On February 24, we woke up to news of Russia’s full-scale invasion of Ukraine. Peace talks had failed, and Russian forces were entering the southern Ukrainian city of Kherson and continuing to shell Kyiv and Kharkiv. It’s a massive human tragedy and a geopolitical catastrophe. So, why are we talking about sanctions? It’s because sanctions are equally powerful weapons to influence a nation’s behaviour and decisions. Sanctions have been the foreign policy of choice in developed economies for years.
The international outrage against the war translated into sanctions from the US, the UK, Europe and Japan, targeting the assets of Russia’s government and allies, their top officials, the Central Bank (CBR), and their largest financial institutions. Policymakers in western nations are also in the process of compiling a list of financial institutions to exclude from the SWIFT messaging system used to communicate cross border payments.
Where Eagles Won’t Dare!
There have been calls in the European Parliament and the US Congress to impose sanctions on Russia’s oil and gas exports, on which its GDP heavily relies. However, energy-resource-based sanctions give policymakers the heebie jeebies. Let’s not forget that Russia is the world’s third-largest producer of oil, and such sanctions could leave the global economy flat on its feet.
Europe for example, depends on Russia for 25% of its oil and 40% of its gas supply. The ECB estimates a 10% gas rationing will shave 0.7% off the euro-area GDP. A complete freeze on Russia’s gas supply will trim the region’s GDP by 3%.
The Impact on Russian Markets
The sanctions have already significantly weakened the Russian economy. Its stock markets have been closed for the longest period since 1998 and domestic institutions are frantically accumulating cash to support the market at its reopening. The Ruble plummeted more than 25% in response to the sanctions, causing the Central Bank of Russia (CBR) to raise interest rates from 9.5% to 20% and institute capital controls, including a ban on foreign institutions selling off Russian assets. Sanctions also threaten the central bank’s access to their sizeable foreign currency reserves.
Russia isn’t the only one suffering. Here’s a look at the financial market impact of both actual and potential sanctions.
Commodities Inflation in the Global Markets
The Russian and Ukrainian economies make up only 2% of world GDP and global trade. However, the products they trade in have a direct impact on global markets. The countries are large exporters of oil, gas, food grains, fertilisers, and industrial metals. Sanctions are currently not targeted at these exports, as the world needs these crucial supplies. However, this has not stopped markets from reacting.
Fears around the Russian invasion causing more supply disruptions and logistical constraints have driven up food, oil and metal prices. The global food markets are already under considerable pressure, following a 28% rally in prices in 2021 and uncertainty around weather conditions. The spike in food prices heightens inflationary winds worldwide.
The metal markets are already in the grips of a supply shortage, reaching record prices in copper, aluminium and nickel. Industrial metal prices are a headwind for economies trying to spur output to emerge from the pandemic effect.
On February 24, we woke up to news of Russia’s full-scale invasion of Ukraine. Peace talks had failed, and Russian forces were entering the southern Ukrainian city of Kherson and continuing to shell Kyiv and Kharkiv. It’s a massive human tragedy and a geopolitical catastrophe. So, why are we talking about sanctions? It’s because sanctions are equally powerful weapons to influence a nation’s behaviour and decisions. Sanctions have been the foreign policy of choice in developed economies for years.
The international outrage against the war translated into sanctions from the US, the UK, Europe and Japan, targeting the assets of Russia’s government and allies, their top officials, the Central Bank (CBR), and their largest financial institutions. Policymakers in western nations are also in the process of compiling a list of financial institutions to exclude from the SWIFT messaging system used to communicate cross border payments.
Where Eagles Won’t Dare!
There have been calls in the European Parliament and the US Congress to impose sanctions on Russia’s oil and gas exports, on which its GDP heavily relies. However, energy-resource-based sanctions give policymakers the heebie jeebies. Let’s not forget that Russia is the world’s third-largest producer of oil, and such sanctions could leave the global economy flat on its feet.
Europe for example, depends on Russia for 25% of its oil and 40% of its gas supply. The ECB estimates a 10% gas rationing will shave 0.7% off the euro-area GDP. A complete freeze on Russia’s gas supply will trim the region’s GDP by 3%.
The Impact on Russian Markets
The sanctions have already significantly weakened the Russian economy. Its stock markets have been closed for the longest period since 1998 and domestic institutions are frantically accumulating cash to support the market at its reopening. The Ruble plummeted more than 25% in response to the sanctions, causing the Central Bank of Russia (CBR) to raise interest rates from 9.5% to 20% and institute capital controls, including a ban on foreign institutions selling off Russian assets. Sanctions also threaten the central bank’s access to their sizeable foreign currency reserves.
Russia isn’t the only one suffering. Here’s a look at the financial market impact of both actual and potential sanctions.
Commodities Inflation in the Global Markets
The Russian and Ukrainian economies make up only 2% of world GDP and global trade. However, the products they trade in have a direct impact on global markets. The countries are large exporters of oil, gas, food grains, fertilisers, and industrial metals. Sanctions are currently not targeted at these exports, as the world needs these crucial supplies. However, this has not stopped markets from reacting.
Fears around the Russian invasion causing more supply disruptions and logistical constraints have driven up food, oil and metal prices. The global food markets are already under considerable pressure, following a 28% rally in prices in 2021 and uncertainty around weather conditions. The spike in food prices heightens inflationary winds worldwide.
The metal markets are already in the grips of a supply shortage, reaching record prices in copper, aluminium and nickel. Industrial metal prices are a headwind for economies trying to spur output to emerge from the pandemic effect.
Source: https://www.financemagnates.com/executives/insights/how-the-sanctions-on-russia-impact-global-markets/