Thursday, February 24 was supposed to be an important date in the energy sector of Ukraine. Namely, on that day, the Ukrainian electricity transmission system was supposed to completely cut off the connection with the energy systems of Russia and Belarus for two days, in order to function in isolation mode as part of mandatory tests ahead of full synchronization with the European energy system, which was planned for 2023.
Unfortunately, February 24 will be remembered as the day Russia's invasion of Ukraine began. Of course, in addition to tectonic security and political disturbances, strong economic distortions will also occur in the foreseeable future, which will largely shape the new world order in the new post-pandemic and post-war reality.
Pandemic perspective of invasion
The invasion of Ukraine is taking place at a time when the world is largely exhausted by the two-year fight against the covid-19 virus, which has drastically changed global economic flows. In the last 12 months, energy prices have risen significantly, which has followed the increase in food prices as a result of the disruption of distribution channels linked to the pandemic, rising costs for farmers and unfavorable weather conditions. IMF data shows that from April 2020 to December 2021, the price of wheat increased by 80 percent, which led to record inflation with the increase in other food prices. When the impact of the invasion, which is already negatively reflected on world markets, is added to the above, it is clear that an additional wave of price increases for energy and basic foodstuffs is soon to be expected.
The impact of swift and coordinated Western bloc sanctions
In response to the Russian invasion of Ukraine, EU member states, the US and other Western bloc countries made quick decisions through the introduction of unprecedented massive economic sanctions, which to the greatest extent narrow Russia's room for maneuver to finance the invasion. Namely, the funds of the Russian Central Bank as well as the largest Russian state banks (SBER, VTB, Otkritie, Novikom, Sovcom, Alfa) and their subsidiary companies were frozen, while they were prohibited from conducting transactions with Western partners. Also, financing of leading Russian companies from the energy and telecommunications sector (Gazprom, Transsneft, RossTelecom, RusHydro) from Western sources of financing is prohibited, which creates additional pressure on Russian state structures in the context of weakening their economic position.
The largest Russian banks were kicked out of the SWIFT system (short clarification: SWIFT is for banks what the Internet is for people - without it, it is difficult to get much-needed cash flows), which represents a huge shock for the banking system of Russia, but also of other countries, to a lesser extent measures.
The Nord Stream 2 project, which was supposed to enable the necessary diversification of Europe's supply of Russian gas, was frozen. Rating agencies have downgraded Russia's credit rating to the "junk" category with uncertain prospects, making it difficult to access favorable external financing. A ban was introduced on the export from EU countries of components for the development of advanced military and civil industry, primarily targeting the energy sector. In addition, sanctions were imposed on the leading political figures of Russia, as well as the leading people of the financial elite of Russia. In the coming days, precise targeting of the assets of Russian oligarchs, who transferred hundreds of billions of dollars through offshore companies to the countries of Western Europe and the USA, is expected. In addition, stronger pressure can be expected on the largest part of the corrupt political and social Russian elite, which has influence on decision-makers, through the freezing of their assets abroad, which have been the subject of attention for many years due to the extravagant lifestyle of the Russian elite, while the standard of living of citizens of Russia was in decline.
Which is why the sanctions defined in this way will be extremely painful for Russia: since 2015, Russia has doubled its foreign exchange reserves and they amount to 2021 billion euros at the end of 630 (about 40% of Russia's GDP), which may indicate the fact that Russia prepared years in advance for possible economic sanctions that would be a consequence of a move such as the invasion of Ukraine. Really massive economic sanctions introduced by the countries of the Western bloc, Russia could easily absorb in the short term due to the aforementioned accumulated foreign exchange reserves. However, the rapid and coordinated reaction of the Western powers through a combination of strong economic sanctions, blocking the assets of the Russian Central Bank and state-owned banks as well as state funds and their related companies, disconnection from SWIFT as well as the deterioration of the credit rating to the status of "junk", dramatically accelerated the economic exhaustion of Russia, which is heavily dependent on the inflow of foreign capital, which finances its non-derivative economy and now the invasion of Ukraine.
