Russia s current account surplus reached $227 bn in 2022. Exports increased by more than 10% Jan-Sept 2022, while, imports contracted by 16% for the year as a whole. After falling by over 35% in spring, Russia s imports recovered. China, Hong Kong, and Turkey have expanded exports to Russia. Replacing Russia s former top trade partners, such as the EU. China accounts for over 36% of Russia s imports and 20% of exports. Despite export controls, Russia increased its import of chips in 2022. With China and Hong Kong supply about 40% of Russia s total chips.

Russia stopped publishing some key statistics since February 2022. The authorities say the measure is to protect Russia from sanctions. Hidden data make independent economic analysis challenging. In the near term, it allows the authorities to control the narrative. It also incentivizes institutions to embellish reporting to the center. With time, accurate macro-analysis will become nearly impossible. Russia s observance of the IMF s SDDS appears sufficient for now.

Russia s current account surplus reached $180 bn by end-August. Well on track to hit the forecast of $250-$280 bn surplus in 2022, followed by a current account surplus of about $80 bn in 2023. Russian banks are accumulating FX as the BoR is under sanctions. Due to the risk of further sanctions, Russia is keen to de-dollarize. Despite the creative schemes, progress has been limited so far.

Russia s fiscal accounts continue to benefit from high commodity prices. Debt-to-GDP stands at 17%, and the NWF fund is 8% of GDP in 1H2022. However, 40% of federal budget revenues come from oil and gas. Revenues will fall due to energy wars and the EU oil embargo in 2023. We expect a federal budget deficit of about 2% in 2022 and 3% in 2023.

This paper highlights why sanctions on Russia should not be considered static. Rather, they are a "moving target" requiring regular adjustments as their consequences play out and countermeasures are taken. Importantly, we have also yet to reach the top rung of the escalation ladder. Western allies could take additional steps in the coming weeks and months to keep up pressure on the Russian government.

Russia has weathered the de-SWIFTing of key banks better than many expected. Investment in domestic payments and messaging systems since 2014 has paid off. Some concerns are being raised about sanctions circumvention via crypto assets. We believe it to be unlikely that Russia can rely on such channels in the near term. The market appears to be too small relative to the country’s trade and capital flows. U.S. and EU sanctions have also been extended to crypto assets and companies.

An embargo by the EU on Russian crude oil and petroleum products would be impactful. While details are still being discussed, we project meaningful volume reductions in 2022. The final impact over 2022-24 will largely depend on Russia’s ability to redirect exports. Sanctions by the U.S. and EU could make a difference as far as third parties are involved. We estimate Russian exports could be $155 bn lower than the baseline over 2022-24. Uncertainty surrounding this estimate is unusually high due to the number of moving parts.

Russia stopped natural gas exports to Poland and Bulgaria on April 27. Disruptions should be limited for Poland due to high storage levels, with more diversified sources, including LNG imports, also factoring in. We do not expect spillover effects to other European countries’ supplies. However, Russia’s energy policy is prompting them to seek other sources.

An EU embargo on Russian crude oil exports would have a meaningful impact. Oil accounts for one-fourth of Russian exports and around 30% of fiscal revenues. Ultimately, the effect will depend on the country’s capacity to redirect exports. Infrastructure constraints and the threat of secondary sanctions are key challenges. European decision-makers may prefer direct sanctions on the shipping industry. Overall, the EU has a better chance of limiting "seaborne" (vs. pipeline) oil exports.

Russia’s invasion will have a severe impact on Ukraine’s economy in 2022. We expect output to contract by more than 35%-with risks to the upside. The country’s fiscal gap could reach $3-10 bn/month as revenues collapse. Reserves may also come under heavy pressure should the war be protracted. Ukraine needs macro-financial assistance now-not only for reconstruction. Commodity supply chain disruptions will have worldwide repercussions.

Severe sanctions have focused on Russia’s domestic financial system, with freezes of Bank of Russia assets among the most impactful steps. Emergency liquidity support by the CBR stabilized the banking system. The Ruble has also made up most of its losses due to capital controls, together with large current account surpluses and tight monetary policy. We see a tightening of financial sector sanctions as likely going forward.

