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Russia Braces For A Deep Recession

Russia is headed for one of its worst recessions in recent history.

Countries banded together and imposed crippling sanctions on Russia to stymie President Putin's invasion of Ukraine. Consequently, the International Monetary Fund said that it is very likely that the country will slip into a "deep recession."

Should the Ukraine war be prolonged and the sanctions strictly imposed, the world's eleventh-largest economy could collapse or, at the very least, suffer a more extensive crisis than the one it experienced in 1988.

The value of the rouble tumbled as Russian tanks rolled into Ukraine. The Russian currency's value loss extended to about 22%. The currency weakness has led to a sharp rise in inflation, estimated to be around 14.5% (the highest rate since late 2015). National economics aside, this directly impacts ordinary Russians' purchasing power.

The steep rise in sugar prices, and rationing imposed in some places as the invasion started, made headlines around the world. According to Russia's Federal State Statistics Service, sugar prices have risen by about 30% since early March. Though some may be due to seasonal demand, panic buying certainly contributed to the price rise. The fact remains that since the start of the war, groceries have become dearer.

The Kremlin is aware that rising food costs will negatively affect the people's morale and, in turn, their support for the invasion. While the West is counting on such a scenario, Moscow is doing its best to ensure that the food supply is maintained.

More than half (55%) of Russians in a recent survey said economic sanctions had “started to affect me or people I know."  Nearly 7 in 10 (69%) said they supported the military operation despite the sanctions. On the economy more generally, nearly one-third thought life for ordinary Russians had got worse over the last 20 years.

Moscow had set aside a stability fund to insulate the Russian economy from shocks in the commodity markets, which is now being used to shore up the rouble. The updated 'Food Security Agenda' has increased the country's self-sufficiency in grains, meat, dairy, and other staples. Since attacking Ukraine, the government has allocated 25 billion roubles to ensure agricultural production. Yet, reports of stock of essential items running low have made it to social media.

Despite all these measures, a weak rouble will drive up the cost of production, thus driving up the price of the products. Imports from friendly allies like Belarus or China will invariably be dearer. The focus, at present, is to ward off bankruptcies and continue production. The strategy has a two-pronged impact. One, it ensures employment, and the second, food security.

Measures taken by the Russian regime over the years to insulate its economy from the global markets may not be able to withstand the harsh sanctions. Despite the doubling of interest rates to 20% in March, the demand for euros and dollars is rising. Moscow is also planning to buy billions of dollars worth of Russian shares to support the stock market, which plunged in the wake of the Ukraine invasion.

In the current scenario, the likelihood of Moscow defaulting on debt payments is highly likely. With exposure to Russian banks estimated to be around $120 billion, this may not deeply impact global markets.

President Putin's threat to seize assets of multinational corporations that leave Russia in protest or his plans to sell natural gas to "unfriendly" countries in roubles may not be enough to shield his people from the crushing sanctions of the West.

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TIPP Takes

Geopolitics And Geoeconomics

Truce After Seven Years Of War In Yemen

The Saudi-led coalition fighting Houthis in Yemen will halt military operations after seven years of war, following U.N. calls for a truce during the Muslim holy month of Ramadan.

The United Nations has been working with the coalition and the Iran-backed Houthi movement, which have been at war since March 2015, to secure a peace deal and alleviate a dire humanitarian crisis in the impoverished country.

According to the Armed Conflict Location & Event Data Project, the truce is the most significant step in peace efforts in more than three years. The international community has struggled to end a seven-year conflict that has killed an estimated 110,000 people.

The U.N. proposal calls for a temporary ceasefire during Ramadan to allow fuel ships to dock at the Houthi-held port of Hodeidah. Ramadan begins this weekend.

Separate from the civil war, the United States continues counterterrorism operations in Yemen, relying mainly on airstrikes to target Al Qaeda in the Arabian Peninsula (AQAP) and militants associated with the so-called Islamic State.

U.S. Targets Iran Missile Program With Sanctions After Strikes On Regional Rivals – The Times Of Israel

The announcement comes a day after Blinken's meeting with Abu Dhabi crown prince, two days after the call with Saudi FM as the U.S. seeks to calm their frustrations over lack of support.

The United States on Wednesday announced sanctions against Iranian defense companies after a spate of ballistic missile attacks on targets in Iraq, Saudi Arabia, and the United Arab Emirates. The U.S. and Iran's neighbors blame Tehran for a March 13 strike on Erbil, Iraq, and repeated missile strikes into Saudi Arabia and the UAE by Iranian-backed Houthi rebels in Yemen.

On Friday, a Houthi missile strike set ablaze a Saudi Aramco oil storage site, prompting warnings from angry Saudi leaders that the attacks threatened the stability of the world oil market.

Even as the U.S. carries out indirect negotiations with Iran to revive limits on Iran's nuclear program, it will keep up penalties against those involved in Iran's ballistic missile production, Treasury Undersecretary Brian Nelson said in announcing the sanctions. "We will also work with other partners in the region to hold Iran accountable for its actions, including gross violations of the sovereignty of its neighbors," Nelson said in a statement.

Britain's GCHQ spy chief says Russian soldiers refused to carry out orders in Ukraine - Reuters

On Wednesday, the head of Britain's GCHQ spy service said that new intelligence showed some Russian soldiers in Ukraine had refused to carry out orders, sabotaged their equipment, and accidentally shot down one of their aircraft.

The headquarters of GCHQ in 2017
The headquarters of GCHQ in 2017

"Citing new intelligence, GCHQ Director Jeremy Fleming said there was evidence that Russian soldiers had low morale and were poorly equipped.

The United States assesses that Russia is suffering failure rates as high as 60% for some of its precision-guided missiles, three U.S. officials with knowledge of the intelligence told Reuters.

United Nations Seeks Record $4.4B For Afghans Struggling Under Taliban Rule – A.P.

The appeal is three times what the agency sought for Afghanistan a year earlier.

United Nations Headquarters, New York
United Nations Headquarters, New York

The United Nations' aid coordination office, backed by Britain, Germany, and Qatar, is launching its biggest-ever appeal for funds for a single country in hopes of collecting $4.4 billion to help Afghanistan. It is an ambitious call to assist the impoverished country again run by Taliban militants when much of the world's attention is on Russia's war in Ukraine.

"Ukraine is of vital importance, but Afghanistan, you know, calls to our soul for commitment and loyalty," said Martin Griffiths. He heads the U.N. Office for the Coordination of Humanitarian Affairs ahead of Thursday's pledge drive. "In simple terms, the humanitarian program that we are appealing for is to save lives."

"Less than a year after Taliban fighters toppled its internationally-backed government, Afghanistan is buckling beneath a debilitating humanitarian crisis and an economy in free fall. Some 23 million people face acute food insecurity," the U.N. says.

Chinese Steelmakers Increasingly Use Yuan To Buy Iron Ore Abroad - Caixin

Steel mills are becoming a major force in the drive to internationalize China's currency.

According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the yuan became the fourth-most-active currency for global payments in 2021, accounting for 2.7% of global payments.

Chinese steel companies since 2019 have embraced the yuan in handling their global iron ore deals, mainly using letters of credit for settlements, Caixin learned.

China Baowu Steel Group, the country's largest steelmaker, recently told investors that about 6% of the company's 2021 iron ore purchases abroad were settled in yuan. The company aims to expand that to 10% in 2022.

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