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How Sanctions Strangle The Russian Economy

Russian leader Vladimir Putin may downplay the impact of Western sanctions from his Kremlin bunker, but there’s no doubt the measures are piling on the pressure.

The West’s impression of Putin’s government is yes-men surround him in an echo chamber of his own making where all he hears is approval of his announcements.

The world feared Putin and his cronies, but the might of Russia is smoke and mirrors hiding the truth.

Putin sits alone in his onion-domed capital like the Wizard of Oz behind the curtain, pretending he is all-powerful. Yet, the conflict in Ukraine has exposed the weaknesses of the Russian military and economy.

The world has moved on and Russia risks becoming more isolated from the global community – and crippling sanctions will only make the time he has left in charge more difficult.

Unprecedented Global Response

Although the Russian invasion of Ukraine only started a month ago, the global response and unprecedented sanctions against Russia have rocked world economies.

We’ve all witnessed how quickly grand cities are reduced to rubble and seen protests, support networks and fundraising initiatives to try and support Ukrainian people living through a truly horrific time.

There is much uncertainty and speculation about how long the violence might continue and the eventual outcome.

Still, we know that the fallout will extend far beyond Ukrainian borders.

Why Sanction Russia?

There’s a delicate balance where western nations are trying to curtail the Russian invasion and make their support for Ukraine clear without tipping over the edge into joining the fighting.

Any NATO involvement could trigger conflict on a global scale, so the treaty organisation has responded with calls for the assault to cease, humanitarian aid and financial assistance in the millions.

So, what are the sanctions for – and what are they intended to do?

Sanctions come in a wide range of forms, but the principle is to:

  • Restrict Russian access to credit, investment and international finance.
  • Impact economic growth to destabilise domestic activities.
  • Prevent Russia from trading through imports or exports.

Targeted sanctions against individuals involve seizing assets, freezing accounts, or removing travel freedoms – the aim is to put political pressure on Putin to withdraw from Ukraine as the effects begin to dampen his support network.

The effectiveness of those sanctions and the real-world difference they might make are far from guaranteed.

Financial Sanctions Imposed On Russia

The big news is Russia’s banks are stripped from the SWIFT international payment system.

  • EU traders or banks cannot deal with the central bank in any securities or instruments. The UK, USA, Canada and EU are implementing measures to stop the central bank from accessing international reserves.
  • Seven Russian banks have had access to SWIFT revoked, which means they cannot operate with overseas clients or partner organisations.
  • The US has cut Sberbank, the largest bank in Russia and its 25 subsidiaries from the American financial system, which makes up almost 30 per cent of Russian banking.
  • The US, Canada, Japan, Switzerland, the European Union and the UK blocked trading with Russian banks. VTB Bank had assets frozen in the US, UK and Canada.

We’ve also seen multiple individuals targeted, including Putin, Foreign Minister Sergei Lavrov and a long list of oligarchs and well-known Russian business people linked to the regime.

The UK government intends to levy freezes on assets over £50,000 held in any British bank account by a Russian citizen.

Are Sanctions Biting In Russia?

Economic and financial sanctions take a while to bite.

There are early signs that they may be the catalyst behind financial chaos in Russia – over $630 billion of foreign-exchange reserves will be frozen.

Spikes in energy prices and market fluctuations have already caused the ruble to collapse, bond default risks to soar, and the Moscow stock exchange to close.

This level of economic warfare may be subtler than all-out violence, but the ramifications are no less severe.

However, thinking fine-tuning sanctions will lessen the pain on Western economies is a fallacy.

While the US and UK aren’t wholly reliant on Russian crude oil, it makes up a massive 27 per cent of EU supply and 45 per cent of oil. Now the US has stepped in with increased supplies to wean Europe off Russian imports.

Ultimately, the result will see energy costs continue to rise, and will shave a few GDP growth percentage points from economies, particularly those closest to the conflict.

Rough estimates are that the war will lop between 0.25 and 0.5 per cent from next year’s GDP economic growth projected for the USA, with a 0.5 – 1.0 per cent dip in European economic recovery.