Sanctions have hit the Russian economy hard, but more measures are likely coming. At this time, the discussion largely focuses on a potential embargo on energy exports. We show that a stop to natural gas imports would be much more difficult than to oil. This is due to both Europe’s gas supply composition as well as the mode of delivery. For Russia, an embargo would have a dramatic effect on overall activity and exports. The country could lose $250-300 bn in export receipts, depending on price dynamics.

We expect the Russian economy to contract by 15% in 2022 due to the war in Ukraine. Sanctions play an important role but so does "self-sanctioning" of foreign companies. Domestic demand will fall sharply, while a collapse in imports will offset lower exports. Together with a decline of 3% in 2023, this will wipe out fifteen years of economic growth. However, the impact on medium- and long-term prospects is likely to be even more severe. "Brain drain" and low investment will weigh heavily on already-subdued potential growth.

Sanctions on Russia following the invasion of Ukraine will lead to a deep output contraction. Soaring energy prices and supply chain disruptions are beginning to affect Europe’s economy. The resulting weaker foreign demand, including from the Euro area, will weigh on EM Europe. In addition, tighter liquidity conditions are likely to be a drag on domestic demand through ‘22. Over the medium term, EM Europe could benefit as investors are withdrawing FDI from Russia. The outlook is clouded by extraordinary uncertainty as the military conflict is likely to drag on.

Russia’s invasion of Ukraine has triggered a number of severe sanctions. China, an important partner, has maintained a deliberately neutral stance. While Russia-China trade is important, financial links remain minimal. China could mitigate Russia’s loss of access to global payment systems. Furthermore, with 40% of reserves frozen, holdings in China are critical. The Bank of Russia (CBR) may need to get creative with FX interventions.

This paper will systematically look at additional sanctions that have been or could be imposed on Russia in several key areas: global payments systems, access to the U.S. Dollar, sovereign debt, hydrocarbon exports, and export controls. Equally important, it will not only analyze the effects of these latest sanctions on the Russian economy but also the broader implications for international financial markets. For example, one of the biggest impacts on the global economy is likely to be on trade. While details on how the new sanctions affect energy are still emerging, we do know that sanctions on its central bank will make it more difficult for Russia to export energy and other commodities. As a result, we may see commodity prices surge.

Natural gas imports from Russia have fallen sharply, and storage levels are extremely low. Europe’s high dependence on the country creates vulnerabilities and limits policy options. In the short term, Europe would likely be able to manage even in case of a full disruption. But a full replacement of Russian imports does not seem feasible for a number of reasons. Among them are infrastructure constraints and the lack of alternative supplier capacities. Thus, politically and/or economically painful demand-side adjustments would be needed. Nonetheless, Europe should begin to invest in reducing vulnerabilities while there is time.

Russia’s financial system is dominated by state-controlled banks and highly concentrated. The five largest of these banks represent almost two-thirds of total banking system assets. Foreign institutions only account for 6.3% and have reduced their exposure in recent years. Both Russian banks and corporates were forced to deleverage due to sanctions since 2014. Their external liabilities have fallen by more than 40% to $380 bn, with assets at $530 bn. Total Russian FX holdings of $750 bn can cover external debt, thus reducing vulnerabilities.

Disconnection from global payments systems is increasingly proposed as a "nuclear option". In response to sanctions, Russia has developed domestic payments and messaging systems. But limited international connectivity means cross-border transactions remain challenging.

Russia has continued to diversify away from U.S. assets due to sanctions. Most evident is the shift in the currency composition of official reserves. The U.S. Dollar now accounts for 16% of reserves, down from 40% in 2014. Reserves have also been moved away from the United States and Europe. External trade settlements in U.S. Dollar are declining, albeit more slowly. Inflation targeting and credible monetary policy led to lower dollarization.

