Ukraine-Russia Crisis: An overview of the sanctions imposed on Russia.
Hello reader. In this article, I will try to share the few insights that I have gained about the economic sanctions imposed on Russia, the impact they have had on the Russian economy and the world economy at large, and what Russia’s response has been so far.
“A nation that is boycotted is a nation that is in sight of surrender. Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. It is a terrible remedy. It does not cost a life outside the nation boycotted, but it brings a pressure upon the nation which, in my judgment, no modern nation could resist.”-Woodrow Wilson, Ex-President of the United States of America.
An overview of the sanctions/trade restrictions:
The major economies/international trade organisations have imposed multiple sanctions, in opposition to Russia’s invasion of Ukraine. The Central Banks in the West, the UK, and New Zealand have frozen Russia’s sovereign assets, the USA, Japan and the EU have seized the assets of Russian oligarchs, and SWIFT(scroll to the end to know what SWIFT means) bans have been imposed on 7 Russian banks.
Additionally, MNCs like Starbucks, Ikea, General Motors, Coca Cola, BMW, Ford, and McDonald’s, have announced their withdrawal from the Russian market, and so have Western banks and advisory firms, like J.P.Morgan, Goldman Sachs, and McKinsey. Visa and Mastercard have terminated Russia issued cards, Apple, Xiaomi, Samsung, Google, and Facebook have ceased their operations in the country, and oil majors like Shell, Exxon Mobil and BP, are exiting Russia and unwinding all investments there. Germany has halted the certification of the Nord Stream 2 Gas Pipeline which would have allowed Russia’s Gazprom to almost double its natural gas supplying capacity to Europe. The US has banned all Russian oil and gas imports, the UK will phase out Russian oil by end of 2022 and the EU will switch to alternative supplies, and make Europe, independent of Russian energy, well before 2030. The Russian State-owned media has been banned in several countries.
As recent as the day when I am writing this article, the UK government has imposed a ban on the export of high-end luxury goods to Russia, and has slapped new import tariffs on hundreds of key products, worth around £900 million. The new tariffs represent a 35 percentage point hike on the prevailing rates. Also, the UK is in the process to deny the Most Favoured Nation status to Belarus and Russia which will further deprive both the nations from enjoying the key benefits of WTO membership.
The impact on the Russian economy:
To begin with, the sanctions imposed currently, are far more stringent than those imposed on any country, since World War I. The Russian stock markets have remained closed since 25th February 2022 and the rouble has lost nearly 50% of its value against the dollar, since the start of the year, triggered by the Russian invasion of Ukraine. Fitch, Moody’s, and S&P have given “junk” status to the Russian bonds and have warned that the country is “careening on the brink of default”. Around $600 billion worth of foreign reserves of the Russian economy are under threat owing to its assets being frozen by foreign Central Banks.
Focussing on oil and energy, Russia is the world’s third largest oil producer and the second-largest exporter, supplying approximately 7–8 million barrels of crude oil, on a daily basis. Moscow relies on hydrocarbons for 60% of its national budget, and fulfills around a quarter, and 40% of Europe’s oil and gas requirements, respectively. Till now, only US has hinted at a complete ban of Russian crude oil and gas imports, however, as of 2021, the US imported only 8% of its oil and petroleum products from Russia. Thus, a US ban on Russian oil and energy imports may not create a huge dent on Russia, which can sell off the oil to India/China, albeit at a steep discount. Russia can be adversely affected if Europe imposes a complete ban on Russian oil and energy, with immediate effect. This seems elusive as of now, since Germany, Europe’s largest consumer of Russian energy, has clearly mentioned that is not in favour of a ban.
When it comes to imports, while the Russian elites can do without the luxurious labels, reliance on Western Pharmaceuticals is a cause for concern. Also, about two-thirds of Russia’s imports are capital goods, intermediate goods, and raw materials, and a restriction on their import can cripple Russia’s economy. Already, a cut off of spare parts and servicing has shown the potential to adversely affect the domestic aviation industry of Russia.
The impact on the world economy:
The sanctions have adversely affected the low-income countries, who are yet to recover from the pandemic-induced income losses, by driving up the basic utility prices.
The global oil prices have breached records and have reached to a 14 year high of $140/barrel, on 7th March 2022. Although, according to experts, much of this rise is attributed to self-sanctioning by buyers. The US is has yet not imposed any sanctions on the Russian oil and gas exports as it would have a drastic impact on the oil prices in US as well as around the world. Russia earned $119 billion from oil and gas sales in the past year, at a time when the price averaged around 69–70 dollars a barrel. In the current situation, if the US does intend to sanction Russian energy resources, it could potentially backfire, creating an oil-crisis in the West and driving up prices globally. Countries like Venezuela and Iran have stand a chance of being welcomed back, mostly to fill the void created by the restrictions on Russia.
Countries like Mexico and Turkey, which have not imposed any sanctions on Russia are likely to benefit in the current scenario, by purchasing the Russian commodities and then reselling them.
Russia and Ukraine are global breadbaskets, accounting for 29% of the global wheat exports. Thus, higher food costs are likely in the near future. The growth of US is predicted to decrease by 0.25%–0.5%, and that of Europe by 0.5%-1%, in the next 12–18 months.
Russia’s response so far:
From banning the exports of more than 200 products until the end of 2022, to doubling the key interest rate to 20%, Russia has also blocked interest payments on government bonds held by foreign investors, banned Russian firms from paying overseas shareholders, and put a complete restriction on foreign investors when it comes to selling bonds and stocks held in the Russian markets. It has also placed sanctions on top US officials- President, Joe Biden, Secretary of State, Anthony Blinken and Defence Secretary, Lloyd Austin, to name a few. It has also threatened to shut off gas supplies, were sanctions to be imposed on oil.
It is time to wrap up this article with some food for thought. Since their origin in the twentieth century, more often than not, sanctions have failed to achieve their desired objective, be it to squeeze regimes, end a war, stop genocides, or undermine oppression. Prime examples are Iraq, Iran, North Korea, Cuba, Syria, Venezuela, and even Russia for that matter. In Russia’s case especially, it had been subject to sanctions in the past also, when it had annexed Crimea in 2014. The sanctions had not proved effective, then, as Russia had found workarounds. So, are the current regime of sanctions on Russia actually a means to an end, or simply a tool being used by nations to circumvent getting militarily involved in the Ukraine- Russia crisis?
The next article, the last one to focus on the Ukraine-Russia crisis, will revolve around the role that China- Russia’s “no-limits” partner, can play to help Russia amid the sanctions.
Some facts which I came across while writing this article-
- SWIFT- Society for Worldwide Interbank Financial Telecommunications, is a global network that allows banks to communicate messages relating to money transfer. It has 11000 member banks, and is spread over 200 countries.
- Russia is the third largest producer of crude oil in the world. The US and Saudi Arabia are the first two, respectively.
- Renminbi is the official currency of China and yuan is a unit of that currency.
- The US Dollar, the Euro, and the Japanese Yen are the three most traded currencies globally, in that order.