In the wake of economic sanctions imposed against Russia after their invasion of Ukraine, Chris Wongsosaputro analyses the impact on these measures on Russia's economy.
The aims of sanctions range from getting countries to de-nuclearise on one hand to encouraging a regime change on the other without going to war (their success is subject to debate). The nature of sanctions encompasses economic, diplomatic and sport amongst others.
Key sanctions against Russia
- Limiting the access to Western financial systems for some Russian government-owned entities operating in finance, energy and defence
- Prohibiting exports of selected oil and military equipment to Russia
- Central Bank of Russia (CBR): Freezing CBR assets held in EU territory (estimated to impact c.53% of Russian assets held abroad) and prohibiting its transactions with EU banks;
- SWIFT: Restricting access of Russian banks to the SWIFT payment system (the messaging system used in global payment transactions) – this measure excludes some banks such as Sberbank (Russia’s largest bank) and Gazprombank due to their role in the EU’s energy purchases with Russia;
- Asset freeze and travel ban: Applicable for 680 people and 53 companies as of 28 February 2022 including President Vladimir Putin, Foreign Minister Sergey Lavrov and others deemed enabling the Kremlin. Some Russian-owned yachts have also been seized by European governments such as France and Italy
On 15 March, the EU adopted additional sanctions on Russia prohibiting: a) luxury goods exports, b) steel imports (taking effect in three months), c) new investments in energy excluding nuclear energy and d) transactions with Russian state-owned enterprises apart from oil, gas and some commodities (e.g. aluminium). Furthermore, European credit rating firms are prohibited from serving Russian clients, hindering their ability to secure funding.
In addition, the US has also introduced other economic sanctions including cutting off access to the American banking system for Sberbank as well as freezing the assets and banning financial transactions with second-biggest bank VTB. The US also prohibited the import of Russian energy sources, seafood, vodka and diamonds as well as exports of US oil refinery equipment and military technology (both also implemented by the EU with the latter having additional export bans on aviation and space technology and goods).
Similarly, the UK has also implemented similar asset freezes, travel bans and trading restrictions including prohibiting Russian vessels from UK harbours. The most recent individuals sanctioned include Chelsea FC owner Roman Abramovich, En+ Group shareholder Oleg Deripaska and 386 Duma members. On 15 March, the UK introduced a 35 percentage point tariff rise on Russian goods including steel and vodka. Similar to the US, the UK seeks to terminate Russian oil imports by end-2022.
The UK Parliament has also passed the Economic Crime Bill which entails creating a register of ‘beneficial owners’ of property or land in the UK, tightening the reporting of ‘unexplained’ wealth and easing the process for the Cabinet to sanction individuals.
Other countries including Canada, Australia, Japan, South Korea, New Zealand and Singapore (the latter doing so only on rare occasions) have imposed similar sanctions on Russia. The G7 and EU nations have also cancelled Russia’s status as a ‘most-favoured nation’, in effect inflicting higher tariffs on Russian goods.
In response, the Kremlin retaliated by prohibiting exports of more than 200 products such as telco, medical, auto, electrical and farming appliances to 48 nations including the US and EU until December 2022 at the earliest.
Impacts of the economic sanctions and measures on Russia
The sanctions have had widespread implications on the Russian economy with the clearest being the expected GDP decline of 35% in Q2 2022 and 7% in 2022 according to JP Morgan analysis. In addition, the Ruble had also depreciated and become more volatile after the invasion – the GBP:RUB exchange rate on 18 March was 138 (down from a peak of 187 on 7 March) vs. 112 on 24 February pre-invasion. Therefore, the import of foreign-denominated goods into Russia has become much more expensive while benefits on the price competitiveness of Russian exports are unclear due to export bans and withdrawals of payment companies discussed below.
Figure 1: GBP:RUB exchange rates pre and post-invasion (up to 18 March)
Moreover, the Kremlin has also levied some capital controls by restricting Russian residents from transferring foreign currency to their own bank accounts overseas or settling amounts owed to non-residents in foreign currency without the prior consent of the Government Commission. Other measures include converting at least 80% of sales proceeds denominated in foreign currency into Ruble within 3 business days and prohibiting the export of foreign currency cash or financial instruments above USD10k. These measures were taken in the hope of boosting its foreign currency reserves and also propping up the Ruble by (partially) limiting a drop in its demand.
In order to further support the Ruble and ease inflation, the CBR has also more than doubled interest rates on 28 February from 9.5% to 20%. The hike will have wider ramifications on ordinary Russians including mortgage rates.
Moscow Stock Exchange has also remained closed from 25 February to 18 March at the earliest in a sign of concerns that the exchange will plunge further following a 33% plummet on 24 February. Additionally, the CBR prohibited foreigners from selling Russian securities.
Although Russia is expected to successfully pay for two interest payments denominated in USD due on 16 March, the sanctions might impact Russia’s ability to fulfil its future obligations for c.$20bn sovereign debt denominated in foreign currencies. The same risk applies for Russian corporate bonds of c.$150bn.  The IMF had suggested a default is no longer ‘improbable’, owing to Russia’s inability to access its own USD funds under sanctions. A default will ultimately increase borrowing costs and make securing funding tougher going forward.
Beyond the economy…
The consequences of the sanctions extend beyond government-led actions. Following the invasion, many Western companies have (temporarily) suspended their operations in Russia in quick succession. Their industries range from retail (e.g. McDonald’s, L’Oreal, IKEA and Zara) to professional services (e.g. Big 4 accounting firms) and technology (e.g. Samsung and Apple). Energy companies such as BP and Shell have also announced plans to dispose or suspend their investments, energy purchases and operations in Russia. The withdrawals mark a rapid reversal of Russia’s embrace of globalisation in the 1990s when Western companies such as McDonald’s started operating in the country. Whether or when they will return remains to be seen…
In particular, the withdrawals of payment companies such as Visa and Mastercard restrict the ability of Russian cardholders from using their cards or transferring money abroad and for foreign-issued cards to be used in Russia (i.e. cash-only transactions or ones involving high transaction fees with a minimum spend for both scenarios).
Another industry seeing extensive impacts is the airline industry after the suspension of airworthiness certificates being issued for Russian planes by Bermuda and Ireland as well as Boeing and Airbus exits. The latter move implies that both companies can no longer supply aircraft parts to Russian planes. In turn, Russia is looking to secure the relevant parts from Turkey and India following China’s refusal to do so. The fate of foreign-owned planes in Russia remains uncertain too with the possibility that Russia will retain them despite the lessors’ requests for their return, in line with a sanction deadline of 28 March.
Based on the above, it is clear sanctions have extensive repercussions primarily on ordinary people in Russia. The West has imposed sanctions in the hope of getting President Putin to abandon the invasion. Whether this aim succeeds remains to be seen...
Besides the President and his advisers, key determinants within Russia for the course of the war are the reactions of the elites and ordinary people who will need to consider if the current regime still fulfils their interests. Many in the latter group are not aware of the realities and impacts of the war because of the tight media controls and a new ‘fake’ news law involving the Russian military.
(*) Note: While every effort has been made to keep the article accurate and up-to-date until the date of publication, there might be errors and omissions due to the fast-moving nature of the events. As such, please perform further research for the latest developments.
Chris is a former Co-Chair of the Young Fabians Economy & Finance Network who maintains a keen interest on geopolitics. He currently works as Strategy Consultant. Chris is writing this article in his personal capacity and all views expressed are his own.
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