Za "Time" from Moscow
During August, I noticed significant differences in the menu at a Moscow restaurant. Everything was there, but in a different form. The prices of dishes whose ingredients originate from European Mediterranean countries have risen significantly or were barely available. The waiter, knowing that I am from Serbia, showed sympathy considering that the Serbian government did not join the EU sanctions against Russia. He even asked me if I could help him in supplying the restaurant with dried meat from Serbia for the coming winter season.
He explained to me that he was glad that the tomatoes in Spain had failed, which could no longer be exported to Russia, and that they had replaced the Spanish ones with tomatoes from Tajikistan. According to the same logic, they procure seafood from the Russian Pacific coast, and quality meat from Argentina. He expressed his satisfaction that wine is not subject to sanctions, and therefore one can still drink a glass of good Italian or French wine. But, if the situation there changes, they are supplied with wine from Chile, as well as from Georgia and Moldova, which are geographically close to them. The biggest problem remains apples, because they are no longer imported from Poland (54 percent of Polish apple production went to Russia in 2013), and there is still no replacement in sight that could cover such capacities (677.000 tons).
The bill was surprisingly unpleasant, but also thought-provoking about inflation. While the European Union is going through a period of deflation and historically low interest rates, the weakening of the Russian ruble (since mid-July it has fallen by about ten percent against the US dollar) will definitely affect inflation in the next few months. Inflation will most likely reach a level of over eight percent by the end of the year, which is significantly above the value of five percent (+/-1,5 percent), which was the goal of the Central Bank of the Russian Federation. It was the jump in food prices illustrated above that was one of the motivating factors for the Central Bank to increase the interest rate, which could lead to an interest rate of a full nine percent by the end of the year, compared to the current eight percent. The Russian government is trying to secure additional food supplies from Turkey and Latin America. Also, they started a program of monitoring food prices and preparing a backup plan for regulating food prices in case of additional significant deviations that could get out of control.
DAMN SCENARIO: The new wave of sanctions is by no means helping other segments of the economy. Prime Minister Medvedev has already emphasized that if they happen, the retaliatory measure will be a "blockade" of Siberian airspace for European airlines. Such a measure would cause extraordinary complications on flights whose final destination is Tokyo, Seoul or one of the financial centers of the Asian continent. As soon as this news appeared, the international Avio index recorded a drop of 1,7 percent. If the EU were to ban Aeroflot flights to the Old Continent, this company would also find itself in serious trouble.
When it comes to industry, Russia could ban the import of foreign vehicles, as well as some other industrial segments, which are replaceable by domestic production (for example, textiles). As for machinery and equipment, Russia is dependent on foreign imports (about 48 percent of total imports), and therefore cannot afford that additional "luxury".
On the other hand, the banking sector is definitely one of the segments where unforeseeable consequences can occur. International banks, based on sanctions, are not allowed to provide financing services for more than ninety days to former Russian partners. However, does this mean that an American, British or Swiss bank can carry out a currency transaction (which is exempt from sanctions) where, for example, a Russian bank sells rubles and buys dollars for a period of one year? How can that bank be sure that one day the official institutions of the EU or the USA will not accuse it of encouraging the financing of Russian banks (and those of Russian companies) in the form of currency transactions as an alternative source of financing.
A similar example recently occurred with the French bank BNP, which was fined nine billion dollars for making dollar payments to that country while Sudan was under US sanctions. Therefore, to avoid similar scenarios, it is easier for banks to minimize their relationship with financial institutions in Russia.
This situation is a problem for international banks because they are not seeing growth in emerging markets, which have been sources of income for years. Now with problems in Israel, Russia, Ukraine, occasional political instability in Turkey, emerging markets are no longer a parameter for the source of income and good results in banks that were previously determined for strategic expansion. On the other hand, the sanctions leave the Russian financial sector "hungry" for money isolated from the international capital market. What would be tantamount to financial disaster is the possibility of banning SWIFT payments for Russian issuers. However, for the time being, the prospects are not great, considering that such an extreme measure was not taken even at the height of the Cuban nuclear crisis in 1963, although it was considered.
It is interesting to look at what happened on the Russian and European financial (and not only financial) markets from February to today. From the first wave of sanctions, which were aimed at certain businessmen from the close circle of the Russian president, to sanctions against almost the entire economy of the largest country in the world.
The author is a PhD student at the University of St. Gallen in Switzerland and Vice President of Emerging Markets at the investment bank Barclays in London
