Author: IntaCapital Swiss

UK Interest Rates and the British Pound: October 2024

In an interview on 3rd October 2024, the Governor of the BOE (Bank of England), Andrew Bailey, announced that the Bank could be leaning towards cutting interest rates in a more proactive fashion, providing inflation remained just above the benchmark of 2%. In October 2022, inflation stood at 11.1% due to the energy debacle the United Kingdom faced, but has come down almost to the Bank’s target figure, although the BOE does expect an increase in price growth as energy prices increase throughout the winter months.

Financial markets, after the comments by Governor Bailey, have priced in a 25 basis point interest rate cut to 4.74% at the next meeting of the MPC (Monetary Policy Committee) on Thursday 7th November 2024. With inflation currently standing at 2.2%, Andrew Bailey said the BOE could become a “bit more activist” in their approach to reducing interest rates providing the news on the pace of price rises continued to be good. The current remarks from Governor Bailey are in contradiction of the “steady as she goes” policy since the first rate cut before the beginning of the Covid-19 pandemic. 

The markets continue to worry about the continuing conflicts in the middle east which could indeed drive the cost of a barrel of oil back up to USD100, which could well push up inflation. Oil prices have risen by 3% on concerns of increasing conflict in the Middle East, however Governor Bailey was quick to point out that a year ago, on the 7th of October 2023, Hamas launched their first attack on Israel there had been no significant rise in oil prices.

On the back of Governor Bailey’s remarks, the appeal of Sterling (British Pound) has slumped as financial markets had originally placed bets on quicker reduction in interest rates. The Governors remarks had a big impact on the financial markets as they were on board with his “steady as you go” policy, suggesting that the BOE would lag behind the Federal Reserve and the ECB (European Central Bank) in cutting interest rates. In fact, traders and investors had piled into bullish bets on sterling, taking advantage of various rate differentials. Data issued by the Commodities Futures Trading Commission show hedge fund wagers at their highest since 2018.

A number of financial experts are suggesting that the pounds best days are over with its rally coming to an end. The pound fell against the US Dollar by 1.1% to 1.3118, the biggest fall since March 2023, and the pound also fell by 1.1% against the Euro the most (on a closing basis) since December 2022. Governor Baileys’ remarks has certainly caught traders by surprise with many selling sterling to close out bullish positions.

The Future of America’s Economy: Donald Trump vs. Kamala Harris

Experts and analysts from many walks of life have been mulling over what effect the two presidential candidates (Trump/Harris) will have on the economy of the United States. Both candidates have very different visions of an economy that they will build if/when they get elected to the office of President of the United States of America. Below are some of the differing policy decisions the candidates will make as they try to shape America’s future.

1. Trade policy

Trump

During his first and only term as President of the United States Donald Trump ushered in a new era of trade policy for America by introducing tariffs. Once again, he has promised to put his “America First” policy back on track with greater fervour than before. Donald Trump has informed the voters that he will introduce a baseline tariff of 20% on all imports with a 60% tariff on any imports from China. He has further promised massive new tariffs on those countries that abandon the US Dollar and all imports of cars from Mexico. 

Trump has said that these new tariffs will fund everything from child care to tax cuts, but experts are sceptical as they suggest that the tariffs won’t come close to creating the revenue this policy requires. Indeed, such experts suggest that the best case scenario is that tariff revenue could be between circa USD 200 – USD 400 Billion per year, but these numbers would drop as trade realigns. Furthermore, Trump has promised voters that he will revoke China’s “Most Favoured Nation” status, along with banning Chinese investors from buying US real estate or companies, and he has vowed to keep United States Steel Corp in US Ownership, blocking a potential sale to the Japanese.

Harris

Kamala Harris has issued very little in the terms of trade policy but has vowed no major departure from President Biden’s current trade policies, which have retained all of the Trump’s administration’s tariffs, plus adding a couple of new ones. She has also agreed with Trump, vowing to keep US Steel Corp in US ownership, and has gone on to say she will make available tax credits to help businesses in the United States compete with China. However, she has warned voters that Donald Trump’s promised increase in tariffs for all imports would increase the costs for consumers and argues that it is nothing more than a National Sales Tax. Experts suggest that Harris is expected to expand and enhance the United States domestic technological and economic strength by promoting resilient and diversified global supply chains. Political commentators suggest that voters will be swayed by the fact that Vice President Harris’s trade stance is not that of Donald Trump. 

