Brief n.21, March 2022

In early February we published a report on the possibility of a Russian invasion of Ukraine. After analyzing the conditions necessary for a successful invasion, we concluded that, unless Putin was detached from reality, this possibility was minimal because its cost would be too high. We were wrong. Our mistake was to consider Putin to be a rational and calculating strategist. He turned out to be devoid of any common sense and consumed by a shaky clash-of-civilizations vision. In every other aspect, our analysis remains valid.

Today Russia finds itself in a position it certainly did not bargain for on the day of the invasion. Russia’s unpreparedness for the economic blockade is as mind-boggling as the invasion itself. The military progress in Ukraine appears limited. The Kremlin did not anticipate the level of resistance the Ukrainians were able to put up. It looks like the Russian high command did not have adequate intelligence, either military or political, to properly evaluate the situation beforehand. Neither did the Kremlin expect a consolidated EU and NATO position on Ukraine, or Zelensky’s ability to present himself as a wartime leader. The secrecy surrounding the invasion plan played a bad trick on the Russian military command as Western intelligence agencies and the media were better informed about the invasion plan than the government of Russia. Russian military planners did not entirely estimate the fighting capabilities of the Ukrainian regiments like Azov, Aidar, or Freikorp. Often composed of extreme-right, crypto-Nazi activists, they demonstrate a high level of resilience and willingness to take on an enemy superior in numbers and firepower.

Consequences of Sanctions for Russia

Following the Russian invasion of Ukraine, many Western states, as well as Japan, Taiwan, and South Korea imposed four packages of coordinated economic sanctions against Russia. The measures target trade, services, technology, and finance sectors, and penalize Putin’s immediate circle. The breadth and severity of these sanctions are unprecedented. Their full effects on the Russian economy are still unfolding, as are the related implications for economic activity in other countries, particularly in Europe. But, it is clear that no major economy in the modern world has ever been hit so hard by such sanctions. As devasting as the economic sanctions are the reputational damage that Russia has suffered. Not since the days of the Communist takeover in 1917/18 has Russia been looked upon as a pariah state, ruled by a barbarian despot and his cronies.

Economic measures to cut Russia off from the world’s financial system are perhaps the most significant; the G7 leaders agree to ensure Russia cannot obtain financing from the leading multilateral financial institutions, such as the International Monetary Fund and the World Bank. They also imposed devastating sanctions on Russia’s state and private banks.

— Sanctions on the Central Bank

According to the former Russian deputy minister of finance and former deputy governor of the Russian central bank Sergey Aleksashenko, sanctions against the Central Bank of Russia (CBR), which plays a crucial role in the domestic foreign exchange market, are perhaps the most devasting. The CBR has important foreign exchange reserves amounting to $640 bn and it traditionally regulates the level of the ruble exchange rate. Western countries have frozen almost half of Russia's foreign exchange reserves (about $300 billion.) The West is also putting pressure on China to limit Russia's access to its reserves in renminbi. The freezing of the CBR’s assets means that it is left with gold reserves worth $127 bn held in Russia and renminbi reserves worth $70 bn. Neither can guarantee stability in the domestic foreign exchange market.

The sanctions against the CBR affected the domestic foreign exchange market right away: the ruble lost almost 45 % of its value. Later, the gap between selling and buying rates fluctuated between 20 and 50 %. CBR introduced a new regulation according to which exporters now have to sell 80% of hard currency earnings for rubles. Russian citizens cannot withdraw more than $5000 in any hard currency. Foreigners cannot sell Russian stocks and bonds and transfer coupons and dividends to their accounts, while residents and non-residents from 43 countries (that imposed sanctions on Russia) cannot transfer funds to their accounts with banks outside Russia. This may stabilize the ruble and make it stronger. At the same time, the uncertainty of the ruble, potential problems with imports, and general political uncertainty may undermine a business’s desire to take risks and result in lower growth in agriculture, lower supply, and even higher food inflation. In addition, disruptions in the payment system may lead to disruptions in the supply of imported goods to Russia, further accelerating inflation by reducing supply.