Trade Sanctions Imposed On Russia

Although financial and trade sanctions overlap, several new restrictions directly relate to supply and export relationships crossing Russian borders:

  • Aeroflot, the Russian state airline, is banned from EU and UK airspace.
  • Russian registered ships are banned from travelling to or through a UK port.
  • Products with military uses, including civilian goods, are subject to trade sanctions.
  • Critical industry goods are restricted, such as computers, sensors, lasers, telecoms equipment, and any products potentially used in information security or aviation.

Import and export sanctions are designed to curb Russian finances further, meaning it can’t sell to international markets, finance the regime, or invest in military action and equipment.

The impact for the rest of the world will likely mean that the costs of some foods rise.

Russia and Ukraine are huge wheat producers, providing around 29 per cent of the world’s supply – the price of grain has skyrocketed more than 77 per cent since the invasion began.

When the dust settles, countries like Mexico and Turkey – which haven’t imposed sanctions – will get a boost in increased trade and perhaps act as a third party managing supplies of Russian produce to the rest of the world.

Russian Sanctions On Travel And Shipping

The next slew of sanctions related to travel, affecting individuals and companies.

Aeroflot is not the only Russian carrier banned from entering EU or UK space, but further sanctions mean that:

  • Russian companies in aviation or space industries cannot use insurance or reinsurance services directly or indirectly based in the UK.
  • The pre-existing scheme whereby Russian citizens could participate in citizenship for investment initiatives has been withdrawn.
  • Posting personal belongings other than documents to Russia is not allowed.

These restrictions will impact everyday Russian citizens and businesses more than the government.

Still, the objective is to exert pressure on the economy and remove any processes whereby Russia could use international trade or movement to support its invasion.

Longer-term, we can’t know whether a resolution will come through peace talks, negotiation, NATO involvement or Putin’s government installing a dummy leadership in Ukraine – but sanctions alone may not be enough.

But, when the fighting stops, it’s anyone’s guess what state the Russian economy will be in and how dramatic the ramifications will be for the rest of the world.

How Sanctions Strangle The Russian Economy FAQ

Will sanctions stop war in Ukraine?

Sanctions are a non-violent global strategy to limit the Russian central bank from accessing foreign reserves and removing Russia from international payment systems.

In a short time, this has devastated the value of the ruble (which dropped 30 per cent in one day).

Normally in this sort of scenario, the central bank would tap into foreign reserves to purchase more currency, paying in another denomination to stabilise the economy. Sanctions mean this isn’t an option for Russia.

A collapsing currency and unstable banking system hinder Russia’s capacity to finance the war, with evident consequences for businesses and citizens.

What happens if China joins the sanctions?

China and Russia are long-standing allies, primarily because of their shared dislike of the west.

So, China going against Russia and siding with western states would be a remarkable sea change in world politics.

Currently, China hasn’t participated in sanctions, but has made some surprising moves, such as abstaining from a vote at the UN Security Council to condemn Russia’s actions.

Interestingly, the sanctions might do China a favour, as the yuan becomes an alternative global reserve currency to the US dollar.

Which sanctions have the most impact?

Most advisors think that immobilising Russian overseas assets is the best approach. Russia has a huge chunk of reserves in dollars, and being unable to access the money is a serious blow.

Financial sanctions mean that the Russian central bank has no ability or control to protect the value of its own currency.

Why is the SWIFT sanction such a big deal?

SWIFT is essentially a messaging system that banks use – so it doesn’t mean Russian banks can’t operate.

However, combining a SWIFT sanction and central bank restrictions has a crippling effect.

Russian banks can’t access dollar assets, nor can they process payments with foreign banks..

How will sanctions affect the worldwide economy?

At this stage, it’s tough to say what may happen, but risks will probably increase across nearly all asset classes.

Investors will have less risk appetite, which means businesses may find it harder to secure capital.

Oil and gas prices will almost certainly keep climbing, and there is the chance that inflation will keep creeping up and lead to stalls in economic growth and the recovery from the pandemic.

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