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Economic pain keeps on coming for Russia as invasion rages

The news for Russia’s economy continued to get worse on Thursday, as international businesses and foreign governments accelerated their steps to disengage from Moscow’s war.

Fitch and Moody’s were the latest credit rating agencies to downgrade Russia to so-called junk status on Wednesday evening, after S&P took a similar step last week.

“The severity of international sanctions in response to Russia’s military invasion of Ukraine has heightened macro-financial stability risks, represents a huge shock to Russia’s credit fundamentals and could undermine its willingness to service government debt,” Fitch said. “Developments will weaken Russia’s external and public finances, severely constrain its financing flexibility, markedly reduce trend GDP growth, and elevate domestic and geopolitical risk and uncertainty.”

Meanwhile, in a bid to halt the outflow of capital and the collapse of the ruble, the Russian central bank has imposed a 30 percent commission on foreign exchange transactions, in addition to other restrictive measures such as capital controls brought in recent days, Western media report. The central bank’s liquidity provisions to Russian lenders, which have faced massive deposit outflows, have also increased markedly, reaching a total of 7 trillion rubles Thursday morning, compared to a negative balance on February 24, the day of the invasion.

As the Moscow stock exchange remained shut Thursday, MSCI, an investment data provider, removed Russia from a global investment index on Wednesday night, calling the market “uninvestable.” That echoes a move by rival index FTSE Russell around the same time.

Amid the financial pressure, signs of opposition to the war have begun to emerge among Russia’s policy elite, with the country’s influential national direct investment fund RDIF calling for an end to the invasion on Thursday morning. “RDIF and its international partners believe that only diplomacy can end this conflict and save human lives,” it said in a statement.

Meanwhile, major corporations such as Oracle, Nike, BMW, Google, Apple, H&M, IKEA and Boeing are among the numerous global firms to announce activity suspensions or complete withdrawal from the Russian market.

“Financial interconnectedness and the high-degree globalization give economic weapons a power that they hardly had in past centuries,” said Amundi, the French asset manager, in a report Thursday that analyzed the effects of the invasion.

It also warned that the war is likely to cost Europe dearly. “We expect slower growth and higher inflation: the risk of stagflation by the end of 2022/23 is increasing,” the report said. “The Eurozone is going to pay the highest economic price, even if the crisis is short-lived.”

Hannah Brenton contributed reporting.

This article is part of POLITICO’s premium policy service: Pro Financial Services. From the eurozone, banking union, CMU, and more, our specialized journalists keep you on top of the topics driving the Financial Services policy agenda. Email [email protected] for a complimentary trial.

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