Russia’s invasion of Ukraine has led to unquantifiable human tragedy. The devastating toll includes thousands of military and civilian casualties, as well as over a million Ukrainians who have fled the country so far. While Russia’s military is wreaking physical destruction on Ukrainian cities and their residents in the immediate term, it may be dealing a nuclear blow to its own economy in the long run – creating repercussions that will reverberate around the globe.
Horrified at the invasion, Western nations showed an unprecedented unity in their determination to punish Russia. The U.S, Canada, members of the EU, Japan, and other allies promptly unveiled a litany of political and economic sanctions. The sweeping scale of the punitive measures is unlike anything that Russia has faced in past crises, such as when it invaded Georgia in 2008 or annexed Crimea in 2014.
The measures will have staggering impacts on Russia's nearly $1.5 trillion economy, causing spillover effects across a number of industries worldwide. They will unwind the past thirty years of Russia’s entanglement into the fabric of the global economy with the most profound effects in the financial, energy, transportation, and technology sectors. Here’s what’s in store in those areas.
Western sanctions have thrown the biggest punches at Russia’s financial sector. The Russian government was cut off from at least half of its foreign currency reserves after G7 member nations froze Russian Central Bank funds stored in their jurisdictions. This undermines the Central Bank’s ability to support the ruble by using the $630 billion war chest it has amassed over the past few years. In an effort to further limit Russia’s ability to accumulate foreign currency, the EU banned the import of euros into Russia.
The ruble has already lost 26% of its value since the start of the invasion, as Russians rushed to convert their savings into foreign currency. Struggling against inflation, the Central Bank has raised the key interest rate to 20%, more than double of what it was before. Meanwhile, The U.S has cut off access to the dollar for VTB and Sberbank, two of Russia’s largest banks, which comprise half of its banking assets.
And in a novel move, VTB and a handful of other banks have been disconnected from SWIFT, the international interbank messaging network that is vital for cross-border commerce. Exclusion from SWIFT makes it nearly impossible for the affected banks to transact with the 11,000 SWIFT-member financial institutions worldwide. The SWIFT sanctions stopped short of targeting all Russian banks, leaving open an avenue for settling oil and gas transactions.
The measures have already begun to affect the business of foreign payment companies operating in Russia. A number of cross-border payment service providers have suspended services in Russia, including U.S.- based Remitly and London-based Wise. Apple Pay and Google Pay are limiting their services as they are unable to process payments from cards issued by the sanctioned banks. Visa and Mastercard are likewise forced to exclude the banks from their networks.
Russians may turn to the limited set of alternatives in an attempt to bypass the sanctions, and this too could have a broader impact. In the days following the invasion, Russians flocked to the crypto markets looking for a ruble alternative. Crypto assets could also attract institutions looking to avoid the traditional banking system that has been nailed with restrictions. Chinese banks may come to the aid of their Russian counterparts, offering their financial infrastructure as a way to circumvent the SWIFT restrictions. Though political obstacles might lie in the way, this would bolster the influence of the Chinese financial system and extend the reach of the renminbi as a foreign reserve currency.
The barrage of sanctions have so far left Russia’s oil and gas sectors largely unscathed. [Update: On March 8, the U.S. and U.K. revealed plans to halt energy imports from Russia, according to Bloomberg.]
A mass exodus of foreign energy companies has nevertheless ensued. Shell is walking away from its $3 billion stake in a number of joint ventures, while ExxonMobil is leaving behind its $4 billion investment into the country. Government moves against Russian energy, however, have mostly been limited to restrictions on technology exports.
This is likely due to Russia’s dominance in European energy markets. More than 38% of the EU's natural gas comes from Russia, as well as almost 23% of its crude oil imports. Pipelines (including some that run through Ukraine) are still carrying millions of cubic meters of Russian gas to Europe each day. And, despite the other economic sanctions, billions of euros are flowing in the opposite direction.