2. Immigration

Trump

Donald Trump has announced he will complete the wall on the Mexican US border which he started in his first term, whilst deporting millions of undocumented migrants. His party, the GOP (Grand Old Party), are running on a platform where they promise to end “a tidal wave of illegal aliens, deadly drugs, and migrant crime.” 

Harris

At the start of her term Vice President Harris was mandated to tackle immigration, however that has sadly failed as there has been a surge of migrants across the border. Indeed, under the Biden/Harris administration there has been a surge in border crossings culminating in December 2023 when in excess of 300,000 migrants crossed into the United States. However, in June 2024 these numbers finally fell after asylum restrictions came into effect. Kamala Harris has said very little on immigration policy, but has pledged to re-introduce legislation that will clamp down on border crossings. 

3. Housing

Trump

Former president Trump has proposed that if he wins the White House he will repurpose some federal land to build new homes, whilst promising to reduce the cost of homebuilding by severely reducing the amount of red tape. He also affirms that his policy on immigration will have the effect of reducing the purchase price of homes, making them much more affordable.

Harris

Like Donald Trump, Vice President Harris has also proposed repurposing some federal land to build new homes. Her platform also wants to help first time buyers with down payments on homes, proposing support of up to USD25,000. Furthermore, she has also proposed a fund with USD40 Billion to support innovations in home building whilst offering tax incentives to those builders who work on starter homes. Elsewhere, she is suggesting she will target certain landlords with new measures because they raise rents by utilising price-setting tools. 

There have been some negative comments by related market experts who advise that the United States has two problems in this area, lack of housing and affordability. They acknowledge that Harris’s proposals are to tackle both problems at the same time, however they feel her policies on housing will make purchases less affordable. Their reasons are fairly straightforward, as subsidies given to new home buyers will inevitably push up demand as building new homes will take time to deliver. As such, this will push the prices up and make it an increased pay-day for sellers. 

4. Inflation

Trump

One of Donald Trump’s major promises is to keep inflation low, and energy makes up a key part of this promise. Indeed, he argues that offering new land for drilling and tax relief on gas and oil producers, reducing the time it takes to obtain approvals for permits, licences, and pipelines, will boost oil and gas production and will help bring costs down. However, sceptics point out that unless the Republicans control congress it would be difficult to pass such legislation.

Harris

A lot of Vice President Harris’s rhetoric is all about middle-class families and lowering their costs. In the health care arena she is proposing a USD35 limit on insulin payments and on prescription drugs out of pocket costs will have an annual cap of USD2,000. Regarding groceries, Harris has proposed a federal ban on price gouging, whilst introducing new penalties for those companies who infringe, violate or flout pricing rules. These proposals have been greeted somewhat sceptically by certain economists and analysts. 

Experts note that since March 2020 food prices have risen by 25% making it more difficult for households to live. Data released show that over the past few years profit margins at grocery stores were fairly flat, meaning that these shops were raising prices in face of supply chain disruptions and rising costs, not gouging customers. 

To conclude

A number of experts and analysts suggest that, although Vice President Harris and former President Donald Trump come from vastly different places, both sides agree to deploying tariffs, stopping takeovers of US firms by foreign predators and above all running the largest deficits in the history of the United States, even when the economy is flourishing. As far as the election goes, once again America is deeply divided, it will be the swing states that call this election, and with only a short time to go, it is anybody’s guess. 

Will the US Dollar Continue to Decline?

According to data supplied by Bloomberg’s Dollar Spot Index, the US Dollar has fallen just under 1% in September 2024, and is currently in the longest monthly losing streak since January 2023. Experts suggest that currency traders feel the US Dollar is in for more losses after the Federal Reserve cut interest rates by 50 basis points on 18th September, with analysts suggesting that sentiment is still bearish, with traders having already taken into account the impact of lower cost of borrowing. 

Since late June 2024, financial markets were getting more confident that the Federal Reserve would soon begin to cut interest rates and as a result the US Dollar Index has fallen by circa 3.6%. A downward trend that has continued since and since 18th September. With the United States election becoming imminent and the debate surrounding the rate cut intensifying, there are some strategists who are advising their clients to completely avoid the US Dollar. 

Data shows that markets and investors are engaging in more cross-currency exposure and giving the greenback a miss, so profits from trades such as buying GBP against the New Zealand Dollar or shorting the Swiss Franc against the Japanese Yen will be regardless of the outcome of the US election, or any fiscal policy announced by the Federal Reserve impacting the US Dollar.  Interestingly, data released by the BIS (Bank for International Settlements) reveals that on average the US Dollar accounts for one side of 88% of trades in a market valued at USD7.5 Trillion per day, so for the greenback to be avoided shows the uncertainty surrounding the currency.

