Russian leader Vladimir Putin may play down the impact of Western sanctions from his Kremlin bunker, but there is no doubt that the measures are increasing the pressure.

The impression the West has of Putin’s government is that supporters surround him in an echo chamber of his own making where all he hears is approval of his announcements.

The world feared Putin and his cronies, but Russia’s power is only smoke and mirrors hiding the truth.

Putin sits alone in his onion-domed capital like the Wizard of Oz behind the curtain, pretending he is all-powerful. Yet the conflict in Ukraine has exposed the weaknesses of the Russian military and economy.

The world has moved on and Russia risks becoming more isolated from the global community – and crippling sanctions will only make it harder for her to have time to lead.

Unprecedented global response

Although the Russian invasion of Ukraine only began a month ago, the global response and unprecedented sanctions against Russia have shaken global economies.

We have all witnessed how quickly major cities are reduced to rubble and seen protests, support networks and fundraising initiatives to try and support Ukrainians who are going through a truly horrific time.

There is a lot of uncertainty and speculation about the duration of the violence and the final outcome.

Yet we know that the fallout will extend far beyond Ukraine’s borders.

Why sanction Russia?

There is a delicate balance where Western nations attempt to curb the Russian invasion and show support for Ukraine without tipping over to join the fighting.

Any involvement by NATO could spark a conflict on a global scale, so the treaty organization has responded with calls for a halt to the assault, humanitarian aid and financial assistance in the millions.

So what are sanctions for – and what are they for?

Sanctions come in a wide range of forms, but the principle is to:

  • Restrict Russia’s access to credit, investment and international finance.
  • Impact economic growth to destabilize domestic activities.
  • Prevent Russia from trading by import or export.

Targeted sanctions against individuals involve seizing assets, freezing accounts or removing freedom to travel – the aim is to politically pressure Putin to withdraw from Ukraine as the effects begin to wear off. weaken their support network.

The effectiveness of these sanctions and the real difference they could make are far from guaranteed.

Financial sanctions imposed on Russia

The big news is that Russian banks are being removed from the SWIFT international payment system.

  • EU traders or banks cannot transact with the central bank for securities or instruments. The UK, US, Canada and EU are implementing measures to prevent the central bank from accessing international reserves.
  • Seven Russian banks have had access to SWIFT removed, meaning they cannot operate with foreign customers or partner organizations.
  • The US cut Sberbank, Russia’s largest bank and its 25 subsidiaries from the US financial system, which accounts for almost 30% of Russia’s banking sector.
  • The United States, Canada, Japan, Switzerland, the European Union and the United Kingdom have blocked trade with Russian banks. VTB Bank had assets frozen in the US, UK and Canada.

We also saw several people targeted, including Putin, Foreign Minister Sergei Lavrov and a long list of well-known Russian oligarchs and businessmen linked to the regime.

The UK government intends to freeze assets over £50,000 held in any UK bank account by a Russian citizen.

Do sanctions bite in Russia?

Economic and financial sanctions take time to bite.

There are warning signs that they could be the catalyst for financial chaos in Russia – more than $630 billion in foreign exchange reserves will be frozen.

Energy price spikes and market swings have already caused the ruble to collapse, bond default risks to soar and the Moscow stock exchange to shut down.

This level of economic warfare may be more subtle than outright violence, but the ramifications are no less severe.

However, to think that adjusting sanctions will ease the pain of Western economies is a mistake.

While the US and UK are not entirely dependent on Russian crude oil, it accounts for 27% of EU supply and 45% of oil. Now the United States has stepped in with increased supplies to wean Europe off Russian imports.

Ultimately, the outcome will see energy costs continue to rise and reduce GDP growth by a few percentage points in economies, especially those closest to the conflict.

According to rough estimates, the war will decline by 0.25 to 0.5% compared to the economic growth of GDP expected for the next year in the United States, with a decline of 0.5 to 1.0% in the European economic recovery.

