International sanctions imposed on Russia for its invasion of Ukraine are rapidly affecting international supply chain operations.
Sanctions imposed by countries around the world include restrictions on trade finance, banking, individual Russian citizens, export bans and airspace restrictions, among others. On February 26, the Group of Seven (G7) nations announced a new group of economic measures against Russia. These included removing key Russian banks from the SWIFT international messaging system and imposing new restrictions on the Russian Central Bank’s ability to deploy its international reserves.
Canada has banned Russian aircraft from entering Canadian airspace, and restricted exports to Russia by halting new export permit applications and cancelling valid export permits, with a limited number of exceptions for critical medical supply chains.
“Based on sanctions to date in Crimea, the sanctions likely will be severe and hit the banking, high-tech, and energy sectors hard,” says Clifford Sosnow, co-chair of the international trade and investment group at law firm Fasken.
“It may be that the breakaway republics will have a complete embargo. And this likely will be ratcheted up if the aggression intensifies.”
Ocean carrier Maersk reported on February 26 that its staff were working to apply the sanctions that have already been announced, and “will continue to adapt to further sanctions that are expected in the coming days”. The company urged customers that have been affected by sanctions against certain banks to work with its finance team to establish temporary payment solutions”.
The financial sanctions amount to freezing Russia’s financial assets, said Josh Lipsky, director of the GeoEconomics Center and former advisor at the International Monetary Fund, in an Atlantic Council briefing.
“Today, hundreds of billions of dollars and euros will remain untouchable. To put that in perspective, the amount of money that is now outside of Vladimir Putin’s grasp is the size of Austria’s entire economy,” Lipsky said.
What this means will be “a collapsing ruble, soaring inflation, bank runs, and food shortages — and that is just in Russia. There will be global ramifications including market drawdowns and higher energy prices. But the world’s leading economies decided today that it was a price worth paying. Europe will bear the heaviest load here.”
Energy and minerals
The energy sector will be significantly affected, as Russia supplies 40 percent of Europe’s natural gas supply. The German cancellation of the Nord Stream 2 pipeline on February 22, was just the initial European response. “A disruption to these supplies could send energy prices through the proverbial roof,” said Per Kristian Hong, a partner at Kearney.
Estimates suggest that the Russian invasion could raise oil prices to US$150 a barrel, cut global GDP growth by close to one percent, and double inflation. Even a smaller spike to $100 a barrel would send operating costs and consumer prices soaring when companies and consumers already face high energy bills.
Russia is also a critical supplier of metals such as copper, aluminum, nickle and platinum. “Supply disruptions in these and other key commodities will trigger price increases for economically vital products such as batteries, and hinder the manufacture of semiconductors, jet engines, automobiles, and some medicines,” Hong said.
Ukraine is one of the world’s largest exporters of rye, corn and barley, while Russia is the world’s largest exporter of wheat. Disruptions in agricultural supply will mean higher input costs for food producers, exacerbating already soaring food costs around the globe, according to Hong.
“Food inflation will accelerate significantly with fresh price shocks stemming from increased energy costs, seizures of agricultural areas, and the sweeping economic sanctions promised by Western governments.”
Analysts suggest that Russia will likely step up its cyber warfare against Western targets in response to the sanctions. Hong suggests
“The world is clearly poised on a very dangerous ledge, and the Ukraine crisis may develop into the biggest test yet of the resilience of global supply chains, which are still healing from years of unprecedented stress. The risks envisioned above may represent a worst-case scenario, but events can move very quickly in unpredictable ways. While we may hope for the best, we should prepare for the worst,” Hong concluded.