British economist Timothy Ash has become one of the most quoted of the Western experts analyzing Russia’s attacks on Ukraine. NV asked him whether Russian President Vladimir Putin’s economy can afford an invasion in Ukraine, how the United Kingdom can successfully deter Russia, and why it seems that Germany is afraid of anti-Russian sanctions.
Ash is the chief strategist with Bluebay Asset Management and an expert covering Ukraine. Together with journalist Oleksiy Sorokin, Ash also discussed what the West can do to make a possible Russian invasion in Ukraine a very costly operation for Putin.
- With the situation quickly deteriorating, how would you assess the likelihood of a full-scale war?
I am afraid escalation seems probable given that at Putin has achieved very little from his current bout of escalation. If he de-escalates now, he will lose face. He will need some kind of "win" to withdraw. So far I would argue that he has lost in terms of:
a) The West has united against him, it’s now clear to them that he has been the aggressor;
b) Ukraine is being re-armed at a more rapid pace;
c) If he withdraws now, his threats will be seen as hollow.
- Concerning the Russian financial market, is Russia economically capable of financing a full-scale invasion? Are we looking at a potential free fall of Russian markets and currency?
Russia has a lot of durability, and the Russian economy likely won't collapse into default and maxi devaluation. They have $630 billion in foreign exchage reserves, low debt levels (less than 25% of GDP for public sector and external debt), current account surplus, gross financing surplus, and close to balance fiscal position.
But war and sanctions will hurt Russian markets – we are likely to see increased capital flight, pressure on the ruble and loss in FX reserves. Foreign investment will further slow, the cost of capital will increase, and longer term growth will reduce. Russian living standards will decline and Putin will likely see increased risk of social unrest, as in Kazakhstan. Russian growth stagnation and decline will accelerate.
Ultimately, attacking Ukraine will damage the Russian economy, but is unlikely to bring about its immediate collapse.
- How would you assess Ukraine’s economic situation amid the Russian escalation, we know that the borrowing rate is over 20%, does the Ukrainian economy suffer from the current aggression and what can this mean in the long-run?
A further Russian attack would obviously not be positive, albeit Ukraine has more durability than in 2014-2015. Foreing exchage reserves are six times higher, the fiscal and current account deficits are much lower. But obviously it depends on how long and how bad the war is in terms of loss of productive assets and capacity.
I think the West will provide additional financing to help, and the European Union has already promised another EUR 1.4 billion in macro financial aid. I assume the United States and the International Monetary Fund will provide more financing.
- Concerning the UK, Britain has been one of the most vocal supporters of Ukraine? Why so? Do you think that UK's domestic problems can influence their foreign policy towards Ukraine? Assisting Ukraine is supported by Johnson's administration or is it supported by all parties?
Well I think the UK has a long history of supporting Ukraine. Successive governments have seen the threat from Russia – Salisbury, (the poisoning with deadly radioactive Polonium of Alexander) Litvinenko helped UK understanding. But I think also Brexit and Boris Johnson's political problems makes the government is more interested in showing strength and leadership overseas.
- Despite giving military aid and publicly supporting Ukraine, the UK doesn’t go after Russian money, is it possible that the UK will eventually seize Russian assets in London or scrutinize Russian London-based oligarchs?
The UK is not doing enough to fight kleptocracy and the dirty money trail. I think though a new Russian attack on Ukraine would see oligarch sanctions and I think those high profile characters in the UK will be a particular focus. This will concentrate the minds of the UK political and business elite in doing more in this field.
- What is the estimate for Russian cash in the UK?
I estimated for Chatham House, $58 billion in annual outflows since 1991, so something like $1.8 trillion since then, and one third of this likely came to the UK.
- Can actual sanctions against Russia, for example a cash freeze, canceling Nord Stream 2, cutting off Russia from SWIFT, disrupt the global financial market? What are the consequences of cutting Russia from SWIFT? Are there proponents of such action in the West?
With sanctions, the ones that work usually involve a cost to be paid by the West. But if we value the defense of Western Liberal Market Democracy, then I think we need to be willing to pay a price.
Sanctions on Russia, including SWIFT, and oligarch designations, plus restrictions on Russian state-owned enterprises, will likely be disruptive to global markets.
The Oleg Deripaska sanctions from 2018 showed the problems therein. But I think the Western sanctions teams have spent a lot of time thinking and planning for this, so they likely have lots of interesting ideas how to maximize the impact on Russia, and limit the backdraft back to impact on the West.
- Talking about Germany, what are the main implications for the country’s soft policy towards Russia, is it economic calculation or purely political?
Unfortunately, I think many German elites have been captured by Russian interests – board positions on Russian SOEs. It has not quite reached the same level in the UK or the United States, hence the greater willingness therein to confront Russia. But the German political and business elite has been significantly captured.
- Is it true that Germany will be the biggest loser (not counting Russia) from financial sanctions imposed on Russia?
I don't think so. I think the UK/United States will be as badly impacted from financial sector sanctions given the weight of institutional money in Russia. I think the biggest impact on Germany will be through higher energy prices, but that is pretty much the same across Europe. But German elites will suffer more given their board memberships in Russia.