Deutsche Bank: Russia’s isolation is gaining amazing momentum

By Hans Bentzien

FRANKFURT (Dow Jones) — The West’s distancing from Russia is gaining amazing momentum, according to Deutsche Bank economist Jim Reid. Reid, in his morning commentary, points to the possibility that Russia might turn off energy supplies to Europe if such an outcome appears inevitable.

“When the West imposed its massive sanctions ten days ago, one had the impression that they were moving towards the maximum of what people expected. But now one has the impression that public opinion in Europe is working towards the Russian energy supply cut off completely,” Reid writes.

However, the opinions of the individual countries are still very different, so that this will not be easy, but the pressure is growing. “Don’t be surprised if Russia takes the first step when the direction seems inevitable,” he nonetheless warns.

According to Reid, it is also remarkable that many companies are ending their involvement in Russia regardless of official politics. “In the last 24 hours, McDonald’s announced that it would temporarily close its restaurants in Russia, while Coca-Cola and Starbucks said they would also close their operations in Russia,” Reid said. In addition, Fitch downgraded Russia’s credit rating to C overnight, stating that national bankruptcy was “imminent.”

According to the analyst, Russia’s war against Ukraine could also accelerate a shift in the European policy mix away from monetary policy towards fiscal policy. “Europe spent the decade after 2010 doing everything it could to contain fiscal spending and relying on monetary policy,” notes Reid. In the post-crisis world, this was a recipe for stagnation and disinflation.

However, yesterday’s news suggested that the policy mix will be different this decade. “With more fiscal support, monetary policy can normalize to some extent, provided the European Central Bank (ECB) ensures that risk of fragmentation is managed through more targeted bond purchases, if needed,” Reid writes, adding, “Im So there are some big structural forces at work in the background.”

According to a Bloomberg report that has not yet been confirmed, the EU is considering a large bond issue to finance energy and defense investments.

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(END) Dow Jones Newswires

March 09, 2022 02:47 ET (07:47 GMT)