The sanctions against Russia: their effects on Russia and on the EU

Following the invasion of Ukraine, the European Union has enforced several sanctions against the Russian Federation and those individuals considered as responsible for permitting the conflict. These measures already have and will continue to have a considerable impact on Russia, but the global economy and, in particular, the European Union will inevitably be affected by them as well.

What sanctions did the EU impose on Russia?

The packages of sanctions against Russia adopted by the EU include individual restrictive measures as well as economic sanctions. The measures implemented until now have the main goal of isolating Russia in an attempt to hinder the invasion of Ukraine. Sanctions targeting individuals mainly consist of asset freezes and travel bans aimed at restricting their scope of action. The people involved are mainly government officials and many oligarchs, influential Russian business-owners, that are considered to be close to the Russian President Putin. Economic sanctions include restrictions on access to EU capital markets for some Russian banks and companies, a ban on transactions with the Russian Central Bank and the Central Bank of Belarus, and a SWIFT ban for seven major Russian banks. These financial measures aim at limiting Russia’s capacity to finance the war. As a matter of fact, the asset freezes prevent access to a large portion of reserves held by both the CBR and major Russian banks and further financing operations will be furtherly limited by the ban from the SWIFT system, the most common international payments system. Furthermore, specific sectors have been targeted, such as the aircraft industry; exports of all dual-use goods, goods that can possibly be used for military purposes, have been restricted.

The consequences of the sanctions in Russia

Before the implementation of the sanctions, many believed that Russia could defend itself from the consequences of the restrictive measures through the continuous cash flow of money incoming from gas and oil exports and the large reserves of foreign currency the CBR holds. However, a significant portion of the Russian Central Bank’s assets, including a large part of the foreign currency reserves, are held in other countries and cannot be accessed because of the asset freeze imposed by the EU and other countries. Despite the efforts of the CBR and of the Russian government, namely, actions aimed at protecting the value of the ruble such as demanding gas exports be paid in rubles, the Russian economy will most likely go through inflation and a decline in real GDP. The sanctions put in place by the EU and other countries such as the US, Canada, Japan, and the UK had in fact the immediate effect of making the ruble lose over 20% of its value. Moreover, many companies decided to stop doing business in Russia for fear of incurring legal risks or tainting their reputation. Higher transaction costs have also led some businesses out of Russia, namely in the shipping industry. This could lead to a shortage in consumer goods, which would fuel inflation, already increasing because of the decline in the value of the ruble. Although rising commodities prices will certainly benefit the Russian economy, inflation and the reduction in consumers’ purchasing power will likely lead to negative real GDP growth rates. Additionally, it is not only the sanctions that place a burden on the Russian economy but also the direct costs of the war that will be difficult to sustain for the country.

The Central Bank of Russia. Source: Flickr

The consequences of the sanctions in the European Union

Sanctions have an impact on the global economy as well. As a matter of fact, the Russian economy plays an important role in the energy sectors, especially in Europe. Despite accounting only for around 5% of EU trade, about three quarters of the EU’s natural gas imports came from Russia in 2019 (41%). Russia is also the largest exporter of crude oil to the EU, accounting for 27% of total crude oil imports. If Russia were to retaliate by stopping energy exports to the European Union, many Member States would be affected, notably, Germany and Italy where Russian imports of natural gas account for 66% and 43% of the total, respectively. After the first week of the conflict, energy prices started to rise sharply, especially in Europe. Other than the rise in energy prices, other commodities’ higher prices are likely to cause inflation, which would slow down growth in the EU.

Source: Eurostat

Besides gas and oil, also other key goods became more expensive, such as wheat, corn, nickel, and neon, an essential mineral for the manufacturing of semiconductors. Part of this phenomenon is linked to the disruptions of supply chains across different sectors and to higher costs due to the restrictive measures. For instance, because European and Russian aircraft cannot transit in each other’s airspace, planes are forced to take longer and more expensive flight routes when travelling from Europe to Asia or vice versa, which makes the shipping of some goods more costly.

Source: Eurostat

In the short term, problems would arise from the difficulty of finding an alternative source of energy and the inflation resulting from higher energy and other commodities prices. However, the impact of the negative consequences of sanctions against Russia can be reduced if new sources of energy are found to substitute natural gas from Russia. The EU has declared that it will cut Russian gas imports by two thirds in 2022 and many Member States have started seeking alternative suppliers of gas, oil, and coal. Last week, the US has announced that they will supply at least 15 billion cubic meters of liquefied natural gas (LNG) to the EU. Moreover, other Member States have resorted to temporarily using coal to replace gas or have struck deals with other suppliers such as Qatar to replace Russian energy supplies.

Final thoughts

In conclusion, the EU has implemented severe sanctions against Russia that will have a significant impact on its economy, limiting its capacity to finance the invasion of Ukraine and making it even harder to sustain. Hopefully, they will help to reach the resolution of the conflict soon. Finally, despite the consequences these measures will have on the EU in the short-term, in the long-term the European Union is likely to come out stronger from this crisis, not only because it will not be dependent anymore on one country for its energy supplies but also because of the determination and unity shown by the Member States that unanimously supported the packages of sanctions.