Global Markets

Russian sanctions: A balancing act

02 May, 2014 | Posted By: Oren Laurent

By Oren Laurent
President, Banc De Binary

Obama and his European counterparts will be hoping that sanctions against Russia have a political payoff and dissuade the country from invading Ukraine. However, sanctions don’t come cheap. Don’t overlook that an economic price is often paid on both sides.
Russia annexed the Crimean peninsula in March after President Putin declared his right to use military force in the bordering countries. Following this, the United States, Canada, and the European Union imposed targeted financial sanctions, including freezing the assets of dozens of Russian officials. Keen to resolve the matter, they came to an agreement with Russia on April 17 in Geneva, according to which illegal armed groups and rebels were to disarm and go home.
Yet the crisis continues. The rebels show no sign of retreating. 40,000 Russian troops wait on the border with Ukraine.
After a conference call on Friday between Obama and European leaders, the G7 stated on Sunday, “We will move swiftly to impose additional sanctions on Russia.” This means economic war. Tougher than talk, but less complicated than military force, imposing sanctions seems now to be the Western World’s default option when agreements fall through. However, given Russia’s strength on the world stage, the potential repercussions here are serious.
Will Germany be prepared to cut technology and military exports even though 350,000 jobs depend on Russian trade? Will the City of London give up its addiction to Russian money and bar banks from doing business? Will France refuse a $1.7 billion deal to sell helicopter carriers to the Russian navy? The effects of such measures will inevitably hurt all parties.
If the world really wants to wound Russia, it could re-enact its 2012 sanctions on Iran, banning the country from Swift, the Belgium-based international money-transfer system. That would cripple Russia’s banking system. But they would surely retaliate. Russia is a major oil exporter and Europe’s single largest energy supplier; the wheels of the global economy would creak and slow down if they were deprived of Russian oil and gas.
We can guess that sanctions will be introduced gradually: there is no telling if they will actually work; history teaches us that they sometimes don’t. Yet investors are already reacting to the risk. The ruble has lost almost 9% this year against the dollar and Russia’s Micex stock index has fallen 15%.
At this stage, back-channel diplomacy has failed. Russia is clearly not giving up its position easily. The trick for the rest of the world will be to threaten sanctions that hurt the Russian economy the most, but have minimum impact on the rest of the world. It’s a difficult but important balancing act.