Experts suggest that the US Dollar could well remain weak as the financial markets hunt for clues in economic data which might suggest the pace at which the Federal Reserve will cut interest rates. A number of analysts agree on a 25 (1/4 of 1%) basis points cut in November, however in the swaps markets experts are suggesting that there is a better than 50% chance of a bigger cut in rates. Therefore, the swaps markets feels that future interest rate movements are downwards, so fixed rate notes are betting on a bigger rate cut than 25 basis points.


However, as of 30th September, the Federal Reserve Chairman Jerome Powell adopted a more hawkish tone on the economy leaving financial markets, indicating that interest rates will only be cut by 25 basis points in November’s meeting. The dollar index rose .42% on the news, but as always the Federal Reserve’s decisions will be data driven, so it is still open season on whether the US Dollar continues its slide or not. Furthermore, analysts suggest that a Harris presidency will promote a stronger dollar whilst a Trump presidency will promote a weaker dollar.

Bitcoin Beats September Blues

Bitcoin ,the original and most famous cryptocurrency, is currently enjoying a market capitalisation in excess of USD1.1 Trillion. The coin is having its best September ever due mainly to a swathe of interest rate cuts that were headlined by the Federal Reserve, who slightly surprised some parts of the financial markets with a full 50 basis point cut. This has helped Bitcoin show a gain of 10% in September 2024, which is in total contrast to previous Septembers stretching as far back 2014, where the average decline has been circa 5.9%. 

The correlation between the Federal Reserve’s monetary policy and Bitcoin is at its highest in comparison with other central banks monetary policies. A number of central banks, including the Federal Reserve, cut interest rates in September allowing investors to look elsewhere for returns bidding up many opportunities, including stocks, gold, and cryptocurrencies, while at the same time expecting further rate cuts in the near future.

Bitcoin is a decentralised asset and was originally a technology for payments, however today it is regarded as an investment, and a hedge against inflation. Over the years Bitcoin has, despite being subject to extreme volatility, experienced tremendous growth, and has recently outpaced gains in major stock indices, making it an attractive alternative to traditional portfolio investments. 

Furthermore, September gains have also benefited from US Spot Bitcoin ETFs (Exchange Traded Funds), which is gaining in attraction to both institutional and retail investors. Indeed, September 26th, 2024, the Bitcoin ETFs recorded a net daily inflow of USD365.57 Million, the largest inflow since the end of July this year. Data shows that since Bitcoin ETFs were launched, net inflows have reached an impressive level of USD18.31 Billion. Another factor that might have added to Bitcoin’s impressive September are the effects of April 24th halving* beginning to filter through.

Interestingly, a number of experts have advised that Bitcoin follows global liquidity trends 83% of the time over any twelve-month period, (more than any other asset class). They have highlighted that if on-chain Bitcoin metrics** are combined with global liquidity, it gives a deeper understanding of Bitcoin’s price cycles therefore opening up potential investment opportunities. 

*Bitcoin Halving – Halving or “The Halvening” occurs roughly every four years with the latest halving occurring on 20th April 2024. This event reduces the rate at which Bitcoins are created by 50%, which can potentially lead to price appreciation if demand remains constant or increases.

**On-Chain metrics – refer to data from a blockchain ledger that can be analysed to get a greater understanding of market sentiment and offers insights into various aspects of Bitcoins network health, economic activity and investment trends.

Federal Reserve Cuts US Dollar Interest Rates

On 18th September 2024 the Federal Reserve cut interest rates by 50 basis points: an aggressive start to bring interest rates down in the United States. After more than twelve months, the FOMC voted by 11 to 1 to lower the federal funds rate to a range of 4.75% – 5%, reflecting the first interest rate cut in over four years. Whilst the markets are expecting further rate cuts this year, projections released by the Federal Reserve regarding the same showed that there was a narrow majority of 10 to 9 in favour of further cuts in 2024.

Following the announcement, the Federal Reserve Chairman Jerome Powell was quoted in a press conference as saying, “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%”. Whilst inflation is indeed moving downwards, analysts suggested that the Chairmans press conference was economic speak for “we are still not sure about the labour market”. 

However, Chairman Powell did caution the markets not to take this rate cut as a confirmation that the Federal Reserve has now set the pace at which rate cuts will be considered in the future. As usual, any further rate was tempered with a statement from policymakers that “they will consider additional adjustments to rates based on incoming data, the evolving outlook and balance of risks”. Further tempering was added when policymakers also advised that jog gains have slowed, and inflation remains slightly elevated. 

