Londres (CNN Business) — A week of war in Ukraine rocked the world economy as swift Western sanctions isolated Russia, collapsed its currency and financial assets, and sent energy and food prices soaring.
Russia’s $1.5 trillion economy is the 11th largest in the world, according to World Bank data. A week ago, it was doing a terrific energy trade, exporting millions of barrels of crude per day with the help of the major oil companies. Western brands were doing good business in Russia and investors were lending to their companies.
Now, a barrage of sanctions has rendered Russia’s biggest banks radioactive, traders shun barrels of crude oil from the Urals and western companies are fleeing the country or closing their shops. Russian stocks have been pushed off global indices and trading by some Russian companies has ground to a halt in New York and London.
Sanctions have a big impact
Russian President Vladimir Putin’s invasion of Ukraine has drawn an unprecedented response from the United States, the United Kingdom, the European Union, Canada, Japan, Australia and other countries. Even Switzerland, famous for its banking neutrality and secrecy, has pledged to impose sanctions on Russia.
Sanctions announced last week have prevented Russia’s two largest banks, Sberbank and VTB, from trading in US dollars. The West also removed seven Russian banks – including VTB – from SWIFT, a global service that connects financial institutions and facilitates fast and secure payments.
The coalition is trying to prevent Russia’s central bank from selling dollars and other foreign currencies to defend the ruble and its economy. In all, nearly $1 trillion in Russian assets have been frozen by the sanctions, according to French finance minister Bruno Le Maire.
“Western democracies have surprised many by pursuing a strategy of exerting intense economic pressure on Russia by effectively isolating it from global financial markets,” Oliver Allen, markets economist at Capital Economics, said in a research note.
“If Russia continues on its current path, it’s quite easy to see how the latest sanctions might be just the first steps in a severe and lasting severing of Russia’s financial and economic ties with the rest of the world.”
People line up in front of Sberbank on February 28, 2022 in Moscow.
Oil rises 20%
Russia’s economy is important to the rest of the world because of its vast energy resources.
The country’s oil and gas exports have not been a direct target of Western governments, but that hasn’t stopped prices from soaring in recent days. Russian crude, however, is trading at its biggest discount in more than 30 years.
Moscow is finding it harder to sell shipments to foreign buyers worried regarding being caught up in the fallout from financial sanctions. Oil operators are wary of the risk to ships in the Black Sea, and the world’s major oil companies are abandoning operations in the country.
The futures of Brent Crude, the global benchmark, have risen regarding 20% since the start of the invasion to trade near $115 a barrel. US oil futures have risen to the highest level since 2008. In Europe, the price of wholesale natural gas soared to an all-time high on Wednesday, more than double from last Friday.
Huge price increases will make fuel more expensive around the world, driving up the cost of travel and commuting. It will also increase inflation and might act as a drag on economic growth, reviving fears of this inflation and complicating the decisions of global central banks as they seek to counter rising prices.
Prices of other raw materials are also rising
The crisis is also adding pressure to already saturated global supply chains. Together Ukraine and Russia are responsible for regarding 14% of the world’s wheat production and supply 29% of all wheat exports. Wheat futures have soared, making the commodity more expensive for food manufacturers, who will likely pass those costs on to consumers.
Palm oil prices have also soared as markets struggle to find alternatives to sunflower oil shipments stuck at Black Sea ports.
And it might get worse. In a scenario where fighting in Ukraine lasts well into 2023 and Russia cuts Europe’s natural gas supply for six months in retaliation for additional sanctions, eurozone inflation exceeds 7% in the third quarter of this year. year, according to Oxford Economics. UK inflation would exceed 10%.
Russia would bear the brunt of the economic pain. In the scenario outlined by Oxford Economics, Russia’s economic output in 2023 would be 7% below the levels it would have reached without an invasion. Global growth that year would shrink by 1.1 percentage points, according to the research firm.
Global companies struggle to adapt
Russia’s energy riches have not been the direct target of Western sanctions, but many of the world’s largest oil companies are leaving the country or halting new investment in projects to explore and develop fields.
ExxonMobil said Tuesday that it was exiting its latest project in the country, Sakhalin-1, which was listed as “one of the largest international direct investments in Russia”. An Exxon subsidiary was the operator of the project, and the company’s decision to pull out will end its more than 25-year presence in Russia.
BP, Shell and Norway’s Equinor have said this week that they intend to exit their Russian businesses in the face of a likely multibillion-dollar hit to their balance sheets. France’s TotalEnergies has stopped new investments.
The business exodus has accelerated in recent days and has reached almost all sectors of the economy. The tech giantsautomakers, retailers and airlines have suspended their operations in Russia.
Container shipping lines have drastically reduced their services. Western banks are trying to find out how exposed they are to Russia’s shaky financial system. Visa and Mastercard no longer work in Russia. Boeing and Airbus will not service the Russian fleet.
