Sanctions and the Economic Consequences of The Sanctions Against Russia
It has been more than 100 days since the first Russian troops invaded Ukraine. It has reverberated across global commodities markets, affecting everything from oil and gas to wheat and nickel. Even though there was uncertainty over the new policies of distributed trade, Russian Oil exports fell by one-third (2.5 million barrels per day) immediately after the first round of sanctions.
The list of sanctions imposed by the West was long. It is deemed powerful, including the US bans on imports of Russian oil, liquefied natural gas, and coal, and the EU partial embargo on Russian oil, due to an agreement reached last month after several rounds of negotiation. In this case, EU members were also forbidden from reselling Russian crude oil and petroleum products to other EU member states or elsewhere.
According to one study, the type of sanctions imposed on Russia is unclear. It is not one size fits all but rather "sanction picking," where a country imposes restrictions at its discretion and if it can/cannot afford the imports of gas oil. For instance, at the beginning of March, the US had declared sanctions on all Russian energy imports; the UK announced only phasing out of Russian oil, and the EU phasing out of two-thirds of Russian gas. So is "sanction picking" beneficial to the global economy?
The answer to this question is still being explored, as the impact of these sanctions is unclear months after the war. According to a report by the Center for Research on Energy and Clean Air, Russia's revenue from exports of fossil fuels soared to 93 billion euros — about $97 billion — in the first 100 days after the invasion of Ukraine. The largest importer in this period was China, buying more than $13 billion of fossil fuels, followed by Germany at around $12.6 billion. Many Western countries appeared at the top of the list of importers. France was the largest importer of Russian liquefied natural gas (LNG), Germany bought the most Russian pipeline gas, and Japan imported the most coal.
This scenario raises essential questions on the effectiveness of the sanctions. The CREA indicates that in Russia, import volumes fell modestly in May, around 15% compared to the volumes before the invasion, as many countries and firms banned Russian supplies. However, the increase in fossil demand had a collateral effect: it increased Russia's average export prices, which were 60% higher than last year, even if they were discounted from international prices. For instance, countries like France and Belgium profited from buying liquefied natural gas and crude oil on the spot market. According to the report, these purchases represented an active purchase decision, as there were no preexisting contracts to support them.
It is unclear whether the West's sanctions against Russia are effectively working. However, there are no signs that Russia's war in Ukraine will end soon. Russia is continuing its large-scale invasion of Ukraine. Russian troops' attacks on Ukrainian continue to expand in Kharkiv and Mariupol. On June 15, Biden announced an additional $1B in military assistance to support Ukraine's defense against Russian forces.
As the war escalates, it further impacts the global economy, geopolitical security and the climate. To minimize the consequences of the war, several countries are sending aid to Ukraine and are planning energy alternatives to reduce their reliance on Russia. Also, the EU started to rethink the global energy supply framework, as they plan to invest 210 billion euros in green energy. The EU's ultimate plan is to end its reliance on Russian fossil fuels by 2027.
Despite these sanctions development and phasing out plans to reduce the West's reliance on Russian energy, it is no secret that Russia is still the world's largest energy exporter. Therefore, adapting to these new developments is a significant global challenge. In fact, the war has dramatically impacted the climate change transition plan discussed in the 2021 United Nations Climate Change Conference (COP26). Reality struck now that the policies mentioned in COP26 are crumbling because policymakers shifted their focus on the prices and the limited energy production instead of implementing climate change transformation policies. For example, Biden plans to travel to Saudi Arabia in July to negotiate with the Saudis to boost oil production and maintain lower prices to rival Russia. In addition, the US pressured OPEC to increase its supply based on the new market conditions. OPEC members agreed they would increase the production by 648,000 barrels a day in July and August rather than the 400,000 barrels a day. Such actions contradict the initial plan discussed in COP26 to limit the production/investment in oil and gas.
It is hard to keep track of the impact of the sanctions against Russia. However, as events unfold in the second phase, it is evident that the war has ripple effects on the world. It is no secret that the global economy is facing global inflationary pressures. The OECD stated, "The world economy will pay a hefty price for the war in Ukraine encompassing weaker growth, stronger inflation, and potentially long-lasting damage to supply chains”. The OECD also projected doubled inflation to nearly 9% for its 38 member countries. In 2023, it expects growth to slow to 2.8%.
Russia and Ukraine are essential commodity producers, and the interruptions have increased worldwide prices, particularly oil and natural gas. Food prices have risen sharply, with wheat shipments from Ukraine and Russia accounting for 30% of global exports. The increased costs for commodities such as food and energy are driving higher inflation, diminishing the value of incomes and putting downward pressure on demand. The economies of many countries are facing disruptions in commerce, supply chains, and remittances. Asset values are negatively impacted due to increased investor uncertainty, resulting in tightening financial conditions and perhaps causing capital outflows from emerging markets.
The aftermath of Russia's war with Ukraine has shaken neighboring countries and the world, bringing to attention the importance of global safety nets and regional safeguards to help ease the economy. Although the full effects of the war will take years to manifest, there are already snapshots of what to expect. An increase in the cost of essential commodities and energy is shifting the focus of policymakers. It makes it more difficult for policymakers to strike a delicate balance between containing inflation and supporting the pandemic's economic recovery. While it is impossible to predict the future, policymakers should consider having strategic planning for successful policy-making in the face of uncertainty and unpredictable events.
References:
Russian Oil Exports Fall by One-Third. Energy Intelligence (March 2022): https://www.energyintel.com/0000017f-4c35-d78a-af7f-efb5753e0000
How War in Ukraine Is Reverberating Across World’s Regions. IMFBlog (March 2022):
https://blogs.imf.org/2022/03/15/how-war-in-ukraine-is-reverberating-across-worlds-regions/
Sanctions And The Economic Consequences Of Higher Oil Prices. Columbia University - Center of Global Energy (April 2022):
EU agrees on partial ban of Russian oil imports. CNN Business (May 2022):
https://www.cnn.com/2022/05/30/energy/eu-russian-oil/index.html
EU plans ‘massive’ increase in green energy to help end reliance on Russia. The Guardian (May 2022):
The Ukraine war has upended the energy transition — and it’s not good news for the planet. CNBC (May 2022)
European Union Imposes Partial Ban on Russian Oil. Center for Strategic and International Studies (June 2022):
https://www.csis.org/analysis/european-union-imposes-partial-ban-russian-oil
Sanctions On Russian Oil And Gas Didn’t Work, And Now We Know Why. Forbes (June 2022)
Ukraine war in maps: Tracking the Russian invasion. BBC News (June 2022):
Russia-Ukraine live updates: 2 US veterans who joined Ukrainian forces missing. ABC News (June 2022):
https://abcnews.go.com/International/live-updates/russia-ukraine/?id=83931446
US officials confirm Biden to visit Saudi Arabia, meet MBS. Aljazeera (June 2022):
OPEC+ agrees to pump more oil ahead of possible Biden Middle East trip. Politico (June 2022):
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