Despite these somewhat negative announcements regarding future interest rate cuts, the financial markets have taken the opposite view with traders ramping up their bets on future interest rate cuts and pricing in a further 70 basis points of rate cuts between now and the end of Q4. Experts suggest that the pace of rate cuts will be as the market predicts, as previously traders have done a relatively good job of predicting the amount and early pace of the cuts. Indeed, despite negative rhetoric, including the warning that ‘the outlook for the world’s largest economy was uncertain’, the ‘Dot Plot’* published by the Federal Reserve indicates that interest rate could be cut by another 50 basis points by the end of Q4, and a further full 1% cut in 2025.

*Dot Plot – This is a graphical display consisting of data points which the Federal Reserve uses to predict interest rates. The graphs display quantitative variables where each dot represents a value.

The Bank of England Keeps Interest Rates on Hold

On September 19th, 2024, and despite a full 50 basis point reduction in US interest rates announced by the Federal Reserve the day before, the Bank of England, (BOE) advised they were holding interest rates steady at 5%, with the MPC (Monetary Policy Committee) voting by 8 – 1 to keep the cost of borrowing steady. Whilst many experts, investors and analysts expected a hold on interest rates, the word coming out of the BOE was that they are waiting on further data to confirm inflationary pressures have subsided before making a second cut in the cost of borrowing. The decision also pushed sterling to its strongest level against the US Dollar since March 2022, and is just a hair’s breadth away from its two year high against the Euro.

I think we are on a gradual path down. That is the good news.

Andrew Bailey, BOE Governor

In a statement by the BOE Governor Andrew Bailey he said “We should be able to reduce rates gradually over time, it is vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” Later on the Governor was also quoted as saying “I think we are on a gradual path down. That is the good news. I think interest rates are going to come down. I am optimistic on that front, but we do need to see some more evidence. We need to see that sort of residual element now fully taken out, to keep inflation sustainably at the 2% target.”

Released minutes of the MPC meeting said, “In the absence of material developments, a gradual approach to removing policy restraints remains appropriate.” The minutes also reiterated the need for policy to remain ‘restrictive for sufficiently long’ and that the MPC will take a meeting-by-meeting approach to interest rates. This gradual approach comes despite recently released data showing August inflation at 2.2% (below the BOE’s forecast of 2.4%), however, service inflation remains sticky at an uncomfortable high of 5.6%. Some experts are suggesting that service inflation may well hamper any further rate cuts this year, but they are definitely in the minority.

Experts advise the general feeling in the financial markets is that at the next policy meeting of the MPC on November 7th, a rate cut is almost a racing certainty, especially as inflation is below the BOE’s expectation. However, the BOE have warned that they expect headline inflation to increase to 2.5% by the end of Q4 this year. Elsewhere, interest rates were held steady in Japan, China , Taiwan, and Turkey, whilst Oman and South Africa both cut interest rates.

September 2024: The 2nd ECB Interest Rate Cuts

For the second time in 2024 the ECB (European Central Bank) has cut interest rates by a ¼ of 1% (25 basis points) as inflation recedes towards their target of 2%. The key deposit rate was cut, as expected by most financial experts, to 3.5% despite the recovery facing some economic headwinds. Additionally, the refinancing rate (or minimum bid rate, is the interest rate which banks have to pay when borrowing money from the ECB) was cut by a full 60 basis points to 3.65%, a technical adjustment which had been on the cards for quite a while. 

The ECB President Christine Lagarde, like her peers in the United Kingdom and the United States, was quoted as saying “we shall remain data-dependent” and going on to add that the decision to cut interest rates was totally unanimous. The President was further quoted as saying “A declining path is not predetermined, neither in terms of sequence, nor in terms of volume”. A number of analysts surmised that this is financial speak for ‘We may or may not be doing another rate cut this year and we are therefore not going to commit ourselves.’ Financial markets slightly eased back on bets on further monetary easing predicting a total, predicting a circa 36 basis points increase by the end of Q4, though there is no complete consensus.  

The interest rate announcement by the ECB follows a fall in inflation in August to 2.2% with data released showing wage increases which drive price increases in the service sector are now on the decline. A comprehensive measure of workers’ pay, the “Compensation Per Employee”, provided data showing an easing to 4.3% in Q2 from 4.8% in Q1. The ECB President stressed that their inflation target of 2% should be reached by the end of Q4 2025. However, as in a number of other economies, service inflation is still on the radar as being one of the main concerns. 

