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Global Economy

What sanctions could hit Russia

In the conflict between NATO and Russia, sanctions are the West's primary threat. In view of an impending escalation of the crisis, the USA and the EU have repeatedly threatened the Kremlin with various measures. The question is how tough the West would be if Russia took military action against Ukraine.

So far, Washington and Brussels have not revealed a clear scenario. The threat recently announced by the seven leading industrial nations G7 was formulated in a correspondingly vague manner. In the event of an attack on Ukraine, there would be economic and financial sanctions against Russia, which would have an immediate and massive impact on the country's economy, the G7 finance ministers said. But what options are there for this?

Personal sanctions against pro-Kremlin oligarchs

Immediate punitive measures include direct sanctions against pro-Kremlin oligarchs that have not yet been targeted. An entry ban could be imposed on them and their bank accounts frozen. Proponents of the measure argue that if the entrepreneurs were no longer allowed to travel and could no longer get their money, this could possibly have a greater impact than other sanctions.

Bond Market Restrictions

In addition, sanctions in the financial sector are being considered. For example, it could be made more difficult for Russian oil and gas companies to raise capital in foreign financial centers. Likewise, American or European banks could be prohibited from buying Russian government bonds on the so-called secondary market. Since last year, President Joe Biden's administration has banned US financial institutions from buying Russian government bonds directly from state institutions.

However, experts doubt whether such measures would really affect Russia. "The country has extremely low national debt, very large foreign exchange reserves of $640 billion, fiscal reserves in the form of the state welfare fund and has current account surpluses," East European researcher Vasily Astrov from the Vienna Institute for International Economic Comparisons (WIIW) told "Russia is relatively well protected from Western sanctions." In the short term, the sanctions could be largely neutralized by the central bank and the government.

SWIFT exclusion as a "financial nuclear bomb"

It would be different if Russia were banned from the SWIFT payment system. This would cut off the country from most global transactions. Oil and gas companies in particular would be affected. Their international profits account for more than 40 percent of Russia's revenues. Experts are therefore talking about a "financial atomic bomb". In 2018, Iran found out how severe the effects of a SWIFT ban would be.

"Because of the massive consequences, the credible threat of banning Russia from SWIFT would be extremely effective," says Gabriel Felbermayr, director of the Austrian Institute for Economic Research. The measure would also have major economic implications for Europe. Exports from European companies to Russia and Russian gas deliveries to Europe could then no longer be paid for. The Russian loans of European banks would also be on hold.

Sanctions only against certain banks?

It is therefore quite possible that the West will shy away from this, the harshest of all financial sanctions – as it did in 2014. At that time, the USA and the EU considered the SWIFT penalty option, but then rejected it. As a result, Russia built its own financial transaction system, which is not yet widespread. Janis Kluge, Eastern Europe expert at the Stiftung Wissenschaft und Politik, does not consider the general blocking of SWIFT to be a realistic option because of the severe side effects. It is more likely that the West would exclude or sanction certain Russian banks from SWIFT.

Alternatively, the US could ban Russia and Russian citizens from doing dollar deals. They would then no longer have access to the US banking system. Such a penalty could be imposed by the Biden administration on its own.

Technology Embargo

Among the economic sanctions, a technology embargo is discussed above all. The West could decide on a kind of export ban for certain high-tech products such as chips or entire technologies. The consequences would be felt by Russian citizens: they would then no longer be able to buy Western mobile phones, computers or household appliances. The armaments and aircraft industry could also be targeted in this way. A kind of chip boycott through so-called export controls would be possible. According to the Biden government, it is conceivable that Russia will be on the list of countries with the strictest export controls. These currently include Cuba, North Korea, Iran and Syria.

Among other things, EU Commission President Ursula von der Leyen has spoken out in favor of possible export controls of high-tech goods – for example of components that Russia cannot simply replace – for example in armaments, space travel, quantum computers and artificial intelligence. Experts are skeptical about such a punitive measure. "A ban on high-tech exports from the West to Russia will only become noticeable in the medium term and can be cushioned by imports from China or by domestic substitution," says WIIW researcher Astrov.

Possible stop of Nord Stream 2

For weeks there has been a dispute over stopping the new Baltic Sea pipeline Nord Stream 2, through which Russian natural gas is to flow to Germany, as a further economic sanction. Washington threatens to do so as the inevitable consequence of a Russian invasion of Ukraine. Chancellor Olaf Scholz, on the other hand, has not made a clear statement on this – probably because Moscow itself could turn off the gas tap as a retaliatory measure. That would have serious consequences for Germany, which gets around 55 percent of its natural gas from Russia.

More independence, higher prices

So far, Russia's President Vladimir Putin has taken the threat of sanctions calmly. Russia does not allow itself to be put under pressure, he emphasizes. The country has long since made up for the billions in losses from sanctions imposed by diversifying its own economy. The Russian Ambassador to Sweden, Viktor Tatarintsvev, also stated that Russia has already been subject to many sanctions, which have even had a positive effect on the economy. This has made Russia more self-sufficient. "We may not have Italian or Swiss cheese, but we have learned to produce equally good Russian cheese based on Italian and Swiss recipes," he said.

In fact, the Kremlin reacted to the sanctions that followed the Crimean crisis in 2014 and restructured the economy. Russia is now less dependent on Western imports. The gold and currency reserves were increased, the national debt was reduced. Many Russian companies are no longer financed in the West, but at home. Russia has also become more independent in terms of food supply. However, the price that the country pays for this is high: the population has to spend more money on Russian food. As a result, inflation has risen significantly.

Some Russian entrepreneurs do not share the optimistic assessment of Putin and the ambassador to Sweden. They complain about trade, production and investment obstacles due to the sanctions. And the head of the Russian Court of Accounts, Alexej Kudrin, recently admitted that the economy is definitely feeling the effects of the restrictions. "Russia is losing to the sanctions and is still making losses," he said.

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