Unprecedented sanctions against Russia are causing global economic implications.
The U.S. and Europe agreed to cut off some Russian banks from the SWIFT messaging system, which is used to make trillions of dollars’ worth of transactions every day, an option so devastating it has been called “the nuclear option” of sanctioning. They also vowed to prevent Russia from accessing some of its foreign reserves, making it harder to offset the effects of the sanctions.
Two days earlier, the White House announced a multifaceted sanctions package that cuts off Russia’s major banks and companies from Western financing and imposed direct financial costs on many of Russian President Vladimir Putin’s top allies. It also restricted Russia’s access to semiconductor products and the technologies it needs to sustain its industrial sector and military capabilities. Western governments also sought to punish Putin personally in separate sanctions targeting his personal assets held abroad.
Experts on the effectiveness of sanctions believe the combination of these measures comprise an unprecedented global attack on a national economy – in this case, Russia’s – the negative impact of which will increase by the hour.
The U.S. and allies also announced on Feb. 26 that they would block the Russian central bank’s access to some of its over US$600 billion in foreign currency reserves. Elina Ribakova, deputy chief economist for the Institute of International Finance, said this measure would have a dramatic effect on Russia’s economy and banking system and lead to “massive bank runs,” a selloff of rubles and “possibly a full-on collapse of Russia’s financial system.”
Altogether, these sanctions – if sustained – should have a devastating effect on Russia’s economy, as well as curtail its strategic capabilities by hurting the powerful energy sector and military industrial companies, which are bulwarks of Putin’s regime.
Bank runs, as Russians line up at banks to try to get their ruble deposits and convert it into the safer dollar, will likely worsen, said Clay Lowery, executive vice president of the Institute of International Finance. And the run on dollars inside Russia would cause a drain on the central bank’s reserves.
Combined with the new SWIFT limits announced by Europe and the United States, the Central Bank measure is “likely to cause serious damage to the Russian economy and its banking system,” Lowery said.
The ruble was trading for 97 to the dollar Tuesday, up more than 10% from its nadir of 108.02 per dollar a day earlier. Russian markets, after closing early Monday, remained closed Tuesday.
Governors and lawmakers in numerous U.S. states, seeking to add to the financial squeeze on Russia, were taking steps to pull state pension and treasury funds out of investments in Russian-held entities or Russian companies supporting the war.
Various companies have announced plans to scale back or pull out from ventures in Russia, or to suspend operations in Ukraine due to the conflict.
Investors already were on edge before Russia’s invasion in anticipation of the Federal Reserve’s plans to hike interest rates for the first time since 2018 to counter inflation.
The Fed is treading a tightrope, needing to raise rates enough to curb inflation but not by so much as to choke the economy into a recession. Higher rates also put downward pressure on various investments from stocks to cryptocurrencies.
The war in Ukraine is raising expectations that the Fed and other central banks may have to adopt a gentler approach to raising interest rates than earlier expected.
Oil prices soared and investors shifted more money into ultra-safe U.S. government bonds as Russia stepped up its war on Ukraine. The price of oil surged back above $100 a barrel after Russia, a major energy producer, faced further isolation and economic damage because of its invasion of Ukraine. The rush into bonds pushed the yield on the 10-year Treasury back down to 1.77%, where it was in early February.
Russia is a major energy producer and surging oil prices and increasing financial pressure from the U.S. and allies on Russia for its invasion of Ukraine were adding to uncertainty about the global economic outlook.
“While the ceasefire talks at the Belarus-Ukraine border ended, the military fires certainly have not ended by any means alongside sanctions being raised further,” Tan Boon Heng at Mizuho Bank in Singapore said in a commentary.
Export controls announced by the Biden administration earlier in the week featured another especially strong piece of leverage the U.S. holds — America’s semiconductors and other advanced high-tech gear.
President Joe Biden said new U.S. export limits will deprive Russia of more than half of its current high-tech supply. It will “strike a blow” to Russia’s aims to modernize its military, its vaunted aerospace industry, its space program, shipping and other industry, he declared.
By “reducing their ability to compete economically,” the high-tech limits will be a “major hit to long-term strategic ambitions,” Biden said.
U.S. export controls are expected to deprive Russian industries and the military of the high-tech U.S. components that help warplanes and passenger jets fly and make smartphones smart, along with other software and advanced electronic gear that make the modern world run.
The U.S. said the European Union, Japan, Britain and other countries were also cooperating in the move to starve Russia of high-tech components.
The U.S. response could add Russia to the most restrictive group of countries for export control purposes, putting them with Cuba, Iran, North Korea and Syria.
They limit Russia’s ability to obtain integrated circuits and products containing integrated circuits, due to the global dominance of U.S. software, technology and equipment. The impact could extend to aircraft avionics, machine tools, smartphones, game consoles, tablets and televisions.
However, U.S. export restrictions would risk motivating businesses to look for alternatives elsewhere, including China.