Despite the sluggish growth in the euro zone’s 20- nation economy, where declining momentum from earlier in the year (households are not supporting the rebound in Q1 and figures for manufacturers remain indifferent), many analysts suggest that there is a predictable outlook to interest rate cuts. Whilst many analysts see an interest rate cut in each of the upcoming quarters until end of Q4 2025, there are some doubts due to the weak economy, which is the justification for the ECB remaining on the fence regarding the timing of future rate cuts. 

UK Government Debt Still as Popular as Ever

On Tuesday 2nd of September 2024, the appetite for UK Government Bonds remained as strong as ever as the government received orders of £110 Billion (USD144 Billion) in orders for a new sale of Gilts (UK Government Bonds), the first sale via banks* since a Labour landslide election victory two months ago. The UK Treasury managed to raise via their executive agency the DMO (Debt Management Office) GBP8 Billion on the sale of a gilt which matures in January 2040 offering a coupon of 4.375%**.

*Banks / Bookrunners – Banco Santander SA, HSBC Holdings Plc, Bank of America Corp, Lloyds Bank Group Plc and Goldman Sachs Group Inc.

**Gilt Maturing 2040 – This security is priced at 4 Basis Points over comparable notes.

According to experts, this is the largest ever demand on record where demand is compared to the size of the sale, and data shows that the order book matched that of June this year where a similar record was set. This latest offering and take-up does, according to analysts, show a trust by investors in this new Labour government who are indeed under pressure to fill a hole in the UK’s budget. Furthermore, data reflets that growth in the United Kingdom in Q1 and Q2 of 2024 outstripped that of the other G7 Nations, giving investors optimism regarding the near-term growth of the country.

Experts suggest that the outsized orders for this gilt not only reflects a trust in this government but also that investors are grabbing yields that are still elevated before the Bank of England introduce yet another rate cut. The head of fixed-income strategy at Saxo Bank said, “The recent successful gilt sale is primarily fueled by long-term investors seeking to lock in yields above historical averages”, they also added that if inflation persists then long-term debt is susceptible to even higher yields. Data provided by analysts show government borrowing as higher than expected in Q1 and the first month of Q2 of the fiscal year despite the economy being stronger

Experts go on to suggest that the new Chancellor of the Exchequer, Rachel Reeves, will either have to cut spending or raise taxes to meet the fiscal rules that Labour have kept from the previous conservative government. Cutting spending seems hardly likely as the chancellor has already announced on 29th July 2024 an above-inflation pay rise of 5.5% to 6% to most NHS workers, teachers, and the armed forces. She has also offered medics in England a 22.3% average pay rise, all of which suggest that the tax avenue is where the chancellor intends to go as the these pay rises amount to circa GBP9.4 Billion, however unpopular cuts elsewhere such as the winter fuel allowance she hopes will help balance the pay rises. This is a new government and only time will tell if future gilt sales are just as popular as the recent 2040 maturity bond.

The Declining Value of the US Dollar

In the past two months the US Dollar has declined 5% against major currencies (the US Dollar index currently stands at a 13 month low) suggesting that increase in the value of the dollar in the years after the Covid-19 Pandemic has come to end. Analysts suggest that this is not too surprising because the rhetoric coming out of the Federal Reserve has recently softened regarding interest rates. Indeed, the Chairman of the Federal Reserve, Jerome Powell, made it plain at the Jackson Hole Economic Symposium (20th  – 22nd August 2024) that inflation was, in fact, receding. Chairman Powell went on to say “Inflation is on what increasingly appears to be a sustainable path to our 2% objective”. 

The big question at the moment is not if, but by how much the Federal Reserve will cut interest rates at their next meeting on September 18th, 2024, and will sustained cuts in interest rates erode the dollar haven that the United States has enjoyed for the last three years? Analysts suggest that according to bond market pricing* financial markets can expect a 0.25% reduction in interest rates at the September Federal Reserve meeting. However, there are those in the market who suggest that the Federal Reserve could indeed cut rates by a full half percentage point. 

*Correlation Between Interest Rates and Bond Prices – The relationship between interest rates and bond prices are such that when interest rates fall bond prices rise and when interest rates rise bond prices fall. Thus when existing bonds have a lower interest rate than current interest rates they are less desirable, so as the interest rate on the US Dollar falls, so bonds become more attractive and their price rises. 

