Mark John

(Reuters.) – Western economic sanctions are being used to sanction Russia over its invasion in Ukraine. This adds a layer of unknowns to an already distorted world economy that has been ravaged by the coronavirus pandemic as well as a decade of extremely cheap money.

There is no precedent for the internationalized age in the bid to exempt whole sectors of the 11th-largest economy of the planet, which also supplies one-sixth all commodities.

Russian banks will be affected by the sanctions in place so far. They will face penalties in pounds, dollars, euros and yen. The U.S. will restrict Russian exports to computers and electronics while European capitals fine tune similar export controls to hit the transport and energy sectors.

They will not condemn Russia to isolation for the moment: Europe’s gas supply will remain strong and Russia’s banks can continue accessing the SWIFT global messaging network.

However, further punitive actions are still possible. The chaos and potential counter-measures from Moscow makes it probable that there will be some disassociation of Russia’s economy and huge resources.

According to Eurasia Group, “The combination of sanctions and war will most likely result in a substantial global recessionary surprise.”

“Sanctions against Russian banks and traders will likely cause significant disruptions in global trade and financial relations with far-reaching consequences.”

Even after COVID-19’s two-years of global recession, the initial effect will be minimal, given that a stimulus-fuelled boom spurt which created global shortages in labour, inflation, and bottlenecks in global supply chains has led to an increase in global demand.

Oxford Economics reported that global inflation is now at 6.1%. It was 5.4% previously.

However, this will raise cost-of-living concerns. Oxford has lowered its projections for global output growth to just 0.2 percentage points at 3.8% in 2018 and to just 0.1% at 3.4% by 2023.

The small degree of “stagflation”, which is not a serious problem, can cause central banks to have a difficult time trying to decrease stimulus and return base rate to normal levels after 10 years near zero.

However, for the moment tightening is allowed to continue cautiously.

PIVOT

How the sanctions affect time will determine how much impact there are on the structure of the economy, particularly in areas like commodities, finance, and energy.

One specialist lawyer said that even if Russia is excluded from SWIFT the slightest hint of sanctions being imposed on any Western bank for violating them could cause a disruption to business.

This is true for all financial services.

Ben Sheppard is a senior analyst with Argenta Private Capital, an insurance investment advisory. He stated that brokers are being directed by compliance and market security committees not to use Russian insurers but instead find other insurers.

Uncertain how Russia will face sanctions for its vast oil and commodities resources.

Russia supplies 40% of Europe’s natural gas and produces 10% of the world’s oil. Russia is the largest exporter of grains and fertilizers, top producer of palladium, nickel, third-largest steel and coal exporter and fifth-largest timber exporter.

Amrita Sen of Energy Aspects thought tank stated that for the moment, Russia appears to have some room.

He stated that “the financial sanctions have been designed in such a manner to allow energy-related payment to continue,” and added that he expects some exemptions to be granted for agricultural goods and metals.

We don’t think the West has enough interest in sanctioning Russia during a period when both inflation and high energy prices have made it difficult for us to see how we can support Russia.

Joe Biden, the U.S. president has stated that sanctions were intended to create a long-term freeze effect on Russia’s economy. How might Moscow react to this growing isolation?

According to the Economy Ministry, it said that Russia will continue to exert sanctions on Crimea in 2014 and it expects these pressures to grow. The Ministry also stated Friday that they plan to strengthen economic and trade ties with Asian nations.

A pivot like this would be dependent on Beijing expressing an interest in China-Russia trade blocs that may emerge as viable alternatives to Western channels.

Jacob Kirkegaard from the German Marshall Fund stated that this could result in companies needing two different supply chains to support each customer. He said it would also reverse decades of efforts to improve efficiency through trade.

After the supply chain issues that caused the pandemic, this could increase prices and lead to shortages in goods which can further hurt the world’s economy.

However, whether or not this leads to structurally higher inflation and longer-term scarcity will depend on the reactions of others. It could serve as a wakeup call to other large economies, according to optimists.

Hung Tran from the Atlantic Council thought tank stated that “Europe will be forced to face increased oil prices and gas prices because of Russia’s invasion of Ukraine”

“If Europe makes use of this moment to really diversify its energie sources, it might be able to insulate itself against future shocks plan by the Kremlin.”