How bad will the economic sanctions on Russia get?

West puts sanctions on Russia

Indian Market
by 5paisa Research Team Last Updated: 2022-08-08T19:02:05+05:30

On Tuesday, the US and most of the developed West called out Russia for launching an attack on Ukraine. Russia has been trying to protect Ukraine from NATO influence while the US wants to put NATO as close to Russia as possible. Having taken Crimea in 2017, Russia is now planning to help two more regions secede from Ukraine. That is, in a way, the genesis of the Russian aggression and the sanctions imposed by the developed West.

For now it looks like the first level of sanctions have been imposed at the level of companies and individuals. However, going ahead, the sanctions are likely to also encompass Russian trade, Russian investments, investment projects and the very participation of Russia in the SWIFT network of global payment systems. Here is what has already happened on the sanctions front and here is what could happen.

Here are some of the banking sanctions. UK announced sanctions on 5 large Russian banks and the US on 2 Russian banks that do defence deals. All US assets of these banks would be frozen and no US citizen or resident can now do business with these banks. EU has been more subdued agreeing to only blacklist banks involved in financing separatist activities in east Ukraine. EU banks hold lion’s share of the $30 billion foreign bank exposure to Russia.

Secondly, sanctions also extend to the bond markets. EU plans to target the ability of Russian government to access global markets, including limits on financing. This includes a ban on trading in Russian state bonds for EU investors. US citizens cannot even buy Russian sovereign debt in secondary markets. UK has not yet banned Russia from accessing the London markets. Restrictions of some level already exist, even at this juncture.

There are also sanctions on individuals but the big story is going to be the bar on Nord Stream 2 gas pipeline. Recently, the Nord Stream 2 pipeline from Russia to Germany had been completed. Germany may want to put Nord Stream 2 on hold but with EU depending on Russia for 35% of its energy needs, there is not much of an alternative for EU. The US also plans restrictions on export of US chips to Russia. That may have a marginal impact.

Finally, the big question is whether Russia can be switched off from SWIFT, the global payment protocol. This is used by over 11,000 institutions in 200 countries. However, SWIFT is based out of Belgium and EU approval would be needed. That may not be easy. Russia already has an alternate payment mechanism (SPFS) but that is hardly anywhere close to the popularity of SWIFT. This will be the most interesting aspect of the sanctions on Russia.

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