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Russia Beat Emerging Markets despite Oil, Sanctions, and War

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Part 4
Russia Beat Emerging Markets despite Oil, Sanctions, and War PART 4 OF 5

Sanctions Imposed by the West Have Fueled Inflation in Russia

The West has imposed sanctions on Russia

Russia (RSX) (RUSL) is also currently struggling with Western sanctions. On July 16, 2014, the US imposed additional sanctions against Russia in retaliation to Russia’s annexation of Crimea from Ukraine and its continued support of the rebellion in eastern Ukraine.

These sanctions primarily target the Russian economy and the flow of investments into it. They were issued against companies in Russia’s defense industry and energy industry. They have also been issued against important Russian banks and individuals.

Sanctions Imposed by the West Have Fueled Inflation in Russia

Sanctions have affected flow of investments into Russia

Among those on target, sanctions imposed against Rosneft, Novatek, and Gazprombank have been hurting the Russian economy the most.

  • Rosneft Oil Co. (OJSCY) is Russia’s largest oil producer.
  • Novatek (NOVKY) is Russia’s second-largest gas producer after Gazprom.
  • Gazprombank is Russia’s third-largest bank and a subsidiary of Gazprom (OGZPY)—the largest extractor of natural gas in the world and one of the world’s largest companies.

Flight of capital

The sanctions have led to a decline in new investments in the region, coupled with the flight of existing capital. The International Monetary Fund (or IMF) has forecasted that the flight of funds from Russia this year could amount to ~$100 billion. It has already become difficult to acquire capital in Russia itself, with both domestic and foreign investors withdrawing their money from the country in recent months. Also, with the additional sanctions, financial markets across the globe, and especially in the U.S., that are conducting business with or investing in Russia would like to reconsider.

It has already become difficult to acquire capital in Russia itself, with both domestic and foreign investors withdrawing their money from the country in recent months. Also, with the additional sanctions, financial markets across the globe, and especially in the US, that are conducting business with or investing in Russia would like to reconsider.

Soaring inflation rate

Moreover, the depreciating ruble, along with Western sanctions, has been fueling inflation in Russia. Russia imports large amounts of food, high-tech equipment, and cars.

Goods such as beef and fish have become 40% to 50% more expensive since the West imposed sanctions on Russia. The inflation rate in Russia has been running in double digits over the past year, and it was recorded at 15% in November 2015.

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