Putin tried to remedy the situation by announcing that all energy business transactions with hostile states will take place in rubles. This measure is meant to force Western buyers of the Russian oil and gas to buy rubles from Russia to pay for their supplies. The decision to charge rubles for Russian exports apparently means a veiled form of a fuel embargo on Europe. This measure has been talked about by the Russian leadership as the most crushing, but it was considered one of the extreme scenarios.


The EU and the US have put on their sanctions list a number of Russian banks and major companies. This will result in Russia’s largest bank, Sberbank, which holds around 34% of the banking system’s assets, being unable to make its payments and those of its customers denominated in dollars. Its correspondent accounts with US banks will be blocked and the bank had to pull out of the European market. Other banks like VTB, Otkrytie, Sovcombank, Rossiya Bank, and others face the same sanctions. Visa and Mastercard cross-border transactions are no longer available to Russian credit and debit card holders; the use of the Union Pay system is also limited.

In addition, the US blocked 13 major Russian companies and banks from accessing its capital markets and banned US investors from buying new issues of Russian government bonds. The G7 countries decided to disconnect several Russian banks from the SWIFT system. Disconnecting banks from SWIFT does not necessarily limit their ability to make foreign payments, but slows down the payment processing and makes it more expensive.

Given that the Russian financial system is highly integrated into the global system and Russia is one of the largest raw materials suppliers to the world market and, at the same time, is a significant importer of consumer goods, technology, and investment equipment, international payments are critical for its smooth functioning.

Disconnecting Russian banks from making customer payments will disrupt the flow of goods, accumulate a consumer market deficit, and accelerate inflation. The devaluation of the ruble will also affect consumer inflation, which may grow by an additional 4 to 8 % for a 40-50% increase in the value of the dollar. By the end of February, consumer price inflation in Russia exceeded 9%, with food inflation exceeding 12.5%.

However, it is important to point out that Western countries have not limited payments related to Russian energy resources, which constitute 50% of Russian exports. For Russia, this means that it will be able to offset the negative impact of financial sanctions with a solid current account balance due to proceeds from raw materials exports, which are not threatened. Furthermore, the scale of application of sanctions by the EU is significantly less than that of the US, which leaves the possibility of virtually unlimited payments in euros. This means, for example, that while the dollar accounts of a sanctioned Russian bank will be blocked, its euro accounts will be operational.

— Foreign Debt

Another significant aspect of the Western sanctions is the ban on the access of Russian banks and companies to Western capital markets. The ban will affect banks’ ability to repay foreign debt (Russia’s foreign debt is around $478 bn.) This year alone, Russian banks and companies will have to repay more than $100 bn. This means that the Russian economy will have to channel substantial financial resources to repay foreign debt. The only way to do this is to use domestic savings, undermining already weak economic growth. It is too early to assess how much the Russian economy will slow down, but it is clear that the recent IMF projection of 2.8 % growth is unrealistic.

— Technology

Sanctions are severely restricting Western exports of technology, equipment, and components to Russia, which could affect Russian imports of machinery, equipment, and technological goods. Russia has traditionally been an importer of advanced technology, used in all kinds of technologically complex products, from refrigerators to supersonic jets. These sanctions no doubt will impact the technological level of the Russian economy and will affect the Russian military-industrial complex.

The severity of these sanctions is amplified by the boycott of Russia by global companies that do not want to take political risks. BP and Shell are withdrawing from oil and gas projects in Russia. Car companies, such as Ford, Volvo, Jaguar, Hyundai, BMW, and Toyota et al, have announced they will stop production or stop supplying cars to Russia.

Shipping companies have stopped shipping containers to and from Russia. Banks have stopped lending to traders to buy Russian oil and insurance companies are sharply increasing their rates for transporting it by sea.

— Aviation

Not only has the EU closed its sky to Russian airlines, including business aviation, but its sanctions have affected the supply of aircraft and components, the provision of aircraft maintenance services, and insurance. European-made aircraft (Airbus) make up about 40 % of the fleets of Russian airlines and they carry 41 % of their passengers. The two largest companies, Aeroflot and S7 operate respectively 117 and 66 Airbus aircraft, which means they will be significantly hit by the sanctions. Most of the aircraft are in a lease, from companies registered abroad.

