What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing. We are now in the second week of putin's invasion of ukraine. It has not gone as smoothly as planned for him. Additionally, western nations have levied severe sanctions against the country, which people think will be devastating to the russian economy, but putin has not been standing idly by he's known for a long time that the west could use sanctions against him.

For the past 10 years he's been pursuing his so-called fortress russia strategy, which aims to make their economy self-sufficient and insulated from the west. It doesn't look like investors have much confidence in fortress russia. The erus russia etf, fell by more than 80 before its trading was suspended. This past friday, their currency is in free fall and many economists are predicting a great depression level disaster.

Even some people within russia share this bleak outlook. Recently, a russian financial news channel interviewed a local economist and stock market expert named alex buttmanoff. He took out a bottle on live air and drank a toast to the death of the russian stock market. He also said that his career as a stock market analyst is over and he'll pursue a new career as a mall santa claus.

The moscow stock exchange has been halted since february 25th, even when it finally opens prices could easily take more than 50 percent. Given how much the er us etf has fallen in this video, we'll look at whether putin's fortress russia strategy will work or whether alex but minoth, is correct about the death of the russian stock market and economy to understand how devastating the sanctions will be. We must first understand the current composition of the russian economy. Russia's economy is dominated by the oil and gas industries.

They export oil and gas to other countries and in return, import finished products like machinery, vehicles and consumer products. As you can see from this chart, more than half of russia's total exports are within the energy sector, including oil, natural gas and coal other than energy. There are also big exporters of grains, agricultural fertilizers and various metals. Their trade with the rest of the world has allowed them to specialize.

They spend almost all of their resources. Getting good at extracting oil and natural gas and they've become experts at that they're comparatively bad. At manufacturing, high-tech products like electronics and semiconductors. They figure that it's better to just import these goods from other countries using their oil money, instead of figuring out how to build them domestically.

Over the past 10 years, russia has exported more than imports every single year when oil prices are high, their trade surplus can reach up to 200 billion dollars or roughly 15 of their gdp. When you run large trade surpluses, you end up building massive stockpiles of foreign currencies, which can be very valuable. In fact, this was a key part of putin's fortress russia strategy. By 2020, the russian central bank had 600 billion dollars of foreign currency and gold reserves.

That's 20 fold greater than the 36 billion dollars they had at the turn of the millennium. The entire idea of the fortress russia strategy is to build up so much foreign currency reserves that they can withstand any sanctions the west decides to throw at them. The main fear about sanctions is that they will reduce the ability of western companies to import russian products or invest in russian financial assets. This would cause a depreciation of the ruble, making it more expensive for russians to import foreign goods and thereby causing inflation to rise.

They want to avoid a situation like the 1998 russian sovereign debt crisis at all costs, as this caused a financial crisis and painful recession. If sanctions ever cause a run on the ruble, the central bank will be able to use its 600 billion dollars of foreign currency reserves to buy rubles and support its valuation. You can almost think of it like a company having a lot of cash on hand, so they can buy back their own stock if it starts to crash. The idea is that this will prevent the ruble from falling too much.

Another important pillar of fortress russia was increasing their political and economic ties with china. China is the world's largest importer of energy and second largest economy in the world. Even if russia can't trade with the rest putin figured that trade with china should be enough to at least keep the country afloat. In 2019, russia finished its massive 55 billion dollar power of siberia pipeline, which gazprom now uses to ship hundreds of billions of dollars worth of natural gas to china.

After meeting with president xi at the recent beijing olympics, putin signed a new 30-year deal with china to build another massive pipeline and further boost his chinese exports. In total, they announced 120 billion dollars of new oil and gas deals at the olympics. Also, putin waited until after the olympics ended to start his invasion of ukraine likely at the behest of xi. Putin's fortress russia plan was meticulously planned and quite impressive.

He had more than enough foreign currency reserves to defend the ruble's value in the short term and in the medium to long term, he could make up for the lost trade with the west by increasing trade with china. This gave him the confidence to invade ukraine with what he thought would be near impunity, but as it would turn out, he made a fatal miscalculation about how united the western bloc would be in opposing his war. Before we go any further. I want to tell you about today's sponsor morningbrew, there's always so much going on in the world from new coveted variants, the economy and russia's military invasions to try and keep up to date.

