Following the Russian military force intervention in Ukraine, The United States government and Europe moved swiftly and imposed several sanctions on Russia. Beyond everybody expectations, these sanctions have significantly affected the Russian economy at a fast rate. The sanctions banned Russian firms and banks from accessing the international capital markets. The sharp decrease in oil price has played a major role in weakening the Russian economy. For the Russian budget to balance, a single barrel of oil must cost about $100 (now a barrel is costing approximately $55). The combination of reduced oil prices and several sanctions has slowly pushed Russian into a major financial crisis similar to one that occurred in 1998.
A shaky economy
During the financial crisis of 1998, Russia depleted its reserves of hard currency and defaulted on its debt, triggering a crisis in the global financial system. Today, after the imposition of the sanctions, the hard currency reserves have dropped by over 50 percent, inflation is skyrocketing, and the high level of interest rates are driving the Russian economy into crisis rapidly. The major advantage that Russia has this is time is that contrary to 1998 it has significant foreign currency reserves. Russia has been forced to rebound 30 percent of its foreign currency reserves to balance its budget.
The nation is expected to start paying its external debt of over $120 billion in 2015. However, contrary to 1998, Russia had borrowed heavily in the private industry. According to George Soros, if the sanctions imposed on Russia are not balanced, the country could end up in default, which in turn will shake the stability of the global financial system.
Rebalancing of policies
George Soros is calling for a revision of the EU’s current policies towards Ukraine and Russia. He is recommending a two-split approach, which balances sanctions imposed on Russia and focuses mostly on assisting Ukraine. Soros believes that the rebalancing should take effect at the beginning of 2015 specifically the first quarter.
George Soros – The New York Times
Why the sanctions need to be revised
Soros termed sanctions as a necessary evil used by both the US and EU to resist Russian aggression, without necessary going to war with the country. The sanctions are evil since they hurt the nation on which they are enforced as well as the nations that enforce them. The effects are bigger than most people expected. For instance, Russia is on its way to a huge financial crisis, which will weaken the Euro and affect the global financial system.
According to Soros, the outcome of assisting Ukraine should be positive. By helping Ukraine to strengthen its defense, Europe will be defending itself indirectly. Financial support to Ukraine will enable the nation to stabilize its economy and avail an opportunity for European countries to invest in it.Instead, they are seeing Ukraine has another nation that requires financial assistance. George Soros is a prominent writer, philanthropist, and investor. His articles and essays are published in popular newspapers and magazines worldwide.
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