According to a Government report, the move to freeze Russia’s central bank’s assets has restricted the country from half of its reserves.
The freeze has essentially stopped the financial system in Russia from making external transactions. The central bank can’t exchange currency, so it’s been unable to sell its foreign currency reserves to buy the rouble and prevent it from devaluing further. It also can’t help countries access foreign currency for their transactions.
“The central bank sanctions are unprecedented for a G20 economy,” explained Neil Shearing, Group Chief Economist at Capital Economics. “They are principally what is causing the economic pain right now…”
Banning some banks from the SWIFT payment system was thought to be a way to ‘inflict maximum pain on Putin’ but it hasn’t had as drastic an impact as first anticipated. It’s made things more inconvenient, but hasn’t isolated Russian banks.
The ban may have made things more painful for international businesses though, and perhaps accelerated their withdrawal from Russia. “You immediately saw companies backing out and saying, ‘We are no longer going to deal with Russia’,” explained Dr Amrita Sen, Director of Research at Energy Aspects.
Outside of sanctions, many UK businesses have chosen to divest from Russian investments, close their Russian operations or cease to trade with Russian firms. For example, Clifford Chance is winding down its operations in the country and so is Allen & Overy, Herbert Smith Freehills, Linklaters and Norton Rose Fulbright, amongst other firms.
The impact has been described as more sociopolitical than economical.
When news of potential oil sanctions broke, the price spiked to just over $140 a barrel and these high prices had given Russia a large hedge. However, many companies have since boycotted Russian oil. Shell, for example, publicly apologised for buying cheap Russian crude and pledged to stop buying it. Almost 70% of Russian oil was struggling to find a buyer – although it’s been reported that India has been snapping up discounted oil.
Even if India and China were to become the main importers of Russian oil, it’s been predicted that the country would only be able to get 60-70% of its previous yield.
There are a number of ways the sanctions are impacting the Russian people, including:
The UK’s exports to Russia account for just 0.2% of GDP – but it’s the increased cost of imports that will have an impact on the British economy. This is driven by the global rise in the cost of Russian imports, not because the UK imports a lot from the country. It could add 1% to inflation and knock 0.25-0.5% off GDP.
In the UK, the following repercussions have been attributed to the sanctions:
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