The Nord Stream 2 pipeline is expected to enter into service in 2022H2. Several rounds of U.S. sanctions have delayed but not stopped the project. And the administration is attempting to mend fences with European allies. But additional measures are likely in case of a Russian invasion of Ukraine. For Europe, sanctions related to natural gas imports are highly problematic. However, a Russian escalation of the Ukraine conflict would force hands. German authorities are considering "all possible measures" against NS2.

Favorable commodity price dynamics will drive up current account surpluses. Russia will also be among only a few countries without fiscal deficits in 2022. Inflation remains the key concern and we expect the CBR to continue hiking. Geopolitics continue to play a major role with new U.S. sanctions a possibility. However, Russia appears well-prepared to withstand their potential impact.

We project non-resident flows of $128 bn to CEEMEA countries in 2021. Higher FDI and the IMF’s SDR allocation are the most important drivers. Excluding one-offs, however, flows will remain below pre-pandemic levels. G3 tightening will likely reduce investors’ appetite for EM assets in 21Q4. But further rate hikes in CEEMEA should improve portfolio flows in 2022. Non-resident flows to the region are estimated to reach $98 bn next year.

Upside inflation surprises prompted rate hike in most CEEMEA countries. We expect inflation to ease across the region, but high uncertainty remains. In Russia, we now see a higher terminal rate and easing to start later in ’22. The SARB can likely afford to stay on hold longer with only one hike in ‘22. We expect gradual cuts in Turkey through 2022 in line with market pricing. Despite above-target inflation, the Ukrainian NBU will likely stay on hold.

We use VAR models to decompose the effect of commodities and FX on EM inflation. Turkey and Russia, for different reasons, appear most exposed to exchange rate shocks. Headline inflation in South Africa and Brazil appear to be driven by energy prices, while price dynamics in Indonesia are more responsive to non-energy commodities. We expect tight stances in Brazil, Mexico, Russia, Turkey to keep expectations anchored.

We continue our series on EM inflation by turning towards country specifics. In this note, we examine inflation dynamics in Russia, South Africa, and Turkey. As demand is a key driver of inflation in Russia, we expect further tightening. In South Africa, we see the pickup as transitory and largely driven by base effects. Turkey stands out with the highest inflationary pressures and little room to ease.

The United States imposed sanctions on the primary OFZ market last week. We believe that the measures’ impact will likely be manageable for Russia. Domestic financial institutions have sufficient capacity to absorb issuance. An improving economy also supports revenues and reduces financing needs. Secondary market sanctions would be far more consequential but are unlikely.

The risk of a full-fledged taper tantrum in 2021 is still high for emerging markets. EM assets have already reacted strongly to the pickup in developed market rates. We analyze a number of country cases to see how circumstances differ from 2013. Russia’s macro vulnerabilities are significantly smaller during the current episode. The key risk for investors is a loss of access to the OFZ market due to U.S. sanctions.

Russia is experiencing the largest protests in years in response to the jailing of Alexei Navalny. Many Russians are frustrated by stagnating incomes, a weak social safety net, and corruption. Years of fiscal consolidation to address sanctions have exacerbated socioeconomic challenges. However, we do not expect protests to change macroeconomic conditions in a fundamental way.

CEEMEA countries recovered faster from the initial COVID-19 shock than expected. This is mainly due to virus containment allowing for a faster reopening of businesses. As a result, we are revising our estimate of the contraction in 2020 from 5.2% to 3.2%. However, a second wave of infections weighed on economic activity in recent months. We expect modest growth of 3.8% in 2021, but much depends on vaccinations efforts.

We project a mild economic contraction in 2020, followed by a gradual recovery this year. This is due to limited lockdown measures, a strong financial system, and reliance on SOEs. The FY2021 NDAA extended Nord Stream 2 sanctions but may not prevent its completion. Geopolitical risks stem from the incoming U.S. administration and the EU’s green agenda.

