24.02.2022.

The impact of Russian aggression in Ukraine

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Photo by: Latvijas Banka

Uldis Rutkaste, Head of the Monetary Policy Department, Latvijas Banka

Russia has crossed all the red lines. This means that our business with this country has been effectively put on hold until better times, cooperation has become impossible. Businesses that had not redirected their activity to other more stable and safer markets so far have to take this into account.
 
Western sanctions will not play a symbolic role this time, they will be comprehensive, painful and targeted at Putin's regime and thus at the economy as a whole. Undoubtedly, this will have devastating effects not only on Russia (and its ally in the act of aggression – Belarus) but will also have an adverse effect on the economy of the imposers of sanctions – Western countries and Latvia. Nevertheless, these sanctions should be supported, since living side by side with an unpredictable and aggressive neighbour anyway would have an even more devastating effect on the economy, investment attractiveness and people's confidence in the future. 
 
What economic consequences can we expect? First, energy prices will continue rising, thus fuelling inflation. Second, Ukraine and the southern part of Russia are important suppliers on the global food market. Therefore, one can expect prices of grain and other food products following an upward path globally and also in Latvia. Third, we have to face the fact that payments involving Russia might become difficult. The sanctions and the expected counter-measures implemented by Russia may hamper exports to Russia. The firms still doing a lot of business with Russia should look for more stable export markets. Currently, the sectors most exposed to the Russian market are: the food industry (alcohol production in particular), mechanical engineering, manufacture of electrical and electronic equipment, pharmacy and textiles, but overall exports to Russia by the above sectors do not exceed 20%–30% of their total eksports (some individual companies may, of course, be more exposed). Latvia's exports of goods to Russia constitute approximately 7% of its total exports. The significance of Russia in services exports decreased already in previous years, and currently it is not systemically important. Other types of provocations from Russia are also likely, e.g. cyber attacks that can cause headaches to a number of business teams, making them invest more resources in planning business continuity.
 
However, the greatest vulnerability of Latvia's economy remains its heavy energy dependence from Russia, and we shall redouble our efforts to accelerate the transition towards domestic and renewable energy sources.

Andris Strazds, Adviser to the Council of Latvijas Banka

First of all, we have to remember that Latvia is safe because of its NATO membership and the collective defence policy.
 
As to the developments in Ukraine, during the previous conflicts, Vladimir Putin pursued the so-called salami slicing strategy, when regular but seemingly less significant acts of aggression and cuts gradually deprive the opponent of all its initial salami in the long run. The Western response has so far also been similar, kind of a sanction slicing, responding with effectively minor and regular additional sanctions to those acts of aggression.
 
This week's aggressive speech delivered by Putin and the events of the last couple of days surely suggest that Putin is done with the salami slicing and has started something much more serious. Consequently, we can expect a worthy response on the sanctions side. If neither the receiving party nor the applying party is pained by the sanctions, they are ineffective, but this time all signs suggest that Russia will feel the pain. And so will the Western world and also Latvia. Freedom comes with a price. The inconveniences we are facing today are a payment for the future generations to be able to live in a free and democratic state rather than an aggressive and despotic empire.
 
Unfortunately, we have to concord with the experts saying that Putin will never stop now unless he is stopped. Moreover, the stopping is no longer likely to be achieved just by diplomatic action or economic sanctions, but rather by military means.
 
Latvia must provide all possible support to Ukraine in these circumstances. And remain calm as we enjoy the safety of a NATO member state.
 

APA: (2022, 26. may.). The impact of Russian aggression in Ukraine. Taken from https://www.macroeconomics.lv/node/5502
MLA: "The impact of Russian aggression in Ukraine" www.macroeconomics.lv. Tīmeklis. 26.05.2022. <https://www.macroeconomics.lv/node/5502>.
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