This Week In The Economy: Economic Fears & Europe’s Energy Weak Spot Impede More Aggressive Sanctions On Russia

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Economic Priorities Outweigh Punishing Russia For Ukraine Invasion

This week we are going to forgo the usual recap of key economic data and central bank news to focus on the war in Eastern Europe, as Russia’s long-predicted invasion of Ukraine continues.

As missiles bombard Ukrainian cities — indiscriminately hitting civilian and military targets — and the Russian army marches ominously towards the capital Kyiv, the West’s response to Vladimir Putin’s manufactured war remains tepid at best and, honestly, self-serving.

What Sanctions Have Been Imposed

In a joint effort to present a united front and communicate universal displeasure regarding Russia’s actions, Canada, the European Union, United Kingdom, United States, and Japan announced punitive actions intended to collectively inflict pain on key areas of the Russia economy, its military apparatus, and supporters of Putin.

The U.S. government cut off Russia’s two largest banks — which combined make up more than half of the total banking system in Russia by asset value — from processing payments through the U.S. financial system (basically they can no longer transact in U.S. dollars).

It also banned thirteen of the most critical major Russian enterprises and entities from raising money in U.S. capital markets, the export of exports to Russia of items containing certain U.S.-origin software, technology, or equipment to targeted military end users, and additional sanctions on Belarus for its support of Russia’s invasion.

The EU is also limiting Russia’s access to critical technologies such as semiconductors, cutting of most of Russia’s financial institutions from its capital markets, and banning the sale of all aircrafts, spare parts and equipment to Russian airlines. It is also ending “privileged access” in terms of visas for Russian diplomats and oligarchs.

Japan suspended the issuance of entry visas designated individuals related to Russia, froze the assets of the three largest Russian banks, and imposed sanctions on exports to Russian military-related entities, on exports of controlled items and of other dual-use goods such as semiconductors.

The UK froze Russian bank assets and banned Russian state-owned and key strategic private companies from raising finance on the UK financial markets. It also targeted more than 100 companies and oligarchs with asset freezes and travel bans, announced new restrictions on trade and export controls against Russia’s hi-tech and strategic industries, banned Russia’s national airline from UK airspace, and unveiled new restrictions to cut off wealthy Russians’ access to UK banks.

Canada is targeting financial institutions as well as individuals within the Russian government and parliament, prohibiting “persons in Canada and Canadians outside Canada from engaging in any activity related to any property of these listed persons or providing financial or related services to them.”

What Punishments Have Been Left Out

Noticeably missing from the list of sanctions discussed above is banning Russia’s natural gas and oil exports — cutting off a vital monetary source for Putin, and kicking the country’s banks out of the SWIFT system — the facilitator of financial transactions and payments between banks worldwide.

The sanctions imposed have pointedly included exemptions for energy imports as well as energy-related transactions. 

Kicking Russian banks off SWIFT would deny them access to the normal smooth and instant transactions, meaning payments for key energy and agricultural products would be severely disrupted.

Banks would be forced to transact directly with one another, adding delays and extra costs, and ultimately cutting off revenues for the Russian government.

Nothing That Inflicts Immediate Pain On Russia

The actions taken by the West are designed to hurt Russia and its economy over the medium- to long-term, but nothing that will delivers a such significant economic cost that Putin rethinks his current actions. 

U.S. President Joe Biden noted in an update to the nation this week that “we have purposefully designed these sanctions to maximize the long-term impact on Russia and to minimize the impact on the United States and our Allies.”

The EU is Russia’s main trading partner and is heavily reliant on its natural gas and oil exports. Energy prices are already sky-high, and European governments — especially Germany — want to avoid further disruption.

Also, ending Russia’s access to SWIFT would mean companies and financial institutions — mainly French, German and Italian — that are owed money by Russia would have to find alternative ways to get paid, as also pose a risk of international banking.

News reports also highlighted the “decades of coziness” between prominent European leaders and Russian business and energy interests, serving on the boards of Russian energy companies, and leveraging their connections to act as de-facto lobbyists. 

There is talk that there are more punitive measures being held in reserve that will come into play as the war drags on. But the fact is the concerns about the negative impact these measures would have on energy supply/prices, the European financial system, and the global economy as a whole seem to be preventing more aggressive action.

Unless countries are willing to tolerate near-term economic pain to punish Putin for his illegal actions, expect to see a more piecemeal response that does little to help Ukraine during this dark time for the country.