GP Short Notes

GP Short Notes # 617, 6 March 2022

Sanctions against Russia: Effects and Divides
Padmashree Anandhan

What happened?
On 26 February, the European Commission released a joint statement with France, Germany, Italy, the United Kingdom, Canada, and the United States rebuking the Russian invasion of Ukraine. Out of the four commitments, one focussed on following up with the sanctions: "we commit to launching this coming week a transatlantic task force that will ensure the effective implementation of our financial sanctions by identifying and freezing the assets of sanctioned individuals and companies that exist within our jurisdictions."
 
On 28 February, the UK, the US, and the EU announced sanctions on Russia's top financial institutions. It barred business entities in the UK from transacting with Russia's central bank, Finance Ministry, and wealth fund. With this, the Russian entities will no longer transfer security or financial instruments into the UK.
 
On the same day, the US sanctioned the central bank of Russia in the US, thereby denying them access to billion-dollar assets held by Russia. Along with this, the US Treasury Department provided a license allowing "energy-related transactions." Likewise, the EU banned Russian banks from SWIFT and excluded energy payments. It comes due to a few from the Eurozone urging the region's dependency on Russian energy.
 
What is the background?
First, the focus on sanctions. The majority are aimed at financial institutions, Russian oligarchs, and state-owned companies, including Russia’s energy sector. The sanctions also include a travel ban on specific individuals, foreign assets held by President Putin and those in his close circle. The EU and the transatlantic countries have tactfully sanctioned Russia's gas and oil companies. The sanctions have also blocked companies relating to military, war weapons, railways, nuclear submarine makers and gas. 

Second, the differences over sanctions. Due to its dependency on the Russian oil industry, countries like Germany, France, and Italy have yet to sanction the energy companies, SWIFT, and crypto exchanges. Whereas the US sanctioned Russia's major oil, gas, and power producers, Gazprom and RusHydro; it has also issued general licenses to carry out debt, equity, agrarian commodities, overflight, and energy transactions. Such exception has not been detailed in the documents, creating loopholes for exploitation.

Third, the effect of sanctions on Russia. The restrictions on SWIFT, freezing of foreign assets and sanctions on various industries will affect the Russian economy. The big question is: to what extent the sanctions will affect Russia? When Russia annexed Crimea, the West imposed sanctions on Russia; however,  Moscow has created alternative solutions for such scenarios. This could be evidenced by the increase in its foreign reserves, structural changes in its economy where Russia has shifted from foreign loans to trade opportunities, conversion of its saving into cryptocurrencies, and, most importantly, keeping China back up. Will Russia be able to circumvent the new sanctions as well?

Fourth, global implications. The rest of the world may sanction Russia, but the economies are linked; imposing sanctions will always have a dual effect. With the West restricting its business entities from transacting with Russia, the price of the trade commodities will shoot up, resulting in a high inflation rate. The sanctions on financial institutions will affect the global trade routes. With the ban on airspace by the EU and Russia, goods transited through the air will not take place, land routes will be disrupted due to security compliance, and sea routes will be hindered as Ukraine closes its commercial shipping. Therefore, leading to stalling of global supply chains. Although the US has assured taking necessary measures to handle the after-effects of the sanctions, it has missed to detail that process. The most affected will be the EU, which is more dependent on Russia. The above challenges will slip the EU into energy deficiency, distortion in trade, and economic decline. 
 
What does this mean?
First, rush amongst the West to impose sanctions. With new escalations and development every day, there is a rush in imposing sanctions, without consideration of the sanctions’ retrospective effects on Europe and the rest of the world. Second, a defensive Russia. When it comes to handling the sanctions, Russia has not been reactive but is taking the hits with a good defence. Till now, the Russian has only condemned the West and has not responded with counter-sanctions. This means it has strategized well, taking lessons from conflict in Crimea. Third, a divided EU. Due to economic dependency and historical links, some EU countries seem to have a different position against Russia. While some have gone pro-US in imposing sanctions, others have restrained. It is the game of power for the US, but for Europe, the sanction can cost its economy.  

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