Prepare for a weaker ruble and economic sentiment in 2022

Firms should be implementing contingency plans now for an escalation in various hybrid warfare tactics by Russia against Ukraine, which will incur some level of Western sanctions. Fortunately for business, assuming a worsening of the conflict, sanctions look set to be relatively moderate, limiting the impact on the ruble and demand. In this downside scenario, we anticipate a USD:RUB of ~77 for the year (USD:EUR ~87), causing more inflationary pressure and higher interest rates for longer. In addition, cyberattacks in Ukraine and a military conflict would cause operational difficulties as well as greater domestic political instability, hurting investment. Under our base-case expectation of prolonged talks and threats, firms should prepare for a weaker ruble than in 2021 and weaker economic sentiment this year.

The Ruble and the Hryvnia suffer as risk in Ukraine escalates.


On January 10, Joe Biden had a discussion with Vladimir Putin, followed by a NATO-Russia meeting in Brussels on the 12th, and talks in Vienna on the 13th at the OSCE. Various foreign ministers and security officials have participated in talks since, and US Secretary of State Anthony Blinken is set to meet with Russian Foreign Minister Sergey Lavrov later this week.

The American side proposed a longer series of talks focused on strategic issues related to arms control and the limitation of military maneuvers to help calm tensions; however, beyond those points, Moscow centrally seeks legal, written guarantees that Ukraine will never join NATO and has threatened military action if that demand is not met. With no such promise forthcoming, tensions have worsened in the past week, including a massive cyberattack against Ukrainian government websites, clear evidence of a further buildup of forces near Ukraine, and announced plans for joint Russian-Belarusian military exercises in February.

The West has repeated its threat of sanctions, including a revelation of the assets of Putin and his close advisers, while leaks from Germany noted that banning Russia from the SWIFT payment system was no longer being considered, softening the Western position.

The ruble and hryvnia have weakened notably across January, while bond prices have increased, and the Russian stock market lost 7% this past week.

Our View

Fundamentally, Putin is seeking to rewrite the European security order established since the fall of the Soviet Union 30 years ago on terms more favorable to Moscow, which naturally will be a long, arduous process with consistent risks of escalation. Our base-case expectation remains an avoidance of formal conflict and protracted talks, as it is in both the West’s and Moscow’s interests, particularly as talks can deliver most of what both sides seek, while heightened conflict may not. Looking ahead, this will involve continuous pressure with troops on the border, cyberattacks, military exercises, and threatening language periodically employed by the Kremlin to repeat its demands until satisfied. However, the continued absence of a diplomatic solution naturally raises the threat of a military escalation to resolve the crisis, as the Kremlin remains insistent on Ukraine never joining NATO, something which the US has said it cannot provide legally and publicly. The expectation remains that Putin will be satisfied with private commitments to this effect matched with other concessions related to arms control and military exercises, among others.

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