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How will Russia sanctions impact the global economy?

  • 22 March 2022
Russia’s invasion of Ukraine has led to severe financial sanctions being imposed on the country that are likely to have lasting consequences. Problem is, they may not be the ones the sanctioners are expecting. They may even come to regret what they have done.

Western countries are banning sales of Russian oil and gas, the country’s main export. Two thirds of the foreign reserves of the Russian central bank have been confiscated. The nation’s currency, the rouble, has fallen sharply. The hope is that by attacking the nation’s economy and financial system it will create such internal instability Vladimir Putin, the Russian president, will either be deposed or forced to withdraw.

It will not work; sanctions rarely do. Russia has already experienced years of prohibitions so has become much more self-sufficient. The country has a trade surplus, which is likely to get bigger as oil and gas prices soar. It will have no problem finding customers, especially with China and India not going along with the bans (India has quadrupled its buying of Russian oil). The main Russian imports can be readily sourced from China, the country’s biggest trade partner: cars, packaged medications, vehicle parts, broadcasting equipment.

Meanwhile, inflation in the West, which in the US is at a 40 year high, is likely to worsen. The oil price is at a 13 year high and wheat prices are at a 14 year high, in part because the biggest suppliers of fertilizer are Russia and Belarus. It is hard to see Australia escaping that inflation, despite the relatively sanguine attitude of our Reserve Bank.

It is a problem because most Western economies are burdened by unsustainable debt; in Australia the household sector is especially vulnerable. The household debt-to-GDP ratio was 119 per cent in the third quarter of 2021, which is second only to Switzerland in the world. If inflation continues to spiral, resulting in a rise in interest rates, the sanctions could turn out to be a massive own goal.

The financial (as opposed to economic) sanctions on Russia are grave. There is a ban on the use of SWIFT (Society for Worldwide Interbank Financial Telecommunication), the main method for making cross border financial transactions. Russia had, however, plenty of prior warning this might happen and had started to prepare. As JP Morgan’s chief executive, Jamie Dimon has warned, SWIFT is just a messaging system, and it will be possible to do business with