Sanctions, Sanctions, Sanctions…

Why Sanctions are so important and why everyone is talking about them. The Ukraine-Russia crisis will lead to major repercussions due to the strength of US sanctions and their potential negative impact on post-COVID-19 global recovery. Particularly as the globalised economy is so dependent on Russia for energy supply and commodities trades. That said, Russia’s $1.7TRN economy may be commendably self-sufficient, but will struggle to cope with economic isolation for long. Particularly if its trade partners China and Iran become embroiled in global condemnation and secondary sanctions measures for dealing with Russia.

The Ukraine-Russia crisis encapsulates the issue of globalisation amid a veritable threat of global superpower sanctions from the US – alongside its strategic allies. Energy supply is so dominated by the likes of Russia – particularly in Europe – with 48% energy supply provided by Russia in 2020 – just maximises the ability of Russia to leverage this against a global economy barely recovering from the COVID-19 pandemic. Vladimir Putin’s frustration with Western advances in Eastern Europe – despite the assurances given to Russia after the fall of the Berlin Wall – have emboldened him to take action on Ukraine by advancing neighbouring troops into the country. US, EU and NATO have all ensured a standoff by keeping an eastward advance. US and Western sanctions amid Western dependence on Russian energy, its ally China – and, ultimately, the third member of the alliance, Iran – make this a very tricky situation indeed.

President Biden came into office promising multilateral diplomatic solutions, but in similar fashion to Obama era sanctions policy, early optimism and diplomacy was followed by robust, costly sanctions culminating in some major moments such as the BNP Paribas fine of $8.9BN in 2014. Or accumulated US fines from 2008-18 – a time period which straddles the end of George W Bush, two Obama and the start of Trump Administrations – of $23.52BN in US money laundering, KYC and sanctions penalties. The bulk of this came from the Obama Administration when a certain Joe Biden was Vice President throughout both terms of office.

US sanctions have already been robust enough – but the US can do far more. US dollar access and access to SWIFT can easily be cut – isolating Russian banks – which have already been targeted. The issue for Russia – and its ally China – whose initial reaction was unique in not condemning Putin’s special military action on Eastern Ukraine in the morning of Thursday, 24 February 2022. The issue is that EU dependence on Russia for its energy supply is significant – after Germany announced on 23 February that it would halt Gazprom’s Russia-Germany gas pipeline, NordStream 2, followed by US sanctions on NordStream 2 AG on the same date. The issue here is very simple – any major sanctions move which would cancel Russian access to SWIFT would imperil energy supply – as hydrocarbon payments for Russian energy would not be feasible if Russia’s access to SWIFT were to be cut off.

$700M per day on commodities spend from Europe is another major issue – should massive US sanctions be imposed. Furthermore, fossil fuel replacement is not a possibility with reliance so heavily geared towards Russia. Looking further out, China is another major trade partner for the EU and particularly Germany – its major trade partner in the past 6 years – and could become embroiled in dangerous reputational repercussions if it continues to support a Russia on the receiving end of increasing international condemnation. The UK’s gas supply is predominantly from Norway and Qatar – but most EU Member states will be massively impacted by major sanctions imposed on Russia – which could paralyse Russia’s energy supply to Europe – should, for example, SWIFT access be cut.

As the global economy emerges from the COVID-19 pandemic, Central banks will find it extraordinarily difficult to “engineer a safe landing” from the multiple shocks facing the global economy which already include raging inflation in the US and the Eurozone – propelled by a long-term QE monetary expansion policy of both the Federal Reserve and European Central Bank post the Global Financial Crisis amid record-low interest rates. The potential for conflict just pushes inflationary worries further, but there could easily be a hit to growth as sanctions hit Russia, the Russian Ruble collapses, and one of the world’s major energy suppliers, Russia, faces economic isolation – with the world’s no. 2 economy China – possibly caught in the crossfire. The ECB has already indicated that they may need to put off any interest rate hikes due to the impact of the Russia Ukraine crisis on the Russian energy-dependent Eurozone.

Interest rate hikes – required to bring down inflation – look far less likely if the global economy faces growth issues. 1980s methodology shows US CPI inflation at 10-15%+ from the whole of 2021, and this is not a great economic landscape from which to base global economic recovery – as the world faces the prospect of conflict after emerging from a global pandemic. The geo-political and geo-financial impact of sanctions means that growth and global recovery will be undoubtedly impacted negatively. Notional oil and gas gainers as crude oil and natural gas prices move upwards are tempered by the inflationary hit to growth – hampering global recovery post-COVID-19 recovery. Naturally the spectre of stagflation comes into play – inflationary pressure amid a hit to overall growth.

President Biden has to be seen to be acting in response to Vladimir Putin’s moves on Ukraine – and this pits the irresistible force of US sanctions against the immovable object which is Russia’s frustration with Western advances East post the fall of the Berlin Wall. One thing is for sure – Russia’s $1.7TRN economy – despite its self-sufficient characteristics – is going to struggle to handle global isolation in the event of major sanctions such as SWIFT ban or isolation from US dollars, and potential hit to its trade partners China and Iran. JCPOA revival could be endangered by the Ukraine-Russia crisis – as oil exports from Iran and nuclear arms escalation are both issues that could lead to a collapse in confidence for any JCPOA revival – or the imposition of sanctions measures isolating Iran’s economy.

Arguably Biden has been comparatively lenient on Iran to date – relative to what ex-President Trump imposed and what Republicans in Congress are proposing in terms of even more robust sanctions on Iran, China and Russia. Certainly – the notion from Moscow that US sanctions can be disregarded – is looking like a very dangerous policy indeed. US sanctions can – and will – hurt. Any global isolation post pandemic is going to lead to major aftershocks.