Sanctions on Russia: The Impact

Recently the North Atlantic Treaty Organization (NATO) has almost reached the Russian borders through Estonia and Latvia and of late, Ukraine started expressing it’s intent to join NATO. This implies that if Ukraine joins NATO the threat of 31 countries including USA and UK will stand at the border lines of Russia. This is where President Vladimir Putin’s objection came in giving rise to war-like conditions. Mr. Putin came out open and bold and said that the NATO should reverse and go back to what it used to be in 1997. As NATO disagreed after multiple threats from Russia, on 24^th February 2022 the invasion of Ukraine happened. To this the world and the NATO could not have taken this head-on and respond with their military. Since Ukraine was not yet a part of the NATO, so these nations could not interfere with their armies; which is exactly why they went with their second option i.e. financial warfare.

Economic sanctions are often designed to hold a country’s economy and to create an indirect pressure on the government to stop the war. In this case the EU, US, UK, Canada and Japan have cut off all the key Russian banks from the international payment network called SWIFT. This network allows smooth and rapid transfer of money across borders. This is expected to delay Russian import and export payments and it is even expected to slow down the borrowing which might cause a potential loss of millions of dollars to the Russian companies.

Secondly, the EU, UK and Canada have shut off their airspace to the Russian airlines. Lastly Germany has now halted the approval of Russia’s Nord stream 2 gas pipeline. Nord stream 2 is a joint venture between Germany and Russia. It is a 1200 km pipeline that costs 11 billion dollars. America banned the sale of a wide range of goods to Russia; big companies pulled out by the dozen; and a number of countries together froze 60% of the central bank’s international reserves. The idea was to send Russia’s economy into free fall, punishing President Vladimir Putin for his aggression. In the week after the invasion, the ruble fell by more than a third against the dollar, and the share prices of many Russian companies collapsed. One of the VoxEU column argues that Russia exporting one seventh of its national income to the rest of the world is weakening, not strengthening, its war effort. Rather than ‘paying for Putin’s war’, Russia’s exports are paying for the accumulation of idle balances of foreign currency. When Putin’s war is grinding on far longer than anyone anticipated, the argument that it is paid for out of Russia’s export revenues suggests that Russia must be desperate to keep its place in the world energy market. Yet Russia itself does not seem so desperate. Rather, the Russian government has set obscure financial conditions for Western buyers, such as payment in rubles. It seems that both sides are treating Russian exports as their own weapon. While NATO threatens Russia with a stop on purchases, Russia threatens NATO with a stop on sales. The reason for Russia’s growing export surplus is that, while exports are holding up, imports from a broad sample of Russia’s trading partners are collapsing – running at half the level of before the war’s outbreak. 

Why? There are two possibilities. One is that Western sanctions on Russia’s imports are working. The other is capital flight – holders of ruble balances are converting them into Western currencies, causing the ruble exchange rate to decline sharply and pushing up import prices for Russian consumers. In the short run, it does not matter. If Russia’s trade surplus will be 15% (or more) of its GDP this year, then in terms of the real resources produced, Russia is sending the same proportion of its domestic product abroad to be utilized by foreigners.  The justification to this lies in the line expressed by Jeff Currie, “You don’t just shut down the second-largest commodity producer in the world and not expect bad things to happen.” He believes that these sanctions are not just a threat to Russia but will also have severe repercussions on the global economy itself. 

How? Russia is the 3^rd largest producer of oil worldwide accounting to over 12% of the global crude oil production. In fact in 2021 the EU alone imported 155 billion cubic meters of natural gas from Russia which is around 45% EU’s gas import and 40% of total gas consumption. What followed next was an energy mayhem that the world will remember for decades. Brent crude futures soared to a 10 year high near 120 dollars a barrel, European natural gas is about 218 dollars megawatt per hour and coal futures are surpassing 400 metric ton in Australia. Apart from this, Ukraine and Russia being the largest exporters of wheat and corn as well as essential  metals like aluminium and palladium and nickel have all closed in on an all-time high.

Now there are two schools of thought. First says that the Russian fortress will cripple due to the sanctions and eventually withdraw. Second school of thought says that the world itself cannot keep the war going because if crude oil touches the expected cost of 185 dollars per barrel it’s going to result into inflation all across the world. Just like the 70s, this will be nothing short of an economic disaster. So who stands to lose more by stopping Russia’s energy exports?

Written by - Ritika Pawar

References: 

• https://www.vox.com/policy-and-politics/2022/8/28/23325958/sanctions-impacting-russias-economy-putin
• https://www.economist.com/finance-and-economics/2022/04/02/under-unprecedented-sanctions-how-is-the-russian-economy-faring