The West Comes Together to Enact Harsher Economic Sanctions on Russia

After the initial measures taken by the West to prevent Russia’s invasion of Ukraine failed, the goal of new economic sanctions has moved from deterrence to punishment.

Western backlash to Russia’s invasion of Ukraine has been uniformly severe. Some significant new economic sanctions were implemented on February 24 by the US and the European Union, including:

• measures by the US to isolate from the global financial system majority state-owned banks VTB and Sberbank, which account for nearly 80% of all banking assets in Russia
• US- and European Union-implemented export controls on high-tech products used in defense, aerospace, and maritime industries
• the freezing of Russian assets in the EU and the restriction of Russian access to EU’s capital and financial markets

Over the weekend, the severity of the sanctions was ratcheted up significantly.  Among the most impactful of the new measures were:

• banning Russia from SWIFT system access: Russia has now been cut off (as Iran was in 2018) from access to the SWIFT financial messaging system that facilitates rapid and secure cross-border payments. While Russia has its own internal alternative to SWIFT, it is far less sophisticated, and thus an exclusion from SWIFT will impose massive costs on the country, particularly in the short term. Initial holdouts from Germany, Italy, and Hungary, which in part wished to keep SWIFT expulsion as a deterrence against further Russian transgressions (with some feeling that extensive business ties between banks in these countries and Russia also fueled reluctance), softened their stances over the weekend in order to support harsher sanctions.
• US sanctions on Russia’s central bank: The Biden administration moved to prevent Americans from doing any business with the Russian central bank and to freeze its assets in the US, which, as of Monday morning, was helping to send Russian markets into meltdown  

These measures will substantially impact both the Russian and global economies.  Metal commodity prices will be especially impacted in the areas in which Russia is a major player, discussed in an earlier Freedonia Impact Tracker.  Additionally, industries that rely heavily on exports to Russia will be affected by a short-term free fall in Russian consumer purchasing power, as the value of the ruble had declined by about a quarter as of Monday morning relative to its Friday level.

Given the substantial escalation of sanctions on Russia, will its energy sector be next? Oil and gas account for 60% of Russia’s exports and 36% of its budget revenues, and restrictions on the import of these products in the West would be the clearest way to strike a devastating financial blow to Russia. However, it is unlikely to be targeted in the near term. A big reason for this is fear of driving oil and gas prices higher. Surging energy prices were a key concern for consumers before the invasion of Ukraine, and already, oil prices have jumped over $100 a barrel as many fear the conflict may lead to a supply disruption. Punishing Russia’s energy sector would push prices even higher, which would be unpopular to both to Western consumers and governments. Additionally, Europe – which currently relies on Russia for 40% of gas consumption – would not be able to entirely shift away from Russia and toward smaller supplier countries in the short term even if it wanted to.  However, other steps have been taken that may harm the Russian energy industry in the long-run, such as Germany mulling an extension of the lifespan of its nuclear power plants, which would reduce its dependence on Russian gas.

Freedonia analysts continue to watch changes in geopolitical positioning – including any additional sanctions that might accompany this crisis – as well as related effects on the supply of key industries and currency fluctuations.

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