What are the implications of the sanctions against Russia?

The events of the past week, with Russia launching an invasion of neighbouring Ukraine, have been shocking. The situation remains volatile and the human impact grave.   

The US and its Western allies have announced a raft of sanctions on Russia over the past week. An initial set of sanctions was levied in response to President Putin’s decision to recognise the independence of two regions in Eastern Ukraine, Donetsk and Luhansk. Russia’s subsequent decision to abandon diplomacy and invade Ukraine was the trigger for another round of more punitive sanctions.

We review the sanctions announced so far and assess the impact for Russia and the world.

What do the most recent sanctions include?

An array of sanctions have been announced so far. These target politicians, officials, individuals, Russian companies, and the financial sector, among others. 

The European Commission, France, Germany, Italy, the UK, Canada, and the US have agreed to freeze the foreign assets of President Vladimir Putin, his Foreign Affairs Minister Sergei Lavrov, the rest of his Security Council, and other officials.

Other measures include limiting the sale of so-called “golden passports” to wealthy Russians, and preventing Russia's central bank from deploying its international reserves.

Several Russian banks have now been removed from the Society for Worldwide Interbank Financial Telecommunication (Swift) payment system, arguably one of the most severe sanctions to date.

Countries in Europe as well as the US were initially divided on the consequences such a ban would have for their economies. Swift is an international payments network that nearly all banks in the world use to communicate financial information when they make or receive payments.

It is the main way Russia transacts with its customers in the oil and gas sector. Removal from Swift means that those impacted Russian banks will need other ways to communicate with other banks.

Meanwhile, the EU has moved to effectively freeze a portion of Russia’s central bank reserves. This is likely to have significant negative implications for Russia’s economy.

The UK has sanctioned more than 100 Russian companies and oligarchs, with measures including asset freezes and travel bans.

Adding to a number of sanctions last week, which included financial restrictions on the biggest Russian institutions, sovereign debt trading, and a number of individuals, the US Treasury has also extended bans to more financial institutions and entities deemed critical to the Russian economy. It also took measures to restrict the export of sensitive technology to Russia and sanctioned key families close to Putin and other influential financiers.

Meanwhile, European Union leaders also agreed to a renewed set of sanctions involving Russia's financial, transport and energy sectors. Among those are a block on some financial transactions, prohibiting state-controlled companies from new equity listings on European exchanges, and a ban on the sale of certain industrial equipment, as well as aircraft and jet parts.

Despite this list of sanctions, Russian energy exports have so far been spared from major international sanctions. Canada is the only country to have announced a ban on import of Russian oil.

Other major economies such as Japan, Canada, Australia and South Korea have also imposed strict sanctions. Meanwhile, the UK and US have imposed separate sanctions against Belarus for taking part in Russia’s actions in Ukraine.

How has Russia responded?

Over the weekend, Putin has put Russia's deterrent forces, including nuclear weapons, on ‘high alert’, in response to sanctions and overall reaction from the West.

Last week, Russia banned UK airlines from landing in Russia, as well as its airspace more broadly.

In an effort to reduce the impact of sanctions on the economy, the central bank raised its policy rate from 9.5% to 20%. It has also required exporters to sell 80% of foreign currency earnings, credited from 1 January this year.

Russian citizens have also been banned from transferring money using electronics payment means provided by foreign companies.

As we write, Russia has also announced a temporary ban on Western companies exiting Russian investments.

How do sanctions impact the investment outlook?

Keith Wade, Chief Economist and Strategist

“Sanctions could easily go further. These are not as severe as the sanctions that the West has put on Iran. With Iran, any bank with operations in the US was not allowed to deal with Iran and the Americans were pretty stringent on following up on those that did break those rules.

“This is one of those situations where you don’t have to put those sanctions on, you can just signal that they can follow. Western banks are unlikely to want to be involved in supporting trade with Russia or financing activity in Russia when more severe sanctions could be around the corner.

“Russia itself is not enough of a global player outside of oil to have too much of an impact. It’s an economy about the size of Italy, and accounts for about 3% of the eurozone exports, less from the US. Russia is not a driver of global demand but we could still see dislocations and liquidity problems in financial markets.

“However, a scenario of further escalation, with fighting intensifying, could create a lot of angst in the West and great pressure for more intervention. In this scenario we think the Brent crude could reach up to $150 a barrel. We could see similar percentage increases in food prices, adding to inflationary pressure, and that would have an impact on growth.”

Nick Brown, Fund Manager, Emerging Market Debt

“Markets are pricing in escalation and retaliation from Russia. But it’s also the uncertainty over the ability to trade in Russian assets. On 28 February, we’ve had the Russian Central Bank raise interest rates to 20% and Russian companies now forced to convert 80% of their FX revenue back into rouble in an attempt to support the Rouble. Capital controls cannot be ruled out.

“The central bank is under pressure, we don’t know how much of the $630 billion in foreign-exchange reserves it has available now. Of this figure 50% are in government or government-backed securities, 25% in deposits and around about 20% of that is in gold. Whether or not they can sell the gold reserves is also a question mark.”

Alex Tedder, Head of Global and International Equities

“The sanctions being issued will certainly have significant impacts on companies doing business with Russia and the continued impacts on both commodity prices and their availability will have important implications for cost inflation, interest rates and supply chain disruption.”