Will Sanctions on Russia cause Backlash to the Global Economy?

Russia’s $2 trillion GDP could shrink by 1.8 percent if the West imposes more sanctions.

russia-sanctionsOn Apr 28, the US and EU imposed a new round of sanctions on Russia, as President Obama put it, “the goal is not to go after Mr. Putin personally, but to change his calculus.”

The sanctions are aimed at 17 banks, energy companies, investment accounts and other firms controlled by four billionaires, who are viewed as part of President Vladimir Putin’s financial circle, in an attempt to constrain the assets to them and even Putin himself.

Since some American officials indicated that the sanctions act as a message to Putin that any hidden assets he might have could ultimately be affected. Although, according to some US and EU officials that they held off targeting broad sectors of Russia’s economy due to the fears of economic backlash, those sanctions on Russia, especially on Sergei Chemezov of Rostec Corp and Igor Sechin of the energy-supplier OAO Rosneft, will definitely have counterproductive effect not only on the western but on the global economy.

Chemezov and Sechin are both well-known businessmen dealing extensively with western companies, like Boeing Co. and General Electric Co. both have Russian business ventures with Rostec, owned by Chemezov. UK oil company, BP PLC, which has a 19.75 percent stake in Rosneft, is the largest foreign investor in Russia’s oil sector.

Its share of Rosneft’s proven reserves already amounts to 5 billion barrels of oil and 9 trillion cubic feet of gas, while Rosneft contributed $2.2 billion to BP’s earnings last year. BP’s shares fell 1.0 percent on Monday; while Rosneft’s shares fell 1.7 percent in Moscow.

Besides BP PLC, there are some other major oil companies who increased their exposure in Russia in recent years. Like, Exxon Mobil Corp, which struck a deal with Rosneft in 2011 to explore Russia’s Arctic seas that could hold billions of barrels of crude. Royal Dutch Shell PLC has a small stake in a Caspian oil pipeline in a joint venture with Rosneft.

Norwegian oil company Statoil ASA has joint projects with Rosneft in the Russian part of the Barents Sea and the Sea of Okhotsk. Besides major oil companies, some commodities trading giants including Glencore Xstrata PLC, Vitol Group and Trafigura Beheer BV, all have close ties with Rosneft.

So far none of these companies’ spokesmen have comments on what impact the personal sanctions on Mr. Sechin would have on their business, since the sanctions only mean no business with sanctioned people or entities not with the companies. While Russia’s energy is the motivation behind those cooperation and economic ties, but considering its current economy, do they still want to continue that business?

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In fact, Russia’s economy had declined before the sanctions. Rising inflation, growth stagnation, the ruble and stock market plunging, and billions in capital fleeing the country for safety, have dragged the country’s economy into deeper recession.

According to the World Bank, Russia’s $2 trillion GDP could shrink by 1.8 percent if the West imposes more sanctions. The Ukraine crisis has already pushed Russia’s economy into recession even without sanctions. More than $70 billion in capital has fled the country and the main stock market index fell by 10 percent in March, though it jumped on Monday as analysts said investors found the latest sanctions to be less severe than anticipated. With Standard & Poor’s cutting Russia’s credit rating one notch to triple B-minus on Friday, there might be more pain lying ahead for the investors.

Part of the reasons why the US and EU didn’t impose harsh enough sanctions towards Russia is due to the fear of backlash.

Besides, according to Konstantin Simonov, president of Russia’s National Energy Security Foundation,Putin might take this slate of sanctions personally and won’t be able to respond economically but retaliate politically. But what if Russia retaliates economically?

If the rumors of Putin’s hidden wealth and close ties with Chemezov and Sechin turns out to be true, Putin will not be a fool to stop escalation in Ukraine because that would otherwise prove that he has weakness in the hands of the US. So far the sanctions haven’t reached an extent that could stop Putin from escalating the tensions over Ukraine.

And if Putin retaliates economically, th EU will be the first to taste the backlash. Based on a chart from Global Trade Information Services, it shows clearly that about one-third of the oil and gas imported into the EU are supplied by Russia. Meanwhile, Russia has already started to put pressure on Ukraine to end up the tension by Gazprom recently jacking up the price of gas to Ukraine by 80 percent and levying an $11.4 billion bill on Kiev for previously discounted energy sales.

Considering Russia’s position as world’s 8th largest economy and its huge population, either the country’s economic recession or economical retaliation will definitely pose an impact on the global economy.

Kaiyu Li is a graduate student majoring in International Relations at NYU.