March 22, 2023

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Does Russia have the funds to go to war?

L ‘Europe is on fire. Russia has amassed more than 100,000 troops on its border with Ukraine and is demanding firm promises to curb NATO expansion. Created during the Cold War to protect the continent from Russian invasion, the organization gradually gained new members. But Russia is deeply disturbed by the continuation of this expansion. He makes it clear that NATO should never unify Ukraine. Americans and Europeans are torn between accepting Russian demands and initiating military expansion and supporting the former Soviet Union, which seeks to escape Russian influence. Why is this conflict dangerous and both sides do not seem to be banging on?

Because it begins that the new world will be in order. In fact, the United States, the global superpower of the 21st century, is retreating, unable to play the ubiquitous first role in abandoning all empires one day. The emerging New World Order is a multi-polar hierarchy with different spheres of influence. The US-dominated Atlantic axis, the Chinese-dominated Pacific axis and the Russian-dominated Eastern European axis. In the Russian concept, this new order requires each force to respect the limits of the other and not try to influence its territory. Russia is trying to set a precedent: to implement its sphere of influence. If Russia succeeds in this, it will mark a breakthrough without turning to this multifaceted world.

Tomorrow, China will be keen to adopt the same tough approach to resolving the dispute over Taiwan. Japan and South Korea, the long-standing allies of the Americans, will certainly turn the pages by tilting quietly and approaching China to ensure their security. Russia has impressive military resources. With 1 million soldiers and 2 million security personnel, 1,531 warplanes, 538 war helicopters, 13,000 tanks, 214 warships (including 64 submarines), the Russian military is undoubtedly one of the most sophisticated in the world. The Ukrainian military, on the other hand, has been professional since the 2014 occupation of Crimea, receiving training and $ 2.5 billion in aid from the Americans, as well as arming civilians considering urban guerrillas.

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The Ukrainians promise not to throw up in 4 days as they did in 2014. But what history teaches us is that war is not just about bombs and ammunition; War is first and foremost a matter of money. Money is the vein of war. If so, does Russia have the financial resources to withstand the war? The question is crucial because the West has made it clear that it will not intervene militarily to protect Ukraine. In the event of an invasion, in the words of Boris Johnson, they promised to retaliate by launching “massive sanctions without precedent.” This makes the question even more reasonable: does Russia have a solid backbone to withstand these financial collapses? We must recognize that the Russian economy is doing well.

Russia has indeed strengthened its economic independence since 2014 (the first round of sanctions was imposed following the invasion of Crimea). Real GDP will shrink by only -2.9% in 2020, as evidenced by the country’s recession during the Govt crisis. Inflation is projected at 4.8% in 2022. Russia pursues a very sensible budget: a 3% surplus of GDP in 2018 and a deficit of 2% in 2018, -4% in 2020 and -0.5% in 2021, and now the new budget surplus of 0.1% of GDP expected in 2022 (before the military runway we experience) Expected). This monetary policy allowed Russia to control its public debt, which is only 18% of GDP. State debt is low, which is a huge financial limit, but the share of foreign investors has fallen from 35% in 2020 to 20% today. This has reduced the country’s dependence on foreigners. Thanks to rising oil prices, the Sovereign Wealth Fund has strengthened its assets, rising from $ 60 billion in 2019 to $ 190 billion today. The central bank’s foreign exchange reserves have increased by + 70% since 2015 to $ 620 billion. The country’s current account balance is 4.4% of GDP. So Russia has strong financial cards in its game.Russian financial markets were understandably cautious

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The stock market has fallen -18% since the beginning of January and -31% for 3 months. The yield curve is reversed: short-term ratios are higher than long-term ratios Reflecting the crisis of the financial markets, cash flow becomes more valuable in the short term. The rate for 6-month loans has risen to 10% from 4% a year ago. The ruble has fallen by -10% against the dollar, but the economy is more self-sufficient than it was during its previous crisis. Westerners are threatening to disconnect Russia from the SWIFT international tariff system. This means that financial agents will not be able to provide transfers. In theory, SWIFT is an independent organization based in Belgium, but the nature of its activities makes it a political tool for Westerners.

The Central Bank of Russia has announced that they are working on an organization similar to SWIFT, called SPFS. According to the central bank, the organization has already succeeded in merging more than 416 companies. Russia has also announced that it will work with SPFS to integrate tariff systems with China, Turkey and Iran. Other threats are related to restrictions on imports and exports. The first series of controls were launched in 2014. As a result, US imports from Russia fell by -33% and exports to Russia by -50%. European imports from Russia fell by -25% and exports to Russia by -40%. It is difficult to imagine that this would decrease further, because Europe is so dependent on Russia for its energy supply. Europe imports 25% of its oil from Russia and 47% from natural gas. One result is obvious: Russia has military and financial avenues to go all the way. This is why time seems appropriate for the Russians, and why the West takes the threat so seriously. But for Russia to go all the way, it needs one last element in its game: China’s support. In fact, funding will take time to mobilize on the battlefield, but will evaporate quickly once the conflict begins. If Russia receives funding from China, it will be able to counter Western economic activity in the long run. The decision of the Westerners to celebrate the opening ceremony of the Winter Olympics in Beijing – while the Russians are in the front row – is a sign of the growing unity between these two powers.

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The Chinese economy is ten times larger than the Russian economy and already ranks first in the world (if you count in terms of purchasing power parity). With Chinese support, Russia can go all the way. In this context, China could play the role of behind-the-scenes pacifist because of its strong economic ties with the rest of the world (which Russia does not) and want less assistance in the armed conflict. For example, China is likely to lose more to sanctions than Russia. It reminds us of the peaceful role that international trade plays. When economic relations are strong, both sides have more to lose than to gain from the conflict, which promotes peace. Contradictions to a lasting peace with Russia require the strengthening of economic ties, not the imposition of unprecedented sanctions. The lesson the world did not learn after World War I was retained after World War II. But nowadays he forgets about it again. So long live the trade, and down with the guns!

: Omar Basal works on the strategy of a local bank. He is the author of three books on finance and is a professor at the school