Of course, the sanctions will not only affect Russia, but will have serious consequences for the countries that introduced the sanctions, as well as for the entire global economy.
The (un)expected "winner" of the invasion
The negative economic consequences that will be caused by the described sanctions can be amortized for Russia in a short period of time by the country that (un)expectedly became the biggest "winner" of Russia's invasion of Ukraine - China. Strongly recovered from the pandemic caused by the corona virus, in an economic spurt aimed at diversifying the economy in the direction of innovation, renewable energy sources, advanced technologies and artificial intelligence, it is expected that China will take decisive action to take advantage of the current situation to strengthen its global influence. In this regard, it should be noted that China and Russia made a strategic move even before the invasion of Ukraine: at the beginning of February, these countries signed contracts worth over 100 billion euros on the supply of Russian gas and oil to China for the next 30 years. Although they have their own currencies, it is interesting that the transactions from this business will be settled in euros and not in dollars, which indicates an attempt to soften European partners in the context of planned activities such as, for example, the invasion of Ukraine. Finally, it is worth noting that China can increase its influence on Taiwan, which produces as much as 90% of the chips that are necessary for the advanced military as well as civilian industry. Without these chips, the sanctions of the European Union for the export of strategic components to Russia do not make sense for a long period of time.
Invasion and agriculture
Russia is the world's largest exporter of wheat, contributing to the nutrition of a huge number of people globally. Additionally, together with Ukraine, Russia is a key global supplier of barley, sunflower oil and corn, which are basic raw materials for the food and processing industry. Therefore, it is to be expected that the export of food products from Russia to the EU and the USA will decrease, as a response to the sanctions of the Western bloc, which will create pressure on the citizens of these countries, who are quite sensitive to the increase in the prices of basic foodstuffs.
Bearing in mind the fact that the wheat harvest will begin in a few months, if the Russian invasion of Ukraine lasts for a long period of time, we can expect a significant increase in the price of basic foodstuffs already during the second quarter of this year.
Influence on Montenegro
Montenegro is a small and open economy, which is particularly sensitive to external shocks, which is mostly due to the inadequate model of economic development that was represented in the previous period. After the devastating impact of the pandemic caused by the corona virus in 2020 (a drop in GDP of 15% and a budget deficit of 10% of GDP), the economy of Montenegro began to recover significantly in 2021. Nevertheless, Montenegro cannot afford another difficult year, so it is necessary to proactively prepare urgent and clear measures in response to the sure coming crisis.
- Given that Russian tourists made up a significant number of high-paying guests visiting Montenegro, it is necessary to direct promotional activities to other emission markets in order to compensate for the decline in the number of tourists from Russia;
- Due to the measures taken by the Russian monetary authorities to preserve their financial system, it is to be expected that foreign direct investments from Russia will decrease, which in the period 2015-2020. amounted to 375 million euros or 9% of all foreign direct investments that came to Montenegro;
- Intervention procurement of basic foodstuffs is imperative, bearing in mind the predicted increase in energy and food prices;
- The reduction of excise duty on fuel must be adopted in the Parliament as soon as possible, in order to prevent the deterioration of the living standards of citizens;
- It is necessary to review the economic citizenship program in the context of preventing those Russian citizens who are under EU and US sanctions from obtaining Montenegrin citizenship;
- Although symbolic in relation to the total budget of NATO, Montenegro must in the next budget increase the allocation for defense to 2% of the annual GDP, as well as strengthen investments in cyber security in cooperation with NATO partners;
- Businessmen must revise plans and lower expectations for 2022, given the growing uncertainties that may adversely affect business performance;
- It is necessary to increase the agricultural budget in the shortest period of time, in order to prevent a jump in the prices of food products, which will have a negative impact on the living standards of citizens.
Another challenging year awaits Montenegro, in which a lot of work, knowledge, political and economic stability, but also luck, will be needed in order to emerge from the crisis of global proportions with as few consequences as possible. Let's all work together to successfully navigate turbulent domestic and foreign waters, which will require a lot of understanding for the forced moves that follow.
The author is the CEO of Fidelity consulting
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