As an Amazon Associate I earn from qualifying purchases from amazon.com

‘Shooting themselves in the foot’: Western sanctions on Russia | Russia-Ukraine war


About a month after Russia launched an invasion of Ukraine, US President Joe Biden hailed the West’s “unprecedented sanctions” on Moscow and said they had caused the rouble to be “almost immediately reduced to rubble”.

The Russian currency lost nearly half of its value, dropping to a record low of 143 roubles to the United States dollar on March 7.

Following the invasion of Ukraine on February 24, Western nations imposed widespread sanctions on Moscow targeting its finances, including freezing its central bank assets to block access to foreign currency reserves.

In the first few weeks, panic ensued as the public tried to acquire as much cash as possible from the banks and to buy goods as the price of imported items shot up. Consumer prices rose by 17.5 percent in April.

But the following month, the Russian rouble rebounded to 40 percent against the dollar compared to January, reaching a seven-year high and becoming the world’s best-performing currency in 2022.

Russian President Vladimir Putin’s demand that foreign buyers pay for the country’s natural gas in the local currency – or else have their supplies cut – helped prop up the local currency, among other measures.

Iskander Lutsko, chief investment strategist at ITI Capital, told Al Jazeera three factors have been supporting the rouble: “escalating oil prices due to sanctions, capital controls, and a drop in dollar demand and excess FX [foreign exchange] liquidity due to high FX revenues from exports of oil and gas”.

Due to sanctions and capital controls, an “artificial and highly supportive environment” was created for the rouble, Lutsko said. Last week Russia’s central bank made its third interest-rate reduction in over a month to halt the rouble from appreciating.

As a result, the Russian banking system experienced excess FX liquidity that led to a drop in dollar rates, historically very rare.

Energy markets expert Vyacheslav Mishchenko told Al Jazeera that Russian financial authorities successfully managed to deal with the emotional reaction of the population and businesses at the onset of the war.

“The price hike was caused by [the] first emotional reaction, because it put a lot of pressure on customers to buy everything,” Mishchenko said.

“But then the beginning of April, the situation returned to normal. The supply is there. Yes, there are some troubles with importing goods, but there aren’t too many. The price hike was mostly on the psychological side, rather than on the economic side.”

As the European Union continued talks last month on phasing out Russian energy supplies, Putin maintained that Europe is “committing economic suicide” with its sanctions, as it would see higher energy prices and higher inflation.

‘Honeymoon period’

Analysts say Russia has so far made correct manoeuvres to withstand the effect of sanctions; the question is whether the West will be able to weather its own sanctions.

Lutsko said the first five months of sanctions have been “more like a honeymoon period” for the Russian economy, but as Europe makes the tough decision to embargo oil and gas, “there will be very little the Russian government could do”.

With Russia accounting for almost 20 percent of global oil and petroleum products combined and 17.5 percent of the world’s gas, making it the largest exporter in the world, there will be implications, Lutsko said.

The government has become reliant on oil and gas as its main source of income, which now accounts for 65 percent of its budget, compared to only 30 percent prior to the invasion of Ukraine.

The EU has been discussing reducing dependency on Russian energy, and after haggling for a month, it decided on Monday to ban 90 percent of Russian oil imports to the EU by the end of the year, part of the bloc’s sixth sanctions package. The EU finalised the decision on Thursday.

The ban applies to Russian oil exported to the EU by sea, exempting the 10 percent of imports by pipeline following Hungary’s opposition that it cannot easily get oil elsewhere. Slovakia and the Czech Republic also voiced the same concerns.

‘A huge discount’

Lutsko said that so far, sanctions have been beneficial for the Russian government as it has created huge volatility in commodity prices.

By March 2, oil had surged beyond $110 per barrel, whereas before it went for $60 per barrel.

And in the first quarter of the year, Russia recorded a historic high trade surplus of $58bn.

“The US and Europe, by imposing sanctions on Russia, they are at the same time shooting themselves in the foot,” Lutsko said.

“It’s highly unfortunate, especially for the world’s largest importers of oil. Some have benefited like China; they have been buying oil from Russia for a huge discount … It’s more of a problem for consumers like OECD Europe [Organisation for Economic Co-operation and Development] and Southeast Asian countries,” Lutsko said.

“I think the whole purpose of those sanctions is created more for psychological pressure and to show that … actions are being taken, that they’re not just watching. But obviously, they haven’t taken into consideration the real impact [sanctions] will have – especially for the poorest countries.”

‘Disrupting the supply’

Mishchenko said when it comes to damage inflicted from sanctions, so far “Russia benefits from the situation much better than the EU.

“The demand for commodities is very high. Nobody can replace Russia on the global markets, especially on energy commodities. The more tension there is between Russia and Western countries, the higher prices there will be in specific commodities like we see in the gas market,” Mishchenko said.

“Despite the restrictions, the dispute, the ban of some routes, seaports, etc, Russia exports less in terms of volume but gets more in terms of money. It puts a lot of pressure on the dollar and euro, but the Russian rouble is doing very well.”

About 36 percent of the EU’s oil imports and more than 40 percent of its gas comes from Russia.

Mishchenko said Russia has been diversifying its exports for decades to other markets in the east, including India, China, Southeast Asia and other regions where there is key demand.

INTERACTIVE - Russian gas imports into the EU - Europe's reliance on Russian gas

China is now Russia’s biggest trade partner, whereas prior to 2014 when Russia annexed Crimea and sanctions ensued, its biggest trade partner was Germany.

Similarly prior to 2014, Russia was one of the world’s biggest importers of food; today, it is a net exporter.

In the last three months, India has bought four times more crude oil from Moscow than it used to in the same period, becoming Russia’s top crude oil buyer, Mishchenko said.

Moscow is now earning a significant amount in oil export revenue – $20bn per month, an increase of 50 percent since the start of 2022.

“European buyers are in the same situation – they need to replace Russian commodities, but it takes time,” Mishchenko said.

“The problem is that Russia was such a big, stable supplier for decades that European markets will be fighting to get the puzzles of supplies and it will be disrupting the supply for many years.

“It won’t be so easy to replace one big, stable supplier, which is your neighbour geographically, by many different destinations and suppliers remotely … I think sanctions harm both sides.”





Source link

We will be happy to hear your thoughts

Leave a reply

Lady in Rainbow
Logo
Enable registration in settings - general
Compare items
  • Total (0)
Compare
0
Shopping cart