Russian Economic Woes
The realities of sanctions are already biting hard, with markets wasting no time in devaluing almost anything Russian. The rouble is at record lows, whilst Russian sovereign debt is now well into ‘junk bond’ status and there is every likelihood they’ll default on their foreign held sovereign debt – particularly as there is now a ban on all Russian residents sending money abroad for any reason, including servicing debts. The price to insure bonds against default, via a credit default swap, is now $37m per $100m of debt (more than double what it cost to insure Greek debt at the height of their debt crisis) As we know, the sanctions and asset freezes on Russia’s foreign exchange reserves means that the central bank are trying to act with at least one hand tied behind their backs and are therefore not going to give any kind of priority to foreign creditors when they need to try and keep domestic bondholders happy by not defaulting. ‘Happy’ is a bit of a stretch for the average Russian citizen, who has seen availability of produce and medicines diminish dramatically and the products that are available are now significantly more expensive than they were a week ago. The capital controls introduced to stop money leaving the country has led to large queues at banks and ATM machines and for a nation where citizens with assets think in both Dollar and Rouble terms, the value of their savings has diminished significantly.
New Delhi Navigates its Diplomacy with the Duma
Increasingly, the constituent components of the global community are displaying some degree of resoluteness in imposing sanctions on the Russian Federation, however geo-political fault lines remain.
As we have seen with changes in the foreign policy of the EU, Germany and Sweden, some states and entities are taking unprecedented action in sending military materiel to support Ukraine’s defence where they were previously reluctant to do so. Moreover, in recent hours we have learnt that Switzerland – a neutral state – has adopted equivalent EU sanctions which would potentially freeze several billions of dollars affiliated with the Russia State, Russian Businesses and Russian oligarchs. Indeed, the Swiss national bank estimated that some $11bn worth of such assets was held in Swiss banks in 2020.
Nevertheless, acts of aggression such as Russia’s invasion of Ukraine always display certain realities of realpolitik as different states navigate their response to peruse certain aims and play diplomatic balancing acts.
One such example in the current climate is India.
New Delhi are keen to maintain an amicable relationship with Moscow given the former’s reliance on the latter’s arms industry and in keeping with a new 10 year bilateral defence agreement signed last year. Indeed, when Putin met Modi in December 2021, the Russian President said that the Russia cooperates with India in the “military and technical sphere like with no other country”. For example, around 2/3 of India’s military resources came from Moscow between 1950 and 2020 which are seen as vital to India given its relationship with its neighbours, Pakistan and China. Away from arms, India is also reliant on crucial Russian exports including energy and fertiliser while the two’s financial industries are also linked.
For example, the FT’s Chloe Cornish and Benjamin Parkin state that “Observers say Moscow needs its allies, like India and China, to help alleviate the crushing pressure of western financial sanctions”. For example, two of India’s banks – Commercial Indo Bank and Perestrakhovanie – (which are partially or fully owned by the state) are very much intertwined with the Russian central bank and hence any sanctions would hit the not only New Delhi’s diplomatic ties but also their finances.
Needless to say, recent Russo-Indian arms deals have greatly angered Washington and those in the West which still maintain strong geo-strategic and economic links with India. For example, India and the US are members of the Quad security partnership which also involves Japan and Australia, and India-US bilateral goods trade was worth $114bn in 2021 alone. Hence, analysis are considering that while India has to maintain an amicable relationship with Russia, it also has to ensure their relationship is not damaged with the West.
India’s position is significant given its temporary membership on the UN Security Council (made up of the P5 (China, France, Russia, the UK, and the US) and ten non-permanent members which serve two-year terms). And while it is important to note that Modi called “for an immediate cessation of violence” they abstained from the UNSCs procedural vote to call for an emergency General Assembly session on the crisis in Ukraine (which nonetheless passed) and hence this demonstrates the balancing act that New Delhi plays as it navigates its diplomacy with the Duma.
Cost of Living Puts Pressure on Rishi
Away from Russia: Rishi Sunak is coming under fresh pressure to scrap the National Insurance rises, due to come into effect next month. A survey by Make UK of its members showed that 60% of them will cut back on recruitment because of the tax hike and more than 70% of them will pass the increase cost on to customers, which will fuel the current inflationary pressures. It’s a tough one for the chancellor, as the £12bn the hike is forecast to bring in will go directly to the NHS to help clear the backlog, but with half of that cost coming directly out of the pay packets of employees, it adds even more pressure onto workers who are already being squeezed by inflation north of 5% and still rising. Today is also the day that commuters face rail fare increases of 3.8%, which though mercifully less than the 8.1% increase it could have been had the government decided to use the ‘RPI + 1%’ calculation that it used in the 2021 fare hike – but with everything else going up so much, that still feels like small consolation.
Have a great day.