Well… that escalated quickly.
For many of us, the Russia/Ukraine standoff might not have seemed that serious before Thursday. Powerful as Russia may be, it’s still part of an interdependent global economy where making enemies is (literally) very costly. As is the US, for that matter.
So when Putin got pugnacious and Biden threatened sanctions, it was natural to suspect that the bark was worse than the bite on both sides. But now Putin has bitten, and Biden is biting back (say that five times fast) in the form of this week’s buzzword: sanctions.
But how serious are these sanctions? Will they even work? And – to bring things a bit closer to home – how will they affect us here in the States? Let’s break it down by the different sectors that are (or might be) affected:
After the US and Saudi Arabia, Russia is the globe’s 3rd largest oil exporter, with most of its product going to China and Europe. But at this time, there are no sanctions on the Russian oil trade and world leaders really want to avoid using them. Why, you ask?
Although we do not import oil from Russia, we still live in a global economy. So if NATO countries band together and vow not to buy oil from Russia, oil and gas prices around the world will rise considerably. Such a reaction would also fan the flames of inflation.
Banking & Financial
US Investors are no longer allowed to buy Russian bonds, and Russian banks will not be permitted to use the US dollar. This should make financing anything in Russia much more expensive for the Nation as well as its citizens but will have minimal, if any, impact on US investors.
The US is now limiting exports of semiconductors and other advanced high-tech gear, which will hurt domestic chip makers such as California-based Qualcomm and Nvidia. However, it will also hurt Russian military software, smartphones and similar industries.
Yup, turns out that Russia is a major player in the world’s fertilizer space. Sanctions here will hurt the Russian economy, for sure, but will also be a very difficult pill for the world economy to swallow. With food prices already increasing (fertilizer prices in the US quadrupled last year alone), this would undoubtedly push inflation even higher.
But will these sanctions even work?
Over the past 4 years, Russia has done an impressive job of reducing its reliance on the US Dollar by diversifying into precious metals and petro-dollars. Over a decade ago they made a strong push, along with China, to cease dealing in USD as much as possible. Obviously this will help soften the blow of the sanctions.
But the fact remains that the rest of the world still deals in USD, especially when it comes to Russia’s biggest exports – oil & gas. On the other hand, severed ties from US investors will also have somewhat muted effects. With crude oil prices now nearing $100 per barrel, Russia has little need for foreign liquidity.
On the other other hand, Russia’s economy has been floundering for a few years now. Ten years ago their GDP was $2.2 trillion; today, only $1.5T (for reference, US GDP was at $16T a decade ago, and now is $24T).
In short, the financial sanctions will further exacerbate Russia’s economic slump, perhaps very significantly. While the other ones could deal a blow as well, they’re a double-edged sword that world leaders – like President Biden – are hesitant to push too far.