Saturday's announcement by the U.S., the U.K. and European allies, including France and Germany, of a raft of 'further restrictive economic measures' to increase the costs on Russia for its invasion of Ukraine has just raised the risks of a more widespread economic fallout from this war. With a view to further isolating Russia from the international financial system, the Western allies decided to block 'selected' Russian banks from the SWIFT messaging system that banks and financial institutions use to validate and complete international payment transactions. They also resolved to impose restrictions on the Russian central bank's ability to access and deploy the country's 'war chest' of an estimated $630 billion in foreign exchange reserves. The immediate impact of these moves on Russia's economy and financial markets have manifested in a sharp depreciation in the value of the rouble – the currency tumbled almost 30% intra-day to a record low against the dollar in Asian trading on Monday and has weakened about 26% so far in 2022. They also forced the country's central bank to more than double its benchmark interest rate to 20%, the highest in almost two decades, and impose controls on capital flows. Russia's largest lender Sberbank found its European arm facing a run on its deposits, which the European Central Bank warned could lead to the unit's 'failure'. With Russians waiting in long queues outside ATMs on fears of likely cash shortages, the country's citizens face the real prospect of runaway inflation.
But the economic costs of Vladimir Putin's unilateral decision to embark on what he called a 'special military operation' to describe Russia's all-out invasion of its western neighbour last week are already being felt worldwide. European banks and companies with significant business exposure to Russia have taken a beating on the bourses given the extent to which the sharp escalation in the sanctions is certain to hurt their operations and revenues. And though the Western allies have carefully avoided any mention so far on closing the tap on Russia's massive exports of oil and gas that contribute substantially to the country's current-account surplus, concerns about possible disruptions to shipments from the world's second-largest producer of oil have pushed the price of Brent crude futures well above $100 a barrel. With most large European economies majorly reliant on energy supplies from Russia, the spectre of rising energy costs fanning a bruising acceleration in inflation in Europe and worldwide is very real. At a time when a durable recovery from the shock of the COVID-19 pandemic is yet to take hold, the war initiated by Russia, and the consequent sanctions on it, especially if widened to cover countries that seek to bypass the sanctions regime, pose a challenge to the global economy that Rabo Bank's economists projected could be 'so bad' as to be unquantifiable. Expedient negotiations to end the conflict are the only way forward.