Divestment From Russia

Leading foreign businesses with multibillion-dollar investments in Russia, including BP, Shell, ExxonMobil, and Norway’s sovereign wealth fund, have announced that they are going to divest or exit operations. Many others, including Apple, McDonald’s, and Starbucks, have begun to suspend operations. Faced with a similarly stark moral dilemma in South Africa during apartheid, many international companies divested and eventually helped compel the government to begin negotiations that ended the system of forced segregation.

The advertising market is also losing money. Of the top 30 largest advertisers in Russia, more than half are foreign brands. And 13 out of 16 of these foreign companies have already announced that they are leaving Russia, suspending business, etc., including the removal of all advertising. This means a loss of $510 million a year in the advertising market and this loss is only among the largest advertisers, like Nestle, Reckitt Benckiser, PepsiCo, Procter & Gamble, Volkswagen, L’Oreal, Mars, etc.

Reputational Damage

There are also more symbolic sanctions, including those targeting specific individuals with visa bans and asset freezes, severing business ties, canceling sports competitions and cultural events, restricting the reach of Russian state media, etc. These symbolic sanctions will increase the feeling of international isolation that the country will suffer as a result of the war. They also radically transformed the image of Russians, particularly those residing and/or working abroad. In the first weeks of the war reports of cancelations of Russian-related cultural events (concerts of Russian composers, lectures about Russian authors, Russian art exhibits) were numerous. Many Russians abroad complained that they are now being treated like the Untermenschen, referring to the treatment of Jews during the Nazi period.

Political Consequences

Deteriorating standards of living resulting from sweeping economic sanctions will have a direct and immediate impact not only on the Russian middle and upper-middle class (less than 15 %) but on the population as a whole. The persecution complex, triggered by the anti-Russian attitudes in the West, will contribute to the rise of the sense of Russian exceptionalism. Already we have extremist fringe ideologies of yesteryears, like National-Bolshevism or neo-Eurasianism finding their way into the political mainstream. Putin’s rhetoric today is not very different from the rhetoric of the National-Bolshevik leader Eduard Limonov.

Consequences for the West

Despite a well-coordinated Western response to the crisis, it appears that the European Union must likely endure serious difficulties too. Rising fuel prices combined with supply shortages of key minerals may lead to the disruption of production chains, lead to rising unemployment, and a rapid decline in household incomes. This will have a direct impact on the political mood of the European middle class, increase the level of distrust for national governments and lead to the rise of populist politics.

The situation may be further exacerbated by a large number of Ukrainian refugees coming to Europe. There are already over three million Ukrainians taking shelter in the EU and almost seven million are internally displaced. This is the largest refugee crisis since WWII. It can lead to rising social tensions in countries like Poland, Germany, Spain, and Italy – traditional hubs of Ukrainian migrants. Other potential threats include human trafficking, arms smuggling, and the overall rise in ethnic organized crime.

The consequences of the economic sanctions will have a negative impact on the EU. The IMF recently predicted a sanctions-triggered recession on a global scale. If Russia even partially, limits the supplies of energy resources, metals, rare earth metals, minerals, and some other products and raw materials to unfriendly countries, having a share in world production and trade from 17% (oil and gas) to 37% (nickel) and 40% (neon), it may have negative consequences on the global economy.

— Energy Sector

Certain European countries will see a rise of the price of fuel resulting from limited supply from Russia. Germany, which imports more than 50 % of its natural gas from Russia, will be hard-pressed to find alternatives. The country has already suspended the newly built Nord Stream 2 pipeline project, which was built to convey gas from Russia, last month.