Trade sanctions imposed on Russia

Although financial and trade sanctions overlap, several new restrictions relate directly to supply and export relationships crossing Russian borders:

  • Aeroflot, the Russian state airline, is banned from EU and UK airspace.
  • Vessels registered in Russia are prohibited from traveling to or through a UK port.
  • Products for military use, including civilian goods, are subject to trade sanctions.
  • Critical industrial goods are limited, such as computers, sensors, lasers, telecommunications equipment and any products potentially used in information security or aviation.

Import and export sanctions are designed to further curb Russian finances, meaning it cannot sell in international markets, fund the regime or invest in military stocks and equipment.

The impact for the rest of the world will likely mean rising costs for some foods.

Russia and Ukraine are huge producers of wheat, providing around 29% of the world’s supply – grain prices have skyrocketed more than 77% since the start of the invasion.

When the dust settles, countries like Mexico and Turkey – which have not imposed sanctions – will benefit from increased trade and perhaps act as third parties managing the supply of Russian products to the rest of the world. world.

Russian sanctions on travel and expeditions

The next round of travel-related sanctions, affecting individuals and businesses.

Aeroflot is not the only Russian carrier banned from entering EU or UK space, but other sanctions mean that:

  • Russian companies in the aviation or space sectors cannot use insurance or reinsurance services directly or indirectly based in the United Kingdom.
  • The pre-existing system allowing Russian citizens to participate in citizenship for investment initiatives has been removed.
  • Sending personal effects other than documents to Russia is not allowed.

These restrictions will have more impact on everyday Russian citizens and businesses than on the government.

Yet the goal is to put pressure on the economy and suppress any process by which Russia could use international trade or movement to support its invasion.

In the longer term, we cannot know whether a resolution will come through peace talks, negotiations, NATO involvement or the installation of a shadow government in Ukraine by the Putin government – but sanctions alone might not be enough.

But, when the fighting stops, anyone can guess what state the Russian economy will be in and how dramatic the ramifications will be for the rest of the world.

How sanctions are strangling the Russian economy FAQ

Will sanctions stop the war in Ukraine?

The sanctions are a non-violent global strategy aimed at preventing Russia’s central bank from accessing foreign exchange reserves and removing Russia from international payment systems.

In a short time, this devastated the value of the ruble (which fell by 30% in one day).

Normally, in this type of scenario, the central bank would dip into foreign exchange reserves to buy more currency, paying in another denomination to stabilize the economy. Sanctions mean this is not an option for Russia.

A collapsing currency and an unstable banking system hamper Russia’s ability to finance the war, with obvious consequences for businesses and citizens.

What if China joins the sanctions?

China and Russia have been longtime allies, mainly because of their shared dislike of the West.

Thus, China going against Russia and siding with Western states would be a remarkable sea change in world politics.

Currently, China has not participated in sanctions, but has taken surprising steps, such as abstaining from a vote in the UN Security Council to condemn Russia’s actions.

Interestingly, the sanctions could do China a favor as the yuan becomes an alternative global reserve currency to the US dollar.

Which sanctions have the most impact?

Most advisers believe that immobilizing Russian assets abroad is the best approach. Russia has a huge amount of dollar reserves, and not having access to the money is a big blow.

The financial sanctions mean that the Russian central bank has no ability or control to protect the value of its own currency.

Why is the SWIFT sanction so important?

SWIFT is basically a messaging system used by banks – so that doesn’t mean Russian banks can’t work.

However, combining a SWIFT sanction with central bank restrictions has a chilling effect.

Russian banks cannot access dollar assets or process payments with foreign banks.

How will the sanctions affect the global economy?

At this point, it’s hard to say what may happen, but the risks will likely increase in almost all asset classes.

Investors will have less appetite for risk, which means companies may find it more difficult to raise capital.

Oil and gas prices will almost certainly continue to climb, and it is possible that inflation will continue to climb and lead to slower economic growth and post-pandemic recovery.

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