chinese yuan and its gold reserves.

Other tools available to the Central Bank to support the ruble include interest rates and capital controls. Both have already been used: interest rates were hiked by a record 20 percent Monday, and the list of capital controls is growing all the time.

Carnage on the stock markets

There are few doubts that the Russian stock market has suffered its worst week in its history. However, it’s impossible to say this for sure because trading on the Moscow Exchange was suspended Monday and is not expected to begin again until Wednesday (Monday and Tuesday this week are public holidays in Russia). Both Russian and foreign investors have been ‘stuck’ in ruble assets.

• Short-selling was banned 24 February. And the Central Bank ordered brokers Thursday to take a commission of no less than 30 percent from individuals selling rubles (this was reduced to 12 percent the following day). For organizations, the commission is also 12 percent. In addition, the Central Bank banned the short-selling of euros Thursday and the National Settlement Depository halted operations with euros, pounds sterling, Swiss francs and Canadian dollars.
• There are even more draconian restrictions for non-residents. The Central Bank has banned brokers from selling any securities for foreigners, who will also not receive dividends or coupon payments (including from government bonds).
• Russian banks targeted by Western sanctions – including state-owned VTB, Otkritie and Sovkombank – can no longer buy securities issued by foreign companies. However, they can still trade Russian securities, sell foreign securities and withdraw funds as normal. U.S. broker Interactive Brokers warned its Russian clients last weekend their accounts could be frozen.
• Russian companies listed on the London Stock Exchange saw their shares become worth almost nothing: state-owned bank Sberbank’s shares fell to $0.05 (compared to $14.76 on Feb. 16) and privately-owned oil giant LUKoil nosedived to $0.72 (from $92.64 on Feb. 16). Many expect a collapse of a similar scale when stock markets finally re-open in Russia.

The Russian market is now anathema to foreign investors. Index provider MSCI said Wednesday it would drop Russian stocks from its widely-followed emerging market indices. Minutes later, index provider FTSE Russell said it would follow suit.

• The decision by the index providers will likely lead to an outflow of about $20 billion from Russian stock markets, according to analysts at investment bank JPMorgan. But it’s not clear how much money investors will actually be able to extract — because non-residents have been forbidden from selling Russian securities.
• Central Bank data suggests that about half of Russian shares are owned by foreigners, according to Aleksandr Kudrin, the chief strategist at Aton investment group.
• In its statement announcing Russia’s exclusion MSCI said the Russian market is now “uninvestable.” Russia will be redesignated with a standalone status.

Amid all this turmoil, the Russian authorities announced measures to help the stock market survive. The government said Tuesday that 1 trillion rubles from the National Wealth Fund has been allocated to buy the shares of Russian companies. “This enormous sum is equivalent to about 7.5 percent of the free-float shares on the Moscow Exchange,” said Vasily Karpunin, an analyst at investment company BKS. “If non-residents are not allowed to sell… these measures could have a very positive effect on stocks. Above all, blue-chip stocks.”

Western business scramble to exit Russia

The list of Western companies that are leaving Russia grows by the hour: from electronics company Samsung, to Swedish furniture-maker IKEA, accommodation site Airbnb and oil giants BP, Exxon Mobil and Shell. In many cases, there is unlikely to be a sale — the company’s offices, or manufacturing facilities will simply be liquidated. Aware of the risks of mass redundancies this poses, Russia has threatened foreign companies with what amounts to nationalization. The government said in a statement that foreign companies looking for an exit have three options:

• Re-think and remain in Russia.
• Allow foreign shareholders to handover their assets to Russian partners, which means they could, at some point in the future, return to the Russian market. Some investors have already chosen this option, according to Kremlin aide Andrei Belousov.
• Complete their shutdown and fire all their employees — but the Russian authorities will treat this as ‘deliberate bankruptcy’ (thus giving them the right to intervene to save jobs). Criminal prosecutions in cases of ‘deliberate bankruptcy’ are also possible.

Peter Mironenko, Howard Amos

Edited by Howard Amos