March 28, 2022
Knowing about the economic sanctions made against Russia is one thing – but applying your understanding of trade and customs to this topical issue will really improve your commercial awareness.

Impact Of Central Banking Sanctions

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…”

Impact Of SWIFT Ban

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.

Impact Of Companies Withdrawing From Russia

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.

Impact Of Oil Sanctions

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.


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How Are Sanctions Impacting Russian Civilians?

There are a number of ways the sanctions are impacting the Russian people, including:

  • Recession. GDP was forecasted to contract by 2.6%, but Neil Shearing, Group Chief Economist at Capital Economics, said it could be much worse. “You will get a fall in GDP of more than 5%, I’m sure, and probably closer to 10%,” he said. “There is going to be an acute period of pain over the next 18 months to two years in Russia.”
  • Inflation. It’s expected Russian inflation will hit 20-30%.
  • Interest rates. Consumers have seen interest rates jump from 9.5% to 20%.
  • Currency devaluation. The Russian rouble has lost more than 40% of its value since the start of the year.

How Are Sanctions Being Felt In The UK?

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:

  • Increased fuel prices. While fuel prices were high before the invasion, it’s been predicted that petrol could rise to £2.40 per litre, and diesel could reach £3 per litre.
  • Increased energy prices. Gas prices were already at a historic high, but “what you are going to see is a doubling in people’s energy bills year on year, because the gas price sets the electricity price in the UK,” explained Nathan Piper, Head of Oil and Gas Research at Investec (speaking in a personal capacity).

Read the full report here.


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