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  • Writer's pictureCrest Economics

Russia tethers on war with Ukraine despite struggling economy- February 2022

Jitters of war are rattling in Russia and its presence is felt by a shaky stock market, threatening to drag the ruble down with it. Whilst hard to tell, Russia may be planning a full-scale invasion into Ukraine’s capital, Kyiv or plan to annex more territory in Eastern Ukraine as Putin did with Crimea in 2014. Whatever the outcome, a big war entails extraordinary risks – risks that the Russian economy may not be able to stand.

A full Russian invasion would be Europe’s biggest war since the 1940s and a blow to the strong standing infrastructure of security in place since the Cold War. Russia would face heavy sanctions, as it did after the annexation of Crimea, its banks would be penalized harshly and economy removed of crucial American high-tech components. Russian citizens would suffer from even lower living standards. For almost a decade, real incomes have stagnated and with inflation rising higher than ever and with average size of consumer loans in the third quarter increased by 27.7%, living conditions are not looking rosy.

For Mr Putin, the economic consequences of war would be survivable, at least in the short term. His central bank has $600bn in reserves and a sovereign wealth fund of almost $200bn, more than enough to weather sanctions. Russia’s macroeconomic situation has no big problems and the budget is balanced.

A successful invasion of Ukraine would set a destabilising political precedent, allowing for other potential aggressors to arise like China’s invasion of Taiwan. The regimes in Iran and Syria would conclude they are freer to use violence with impunity. If might is right, more of the world’s disputed borders would be fought over.

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