We expect a slow and uneven recovery in non-resident capital flows globally. CEEMEA should fare somewhat better with a broad pickup in ‘20H2 and ‘21. The recovery will likely be driven by stronger FDI and portfolio capital flows. A possible COVID-19 resurgence and geopolitical risks weigh on the outlook. If sentiment worsens, Turkey, South Africa, and Ukraine will be most exposed.

Investors are concerned about the possibility of additional sanctions on Russia. German officials have threatened action against Nord Stream 2 in recent weeks. This would have important geopolitical, but likely limited economic, implications. Additional sanctions by the U.S. could depend on the 2020 presidential election. However, the Russian economy is substantially less vulnerable compared to 2014.

We now expect an even deeper output contraction of 5.7% in the CEEMEA region. Effects of the COVID-19 shock are increasingly visible in the data for March-April. We downgrade growth in South Africa, the Czech Republic, Ukraine, and Russia. The fall in activity prompted authorities to implement fiscal stimulus measures. Together with cyclical revenue weakness, additional spending will widen deficits. CEEMEA central banks cut rates and some began government bond purchases.

Russia’s assets are stabilizing, and investors are showing renewed interest. The "Fortress Russia" strategy has reduced macroeconomic vulnerabilities. We expect both the fiscal and monetary policy responses to remain modest. As the economy is set to reopen, COVID-19 infections continue to spread.

Russia is more insulated from external shocks than other EMs but not immune. We expect the economy to contract in ‘20, down from our previous forecast of 2%. Its flexible exchange rate puts Russia at a distinct advantage compared to 2014. Most importantly, authorities have ample policy space to address challenges.

Economic sanctions are a form of government market intervention and can have significant unintended and uncertain consequences-particularly if they are placed on an economy highly integrated into the global economy and the international financial system. In this respect, the measures taken by the United States and its allies against Russia beginning in 2014 represented a paradigm shift.

Sanctions on a highly-integrated economy such as Russia are still unprecedented. Unforeseen and unintended consequences could significantly shake up markets. The impact is likely most significant for asset managers and banking institutions. But further consequences for the underlying market infrastructure are possible.

The debate on U.S. sanctions on sovereign debt is expected to continue in '20. Low macroeconomic vulnerabilities will likely limit the impact on Russia. U.S. investors would lose out given investments in Russian domestic debt. Unintended consequences could also significantly shake up global markets.

Russian authorities announced a policy pivot towards growth. National projects exceed 3% of GDP per year over 2019-24. Apart from national projects, policies will likely remain tight. We therefore expect only a modest pickup in Russia’s growth.

Investors finished the IMF/WB meetings on a less negative note. Concerns remain, but fewer worried about the risk of a recession. Monetary easing and a US-China trade deal would be supportive. Barring surprises from the Dollar, modest flows to EM are likely. The IMF's integrated policy framework remains a key topic for EM.

Nord Stream 2 and TurkStream will change gas transit in Europe, allowing Russian gas to reach Western Europe while bypassing Ukraine. Transit through Ukrainian pipelines could decrease as much as 80%, widening the current account deficit and increasing financing needs. Sanctions on both pipeline projects are being discussed in Congress.

Portfolio flows to Russia are weakly correlated with global flows, likely due to sanctions. Despite the risk of further sanctions, government debt remains attractive to investors, as Russia stands out among EM due to exceptionally low macroeconomic vulnerabilities. In the long run, sanctions can lead to less prudent policies and reduce growth prospects. We expect discussions of Russia sanctions in the US Congress to pick up again in the fall.

Low breakeven oil price for the current account provides buffer against shocks. Introduction of the fiscal rule in 2017 has led to significant reserve accumulation. Debt repayments spiked after the 2014 sanctions but are now less of a concern. However, private sector capital outflows have picked up and may accelerate. Portfolio inflows have returned but are sensitive to sanctions announcements.

The US and EU have introduced numerous financial sanctions on Russia. The first episode of multilateral sanctions in 2014 had the biggest impact. Limiting investor access to the Ruble market (OFZ) is unlikely to be as severe. Existing sanctions will weigh on investment, productivity, and growth.