The Russia sanctions and their consequences

Created: 02/25/2022Updated: 02/25/2022 18:09

Ukrainian President Volodymyr Zelenskyy has criticized the previous sanctions as insufficient.

© Uncredited/Ukrainian Presidential Press Office via AP/dpa

Russia has invaded Ukraine - and the US, EU and other allies are imposing punitive measures.

They are intended to harm the Russian economy, but they also affect the West itself.

Washington/Berlin/Brussels - The EU and the USA have reacted to Russia's invasion of Ukraine with sanctions packages.

The measures are primarily aimed at the Russian financial sector.

In addition, export controls for high-tech products and software are intended to make it difficult for key Russian industries to develop further.

How sharp is the sanction sword?

US President Joe Biden was confident when announcing the extensive punitive measures: "The sanctions we have imposed go beyond anything that has been done so far," he praised.

States that make up about two-thirds of global economic output are behind the sanctions.

These could be exacerbated in the event of a further escalation in Ukraine.

However, Ukrainian President Volodymyr Zelenskyj, among others, criticized the previous sanctions as insufficient.

The Polish opposition leader and former EU Council President Donald Tusk sharply criticized Germany's position on sanctions against Russia.

"Those EU governments that have blocked tough decisions have shamed themselves," he wrote on Twitter.

He cited Germany, Hungary and Italy as examples.

The German government spokesman Steffen Hebestreit rejected such accusations.

The sanctions would have had immediate effect on the stock exchanges in Russia, for example.

Ifo boss Clemens Fuest told the dpa that the sanctions were weak overall and would hardly impress the Russian government.

"It would have been desirable to take action against a significantly larger number of Russian banks and individuals, to freeze significantly more foreign assets and to impose more comprehensive export bans." The President of the Federation of German Industries (BDI), Siegfried Russwurm, also warned of drastic short-term consequences for the German economy, because in many places there is "a comprehensive stop to cooperation".

First of all, no exclusion of Russia from the Swift system

The West has so far shied away from excluding Russia from the Swift system.

The Swift system enables its more than 11,000 participants in over 200 countries to exchange messages automatically: on money transfers, securities or precious metals transactions.

For example, unique bank codes ensure that money is transferred to the right account when making international transfers.

If banks can no longer use Swift, they are effectively excluded from international money flows.

This can slow down the flow of goods because companies are then no longer able to pay for imports or post income for exports.

An exclusion of Russia could also have consequences for Russian natural gas imports.

Trading under these circumstances would be “extremely hampered, if not impossible,” said financial expert Dorothea Schäfer from the German Institute for Economic Research (DIW).

“German companies with Russian subsidiaries would have considerable difficulties getting money into and out of Russia.

For this, detours via banks in other countries that are connected to the Russian payment system and Swift would have to be accepted.

Or the payments would have to be made in cash.” Payments in cryptocurrencies are also conceivable – but not generally accepted.

Hermes guarantees suspended

In addition, the federal government suspended the so-called Hermes guarantees, thereby making it more difficult for German companies to do business with Russia - regardless of whether sanctioned goods or industries are involved or not.

Hermes guarantees are state guarantees with which the federal government protects exporters' transactions against a loss of receivables for economic and political reasons.

The step was logical, according to the economist Hella Engerer from the DIW, who sees the consequences for small and medium-sized companies in particular.

"In any case, companies will currently be extremely reluctant to invest in Russia."

Russian banks are subject to sanctions

The USA imports significant quantities of Russian oil, but overall the economy is much less closely linked to Russia than that of the European countries.

But the US government controls a powerful weapon: access to the world's largest financial market and the global reserve and trading currency, the US dollar.

Washington is now using this lever with its Western allies to turn Russian financial institutions into international pariahs.

Six Russian banks, including the country's second-biggest institution, VTB Bank, are completely sanctioned.

The European sanctions against the financial sector that have now been decided are primarily about cutting off banks from the EU financial markets.

In the future, they should no longer be able to borrow or lend money in the EU.

In addition, the refinancing of Russian state-owned companies in the EU is to be prevented.

Your shares will no longer be traded in the EU.

Something similar is planned for the energy sector.

Possible long-term consequences of the sanctions

In the short term, Russia can certainly compensate for many problems.

In the long term, however, isolation from Western capital and financial markets will entail high costs and economic distortions.

"These effects will, over time, lead to higher inflation, higher interest rates, lower purchasing power, lower investment, lower productivity, lower growth and lower living standards in Russia," said Daleep Singh, a deputy national security adviser at the White House.

New export controls

The US government bans the export of high-tech products to Russia, including semiconductors, computers, telecommunications and encryption technology, and certain parts for the aviation and maritime industries.

In addition, this should also apply in part to products that are manufactured abroad but contain US technology.

According to the White House, the restrictions affect around 50 percent of all high-tech imports from Moscow.

"This will cause serious costs to the Russian economy, both immediately and over time," US President Biden said.

"We will curtail their ability to compete in the high-tech economy of the 21st century."

more on the subject

The bite of US sanctions on Russia

EU approves sanctions against Putin and Lavrov

Biden announces more "heavy" sanctions

The European export controls for high-tech products and software are intended to make it difficult for other key Russian industries to develop further.

The country could be hit hard in the medium and long term, it said in Brussels.

dpa