The EU’s dependence on Russian gas explains the relative lenience of the sanctions towards banks that service the energy sector. Gazprombank, the piggy bank of Russia’s largest gas producer, was not among the banks shut off from SWIFT. U.S moves against Russian banks also contain exemptions for energy payments.
Though North Americans are less reliant than Europeans on Russia to heat their homes, the U.S is not prepared to cut off Russian energy ties. While Canada announced plans to ban Russian oil imports, the U.S nuclear power industry is lobbying the government to avoid sanctioning Russian uranium. The compound is a key ingredient in the cheap electricity supply for Americans. The U.S said that it is considering halting Russian oil purchases but has shied away from any commitments.
A sudden embargo on Russian oil exports would lead to a spike in global oil prices. A number of large oil producing nations would stand to benefit. Among them are Russia’s fellow OPEC members Saudi Arabia and the UAE, as they would get a boost to their export revenues. Global consumers would be the biggest losers, as they would absorb the brunt of the inflationary pressures that would arise as a result.
If the world does decide to do it, weaning off Russian energy might take some time. It would likely be a gradual process that takes place over the next few years as current energy contracts expire without getting renewed. However, Russia’s recklessness on the battlefield might be speeding up the process. EU ministers are reportedly weighing sanctions against Russian energy after an attack on Europe’s largest nuclear reactor in Zaporizhzhya, Ukraine. Europeans and their allies realize that a gasless winter, as painful as it would be, is preferable to a nuclear one.
Though Ukraine’s pleas for NATO to create a no-fly zone in its skies have been ignored, Russian planes will not be flying to many destinations. A total of 33 countries including the U.S, Canada, and the E.U have closed their airspace to Russian aircraft. Russia has reciprocated by shutting its skies to flights from a number of Western countries. The move will cost international airlines some very lucrative flight routes, as well as dealing a blow to the already pandemic-beleaguered international tourism industry.
It will also mean increased flight times between Europe and Asia. In a throwback to a Cold War era reality, Anchorage, Alaska may once again become known as the “Crossroads of the World” as flights from Europe to Asia will have to refuel there. Air travelers worldwide will also find themselves shelling out for costlier flights as a result.
Russian airlines have been further hit with E.U sanctions that ban the sale or leasing of aircraft to companies in Russia. Boeing and Airbus announced that they will no longer supply aircraft replacement parts to Russia. They will also halt servicing of airplanes that are leased to Russian airlines. Planes made by the two companies account for two thirds of Russia's civil aviation fleet. While this may be devastating for Russian airlines, it is also a loss for the two aircraft manufacturers. The Russian aviation market amounts to 6% of the world’s air traffic capacity, which includes the $10 billion worth of planes currently rented from foreign companies.
On the day the invasion began, the U.S unveiled a wide reaching export ban that cut off Russian industry from a variety of cutting-edge technologies. The measure includes semiconductors, lasers, sensors, as well as telecommunication and encryption technology. Russian production facilities will have to make due without U.S-produced technology as well as tech made by foreign companies using American components.
This has already caused NVIDIA and Intel to cease the supply of their processors to Russia. Taiwan Semiconductor Manufacturing Company has joined them, creating an uncertain future for Russia’s ability to produce its own microprocessors.
The microelectronics supply shocks have already begun reverberating throughout the economy, most immediately affecting the automobile industry. Russia’s biggest car manufacturer, Avtovaz was forced to suspend production at one of its plants. Foreign car manufacturers have been pulling out of Russia including Volskwagen, Ford, Volvo, and Toyota. Daimler is pulling the plug on its partnership with Russia’s truck manufacturer KAMAZ.
The most pronounced effects of the technology sanctions will manifest over the long haul. As Russian industry finds itself in isolation, the technology gap between Russia and the countries that are imposing sanctions will continue to widen.
The slump in demand for microchips caused by the sanctions may actually be a small boon for consumers outside of Russia. The resulting surplus of microchips could be redirected to production for other markets, easing inflation that has dogged products such cars and consumer electronics.