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Russian economy likely ‘to dip into a deep recession,’ Longview Global Advisors President says

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Longview Global Advisors President DJ Peterson sits down with Yahoo Finance Live to talk about the Russian economy as additional sanctions will be used to target officials financially, how the ruble is affecting Russian citizens, oil production, and China.

Video Transcript

EMILY MCCORMICK: The escalation of the conflict in Ukraine has left many wondering what the extent of the fallout will be for the economies of Russia and Ukraine, as well as for the rest of Europe and the world. DJ Peterson, Longview Global Advisors president joins us now for the latest. DJ, thanks for joining us this afternoon.

We're now hearing early estimates of how Russia's economy will be hit amid the latest set of Western sanctions. JPMorgan said it now expects a 20% quarter over quarter annualized contraction in Russia's GDP in the second quarter and a full year decline of about 3 and 1/2%. Do these estimates track with what you're expecting out of Russia, given the sanctions as they stand now?

DJ PETERSON: I do agree with this sentiment. Going into 2022, Russia's economy wasn't bouncing back very strongly from the coronavirus pandemic. Now the recent uptick in oil and gas prices has certainly spurred the Russian economy, but it was fundamentally weak.

And now what we see is not only financial sanctions, but technology export controls, logistics-- band of logistics cargo movement into and out of Russia, which is really aimed at throttling their industrial production. So it's not just financial sector issues we have to watch. It's actually the throttling of Russian industry. And yes, I do expect the country to tip into a deep recession.

EMILY MCCORMICK: And of the sanctions that we've seen so far imposed by the US, EU, and UK, in particular-- you mentioned some of those export bans, as well as the financial restrictions-- which do you think are most significant if there is one in particular that stands out as particularly squeezing Russia's economy?

DJ PETERSON: Right now, it's the restrictions that are being placed on the central bank. Russia has amassed about over $600 billion in foreign reserves, including gold. This was a war chest. This was built up, in part, to resist Western pressures, financial pressures, in an event like this. But basically, what the UK, the Europeans, and the Americans have done is basically locked off a large portion of that, perhaps 1/2 of it or 2/3 of it that Russia can't tap.

And you see it very clearly today in the exchange rate. And this is going to hit Russian-- individual Russians very hard. And there's a calculus that this will lead to widespread political unrest. Another important issue is that Russian bond issuers are not going to be able to pay principal and interest, and so very quickly, you could see Russia falling into numerous technical defaults.

EMILY MCCORMICK: And to that point about political unrest, we've been seeing images of the ATM lines in Russia. Citizens have been racing to withdraw funds amid these sanctions. Is there a limit to how much economic fallout Russian people see before Putin is forced to change course?

DJ PETERSON: That's a great question. The situation in Russia is, it's extremely politically stable until it's not. And the general assumption has been is that the political stability, in part, imposed by Putin's very strong authoritarian control and control of domestic security forces will keep a tight wrap on this. But also talking to people in Russia, what I'm hearing is a fundamental sense of shock, first about the fact that there was the invasion, and then, of course, the fact that their country has been completely cut off from the rest of the world.

You think about urban professionals who used to travel to the West, used to travel to Europe, obviously had international business ties. Right now, Russia is on pariah status with Iran and Venezuela. And this is a shock. I think it'll take a few days for this to sink in, but what we've seen in the last few days is that the situation has changed very dramatically. And I think the next few days will be telling as well.

EMILY MCCORMICK: And we've been seeing in the West a number of businesses and entities punishing Russia beyond the scope of sanctions. The European Champions League Soccer finals moved to Paris from Saint Petersburg. Formula One canceled the 2022 Russian Grand Prix. And Delta has suspended its partnership with Russia's Aeroflot. Are these moves mostly symbolic in further condemning Putin's actions, or do they have further real implications to the Russian economy?

DJ PETERSON: This is huge. I think it is quite remarkable that we've seen the business community move so fundamentally on key investments that they have made on Russia. If you look at BP abandoning its 20% stake in Rosneft, BP being by far one of the largest investors in Russia, suddenly walking away at a time when global oil prices are so high. Even the Delta Air Lines example, I think, is very significant. And the fact that this is a key tie, a business trade tie for business leaders to travel back and forth.

What you're seeing across the board-- and it's taking a few days-- but you're seeing both very firm statements coming out of the business community, also the investor community, and then you're seeing very big commitments to pull back from Russia. And Russia is not going to recover very quickly from this. However, the situation changes on the ground. This is significant.

EMILY MCCORMICK: And I'm also wondering if you have any thoughts on how China fits into all this. Of course, Xi Jinping has said he wants Russia and Ukraine to resolve this conflict diplomatically. But China still hasn't outwardly condemned Russia's actions and also abstained from voting on a UN Security Council resolution condemning the Russian invasion of Ukraine. What do you make of this posturing by China and how it fits into the country's relationship with Russia and with the West?

DJ PETERSON: This is a great question, and this is what we need to be watching very closely in the next few days. Obviously, as you noted, Beijing threw its lot in with Russia on Ukraine. And now Beijing is the lender of last resort, is the trader of last resort with Russia. So, in many ways, China is getting a great financial and economic deal with Russia right now.

But the political fallout in Russia, the potential for political instability in this entire region is also something that China does not want. And China overall, for all its-- for many years, has talked about political stability and non-interference. And this is obviously a hallmark example of interference in another country's affairs. So China is walking a very difficult diplomatic position. But also, if things continue to go south in Russia, China doesn't want a basket case as a partner. And you might see some modification of its position in the coming days. It'll be very important to watch.