Oil and Russian sanctions and their impact on world economies

Russian sanctions and their impact on world economiesDo global financial markets pay due attention to geopolitical risk? Despite the undisputed military superiority of the US, the financial consequences of a terrorist nuclear attack, war in the Middle East or Taiwan – or yet other completely unforeseen conflicts – can still be enormous. Globalization under a powerful hegemon has strengthened the ties between the national economies of countries, but these phenomena cannot exclude another great war. Such ties were also strong on the eve of World War I, which surprised investors at the time.

Europe has a problem with Russian resources

Russia has already been subject to numerous sanctions since it supported separatists in the Donbas in 2014. It did not hand over Crimea to Ukraine, nor did it leave Donbas alone, and the threats to impose further sanctions did not have the expected deterrent effect. Apart from the fact that sanctions generally do not work, and certainly not in a timeframe relevant to the attacked country, the Biden administration and the rest of the free world reiterated that their support for Ukraine would not go beyond the sanctions. Money is currently running out of Russia despite the recent introduction of capital controls in the country, and foreign investment that would be destined for Moscow will be diverted elsewhere. Countries receiving money redirected from Russia will experience faster economic growth than expected before the outbreak of the Russian-Ukrainian conflict. Countries like Mexico and Turkey that have not imposed sanctions may also receive an economic boost. These countries could benefit from increased trade and act as an intermediary between Russia and the rest of the world economy. The economies of some countries could benefit from the fact that highly skilled workers from Russia and Ukraine would leave their homes and go to more favorable places. The United States’ resistance to the influx of highly skilled workers is not as strong as it is for the unskilled workforce. The potential of the so-called the brain drain is closely related to Russia’s distancing itself from democracy. Nevertheless, the sanctions imposed on Russia have many negative effects on the world economy, which is likely to suffer from reduced exports of food and key agricultural commodities. Ultimately, experts say, could spike food prices and make farm operations financially difficult in many countries. The sanctions are likely to reduce corporate profits in the US and Europe slightly, in part due to rising energy costs and the withdrawal of technology companies from Russia. Ultimately, this effect will slightly reduce GDP growth in some economies. The closer to the epicenter, the worse it will be. Also, the tourism industry in some countries may be brutally hit, especially in some regions of Europe and North Africa (fashionable destinations of Russian tourists, oligarchs). However, public discourse clearly lacks measures against oil and gas exports, which accounted for 36% of Russia’s budget last year. Different countries implement different policies on energy sanctions. So far, however, the call for restrictions or an embargo on Russian oil and gas from Ukraine’s President Volodymyr Zelensky seems far from possible – it’s easy to see why. Western energy embargoes would be painful for Putin, but he would not feel their full effects until several years later. In the short term – and this is what matters in an invasion – Europe and the rest of the world have more to lose. Overall, war affects investors in two main areas. The first relates to sanctions hitting economies whose trade partner is / was Russia, and thus a decline in economic growth. Second, risk aversion is increasing in the market and investors are transferring their capital to safer assets.

Author: Jowita Olechno, investment analyst at Prosper Capital Dom Maklerski

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