Sanctions against Russia plunge global economy into new unknown

Western economic sanctions to punish Russia for its invasion of Ukraine establish a new set of unknowns in a global economy already distorted by the coronavirus pandemic and a decade of ultra-cheap money.

The attempt to exclude entire parts of the world’s 11th-largest economy — and supplier of one-sixth of all commodities — from the trading system is unprecedented in the globalized age.

The sanctions disclosed so far will affect Russian banks’ trading in dollars, euros, pounds and yen. Restrictions on US exports will limit Russian access to electronics and computers, while European capitals adjust similar export controls and measures to target the energy and transportation sectors.

For now, they will not condemn the Russian economy to anything like isolation: the gas on which Europe depends will continue to flow and Russia’s banks will retain access to the Swift global banking messaging system.

But other punitive measures remain possible, as the chaos of the conflict and potential Moscow countermeasures make it likely that there will be some separation of the Russian economy and its enormous resources.

“The war, sanctions and the likelihood of significant retaliation from Russia together are likely to deliver a material global recessionary shock,” political risk consultancy Eurasia Group said in a note.

Oxford Economics has now said it sees global inflation this year at 6.1%, up from the 5.4% previously forecast, and cites the impact of sanctions, financial market disruption and higher gas, oil and food prices as factors for the projection increase.

While this intensifies cost-of-living concerns, Oxford has cut its forecast for global production growth by a modest 0.2 percentage point to 3.8% this year and 0.1 percentage point to 3.4% in 2023. .

This small dose of stagflation is a headache for central banks trying to scale back their stimulus programs and normalize policy rates after a decade of near zero.

CHANGES

Deeper structural changes will depend on how the impact of the sanctions plays out over time, particularly in the commodities, energy and finance sectors.

Amrita Sen of the Energy Aspects think tank said that, for now, the measures appeared to give Russia some leeway.

“The financial sanctions are designed in a way that allows energy-related payments to continue,” she said, adding that she also expected some exemptions for metals and agricultural products.

The Russian Economy Ministry said on Friday that it expected the pressure from sanctions faced since the country’s annexation of Crimea in 2014 to increase and that it planned to intensify trade and economic ties with Asian nations.

Such a shift would notably depend on Beijing’s interest in a China-Russia trade bloc, which could emerge as a viable alternative to Western channels.

“This could force companies to have two separate supply chains to service each one,” Jacob Kirkegaard of the German Marshall Fund said of a development that would reverse decades of attempts to streamline trade channels for efficiency.

After the pandemic-era supply chain problems, this could exacerbate the high prices and shortages of goods that are crippling the world economy.

But whether this will result in structurally higher inflation and long-term shortages depends on how others react. Optimists argue it may be a wake-up call for other major economies to examine their strategic interests and economic weaknesses.

“If Europe uses this momentum to truly diversify its energy sources, it can insulate itself from future shocks planned by the Kremlin,” said Hung Tran of the Atlantic Council think tank.