Andrey Movchan: “Sanctions imposed on Russia will not lead to a global crisis”

Well-known Russian financial analyst Andrey Movchan debunked the fears of his colleagues about the devastating impact of anti-Russian sanctions on the global economy.

“I want to share some bad news for witnesses of the universal crisis due to the alleged “incredible increase in energy prices and grain, which Russia uses as a weapon in the war with the West”. Let's figure it out.

There will be no catastrophe in the wheat market

The volume of world wheat production is almost 800 million tons per year, depending on the year it fluctuates within plus or minus 5-6%.

Russia produces about 15% and exports in the best years a little less than 4% of world wheat production. Ukraine produces 10% of world wheat production and exports about 1.5% of world production.

If all Russian and Ukrainian exports of 2021 are removed from the expected 2022 harvest, then there will be the most of the 2019 global harvest. Apparently, the world will live somehow and there will be no color revolutions, an influx of refugees into Europe and other fears of conspiracy theorists.

By the way, smart markets are well aware of this. Markets in general (we’ll talk about markets later, but this phrase applies to all markets in principle) behave like a smart woman: they react very emotionally to news, but quickly come to their senses and make informed and far-sighted decisions.

Let's look at a short graph of the price of wheat: from February 24 to March 8 - an increase of 40%; from March 8 to today - a drop of 20% and stabilization. “Yes,” the market tells us, “we are waiting for a decrease in supply. But not catastrophic and not that much influencing the price. Now look at the long graph of the price of wheat: 14 years ago it cost exactly the same in dollars! True, for 14 years inflation was more than 40% and in 2008 dollars the price of wheat that year was over $1,000, in 2011-13, when the color revolutions happened, it (in the same dollars) was $750, and now in those dollars, it is slightly less than 800 dollars. Scary? Not very much, especially since now the market is planning to stop the export of grain by Russia and Ukraine in full, which most likely will not happen - for a very simple reason: Russia will have nowhere to store the unexported grain, there is no capacity. You will either have to sell (and earn at least something), or it is pointless to fester. In addition, the world (primarily in China and the United States) has fairly large stocks of wheat, and neither country needs problems in the Middle East. As with oil, destocking will dampen the effect of falling exports.

The world can painlessly abandon Russian oil

By the way, about oil. It has been written and talked about a lot, so I will limit myself to just market charts. It's the same situation with wheat: up 30% after February 24 to March 8, and then falling to the price level on February 24th in just a week. The markets do not believe in the oil crisis, and they will not believe it: Russia cannot afford not to ship oil - this is the only significant source of dollars. It will be forbidden (if) to sell on the normal market - oil, like Iranian oil, will go to China with a huge discount, but it will remain on the market. And in parallel, the production of other OPEC countries and the United States is growing, Iran and Venezuela will increase shipments. In the end, the maximum export of Russian oil was 5% of world production, and Russia's share is already declining. Perhaps by the end of 2022, the world will be able to completely abandon Russian oil, and, of course, the world will refuse it - not by the end of the year, so a little later (but, as I said, even in the event of an embargo, it will go illegally to China for pennies). But this does not affect prices and will not affect prices.

Europe will use Russian gas for no longer than 5 years

There is, of course, natural gas. The gas that comes to Europe from Russia through gas pipelines is critical for Europe and for now (for now!) it will buy it from Russia no matter what. The question is at what price and in what volumes. Volumes will definitely fall and within about 5 years Europe will be able to comfortably refuse Russian gas. Will Europe do it "uncomfortably"? It is quite possible - today, on average, about 80% of Europeans support sanctions even to the detriment of their own economy and their own wallet, and support is higher, the more Russian gas the country uses (in Poland, for example, the highest, 92%). But the situation no longer affects the price of gas either - the “short” graph indicates that the price has “undergrown” even to the levels of the end of last year and has stalled. It is also useful to look at the “long” chart: it clearly shows that in the zero years the price of gas was much higher than the current one, and the current one is generally plus or minus the average for the period 2009-2015; just don't forget that in the 7-13 years that have passed since that period, dollar inflation has been 23% - 40%, that is, in 2009 the price of gas in real dollars was 40% higher!

So the phrase “sanctions imposed on Russia will lead to a global economic crisis” has no practical basis. For a world in which Russia is now about 1% of GDP, and all Russian exports were barely 0.4% of GDP before February 24, a complete shutdown of the Russian economy would be nothing more than a current nuisance. But there is no complete closure.