What effect will the declining value of the US Dollar have on emerging markets, exporters of commodities, and the rest of the world? As the dollar declines due to interest rate cuts some analysts are questioning whether the status as global reserve currency will be affected. Experts agree that the reserve currency status will not be threatened by a declining US Dollar as the United States is still the safest place to invest with buoyant stock markets and decent yields. However funds that are domiciled in the United States may look outside its borders as investment opportunities open up in other parts of the world. 

Elsewhere, countries whose economies rely on the exports of commodities will usually reap the benefit of a falling US Dollar, as the commodity price correlation usually moves inversely to that of the US Dollar. Emerging markets that have not had the best of times in recent years should broadly benefit, especially those resource-poor markets (Inc India and China) who rely on the importation of commodities denominated in US Dollars. The US Dollar has lost ground against the  G-10 currencies, the largest of which is within the European Union and specifically the Federal Republic of Germany, where a stronger Euro will only increase the pain of weakening capital expenditure and consumer confidence.

The odds are very good for the Federal Reserve to cut interest rates at their September meeting. However, Chairman Powell always hedges his bets by reminding the financial community that their decisions are always data driven. He reminded us at Jackson Hole, with the upside of beating inflation against the downside of labour market concerns (which had cooled substantially with unemployment rising to 4.3%), future actions would depend on incoming data and the balance of risks.

The Underlying Problems in the Russian Economy

Despite over 1,000 global multinational corporations leaving the country plus sanctions being imposed, the Russian leadership has been “bigging up” the economy, but do their words really ring true? On closer inspection the apparent economic feel-good factor is down to the Russian government massively overspending, which has hidden restrictive monetary policy from the populous using intense fiscal stimulus. All is not rosy in the economic garden of Russia as experts suggest that the government is engaged in a spending spree that is completely unsustainable.

Analysts have shown that most of Russia’s human, production and financial resources have all been redirected to the defence sector in order to finance the President’s war with the Ukraine. This has left the civilian sector exceptionally short of resources, who have been struggling to meet the increasing demand from the consumer sector. Sadly, the disparity that now reigns within the Russian economy (funding the war at the expense of the rest of the economy) has seen inflation jump with added pressure coming from increasing costs of imports and the depreciation of the rouble. The prioritisation of military spending over everything else is essentially stifling innovation and damping down any long-term growth prospects.

Analysts suggest that Russia is indeed running out of reserves and estimate that the amount of liquid assets available for distribution is just shy of USD100 Billion. This shows that the war is eating heavily into Russian reserves built up from oil revenues in the first decade of the 21st century, despite new levies and increases in taxes across the whole economy. The largest contributor to revenue has, without a doubt, been the oil and gas sector, where experts estimate such contributions amount to circa 33% of total revenues. Regarding tax, a mineral extraction tax has been levied on the giants of the oil and gas industry and their only LNG producer Novatek now faces an increase in its corporate tax rate from 20% to 34%. Furthermore the Russian government will from January 1st, 2025, increase the overall corporate tax rate from 20% to 25%, the war effort now creeping into the bottom lines of all major Russian corporations. 

The tax measures being taken by the Russian government in itself is not totally ruinous, but when combined with the withdrawal of virtually all global multinationals and sanctions it’s clear they are ruining any chances of critical investment vital to the future of the Russian economy. A number of key development projects such as the Arctic LNG-2* have been brought to a halt due to the lack of investment and the withdrawal of key international companies. The war effort is bleeding the private sector dry, especially in the area of wages, where they cannot compete with the defence sector.

*Arctic LNG-2 – Novatek reported that there had been a massive increase in capital expenditure of USD$4 Billion on this project as they had to turn to Chinese replacements of western equipment. Due to the virtual total withdrawal of international companies (Baker Hughes, Linde and Technip along with sanctions), this project has now come to a complete standstill. 

Despite the political rhetoric, China has ceased helping Russia on the financial front with analysts advising that circa 80% of Russian transactions in Yuan are being reversed as fear of secondary sanctions have scared off Chinese financial institutions indicating the reluctance of engaging with Russia. Furthermore, experts report that important direct commodity payments between Russia and China are being frozen. On top of this interest rates are currently 18% and not stopping inflation. Government financial experts had expected with interest rates so high Indian and Chinese investors would flock to the marketplace, but such thinking is flawed as Russian assets are regarded as toxic. Finally, Russia is banned from the international capital markets so has no chance of raising funds from the global debt and equity markets. At this rate the entire financial structure of the Russian economy will become destabilised, and who knows what a bankrupt President Putin would do to alleviate the situation.