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It only takes 15 seconds if you're interested click, the link in the description below and now back to the video within a week of russian troops. First, marching into ukraine, the us and eu imposed sanctions on various russian banks, including banning them from the swift air national payment system, while this will certainly be a blow to their financial system. This is within the realm of what they expected since fears around the invasion began, the rupal has lost roughly one-third of its value versus the us dollar. So what happened? Shouldn't russia have been able to employ its vast foreign currency resources to prevent this decline.

The russian central bank owns over 100 billion dollars worth of u.s dollars euros and british pounds, but it doesn't keep these lying around as cash as that would be extremely difficult to securely store and operationally difficult to ever spend. Instead, they have an account with the federal reserve bank of england and european central bank. This operates in a very similar way to how you would deposit your money with a local bank. If you have ten thousand dollars in your checking account it's nothing more than an iou in the bank's record book, saying that they owe you 10 000 and you can collect on it at any time.

Historically, money deposited at a foreign central bank was always considered to be safe. If they want to maintain their credibility, they will pay what they owe, but in a shocking move, the us uk, eu and canada all said that they would freeze russian deposits at their respective central banks. These four countries combined represent about 300 billion dollars or more than half of russia's foreign currency reserves. This is perhaps the most extreme of the sanctions announced so far as it is unprecedented to sanction the central bank of a major country.

It would be like waking up. One day to see that your bank account is frozen and your debit card is declined, it's hard to overstate how extreme these measures are. Russia acquired these foreign currency reserves legitimately by running trade surpluses with the eu and u.s. Now the west is essentially doing a 300 billion dollar rug, pull operation to expropriate these assets.

Even with this unprecedented asset freeze, russia still has about 300 billion dollars of physical gold, chinese, yuan and japanese yen that it can use to shore up its currency. But the us dollar is a reserve currency of the world without access to dollars, it's very difficult to support the ruble's value. That's why we've seen its value free falling recently. The declining currency is bad for two reasons.

Firstly, it causes the prices of imported goods to rise, leading to higher inflation and possible shortages. Secondly, a lot of russian companies take out loans denominated in foreign currencies. As these often carry lower interest rates with the ruble tanking, it will be harder for them to make their loan payments fears around a wave of defaults are weighing on the share prices of russian banks, including spare bank, which has already lost 97 percent of its market Value the russian central bank has gotten desperate in their attempts to keep the ruble afloat. They have now halted trading on the moscow stock exchange for more than a week to prevent foreign outflows.

They've also raised interest rates to 20 percent, which would be very painful to the economy in its own right. These sanctions were likely far more than putin expected and he already called them tantamount to a declaration of war against the russian federation. So how bad will it be for the russian economy as of 2017 about a third of their exports, came from nato and other allied countries who will likely adhere to the sanctions? The good portion of the remainder came from china and belarus, which are still friendly to russia, even with the swift ban. Russia and china both have their own payment systems, which they can use to facilitate trade without much difficulty also of the exports that they send to western countries.

About half of it is energy which is exempt from the sanctions. We could see their export volumes decline by maybe 20 under the current sanctions, which would be very bad for their currency and economic growth. One key question is whether they can make up the difference by exporting more to china. Even if china is willing to buy more imports, it will likely take years to set up the infrastructure, such as pipelines, ports and railroads, to make it happen.

The share prices of some chinese trade logistics companies have been skyrocketing recently in anticipation of increased trade with russia, for example, port operator jin, jo port, has seen his share price increase by exactly 10 every day. For the past five days, the shanghai stock exchange has circuit breakers, such that individual stocks can only increase by a maximum of 10 percent in a single day, if not for these restrictions, the stock may have doubled or even tripled. By now with that being said, the chinese stock market is known to be highly speculative. Thus far, president xi has stopped short of condemning the russian invasion, but he also has not expressed support for it, while they're not participating in the sanctions against russia.

It's unclear whether or not they will proactively try to help russia by investing in new trade infrastructure. The more difficult part to predict is whether or not the sanctions will cause a financial crisis in major banking defaults. Major banks, like spare bank, have not given any updates about how much impact the sanctions will have on them with the stock now down 97, the market is assuming the worst, but in times of panic, selling like this, the market is not always rational. It does look like putin bit off a bit more than he could chew.

Russia will almost certainly face a devalued currency in a recession over the next couple years, at least, but whether this turns into a complete collapse of the russian economy remains to be seen. Alright guys that wraps it up for this video, do you think russia can survive the sanctions? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.