Goldman Sachs estimates that rising gas prices will remove at least 0.6% of the EU GDP and 0.1% of the UK GDP. The effect on the German GDP would be even greater. If Russia cuts gas deliveries to Germany, the GDP of the EU will decrease by 2.2%, Germany's by 3.4%, and Italy's by 2.6%. Global isolation could drive Russia to reduce its current account surplus and energy exports. China will hold a crucial role in shaping how the oil market will rebalance, and how much Russian oil exports end up shrinking, with logistical constraints likely to prevent a full reallocation of flows for months.

The energy market may be offset by a potential lift of sanctions on oil imports from Iran and Venezuela. While all of these measures could help compensate a sizable decline in Russian exports, they would leave the global oil market with no buffer, still requiring demand reduction through higher prices.

The uncertainty on how this conflict and oil shortages will be resolved is unprecedented. Despite the encouraging statements by the EU leadership, it is impossible to replace Russian gas supplies in any significant way. Germany, for example, has no terminals to receive liquefied natural gas (LNG) supplies from Qatar or elsewhere. Taking into account that European gas reserves are now at all-time lows (and declining), the surging gas prices on the spot market and the necessity to replenish the gas supply, the impact on the EU may be quite devastating.

Oil prices have surged to their highest level since 2008. Given the role Russia plays in the global energy market, the world economy could soon be dealing with one of the largest energy supply shocks ever. Goldman Sachs forecasts the 2022 Brent spot price to be $135 per barrel, with the 2023 forecast at $115 per barrel, up from $98 and $105 per barrel respectively. The American plan to sanction all of Russia’s banks may lead to the collapse of the energy market in Europe.

Energy crises resulting from sanctions may force the EU to subsidize Albania, Macedonia, Italy, Germany, and other countries' energy consumer markets. (Spain expects to replace the falling out volumes of gas by exporting from Algeria and increasing LNG acceptance at its terminals. But this is unlikely to help maintain the energy balance). Freight transportation tariffs will go up, thus affecting the cost of basic necessities. High gas prices may have a negative impact on logistics within Europe, leading to skyrocketing production costs, followed by two-digit inflation.

— Agriculture

Russia is the third largest exporter of potash fertilize after Canada and Belorussia. Given that Belorussia is under sanctions too and closely collaborates with Russia, Russia's temporary ban on exports of potash fertilizers may undermine the EU agricultural sector.

Russia and Ukraine account for more than a quarter of the world's wheat exports. In March 2022 Russia temporarily banned grain exports to ex-Soviet countries and most sugar exports, but it may provide special trade permissions within its current quota. As a result, wheat futures climbed to $10.59 per bushel in early March, the crop’s highest price since 2008. But even before the war began, global markets were already strained by the ongoing pandemic and regional droughts, which squeezed production and fueled inflation around the world. Shortages of Russian wheat supplies may lead to growing tensions in North Africa and in the Middle East.

Ukraine is the largest exporter of sunflower oil in the world, accounting for up to 46 % of sunflower and safflower oil production. The second largest producer is Russia, which exports about 23% of the world's supply. India, which imports 23 % of its sunflower oil, mostly from Ukraine, and China, which imports about 12% of its sunflower oil from Ukraine and Russia, could start turning to U.S. sunflower oil producers, raising prices for raw materials wherever they are produced.


Ban on importing rare earth metals from Russia is another potential threat of economic instability. As of June 2019, Russia held the fourth largest reserves of rare earth minerals in the world (12 million tons), way ahead of Australia and the United States. Ukraine produces somewhere between 70-90% of the world's neon gas, which is a vital component of microchips used to make smartphones and computers.

Political Consequences

The effect of sanctions and counter-sanctions may have political consequences for the EU as well as for Russia. Rising gas prices, coupled with other economic hardships, will lead to political discontent among EU voters and may contribute to the rise of populist political parties. The situation may be further exacerbated by a large number of Ukrainian refugees coming to Europe. There are already over three million Ukrainians taking shelter in the EU; over seven million Ukrainians are internally displaced. This is the largest refugee crisis since WWII. It can result in the growth of social tensions in countries like Poland, Germany, and Italy – traditional hubs for Ukrainian migrants. Other potential threats of massive migration include human trafficking, arms smuggling from war-torn Ukraine, and the overall rise in ethnic organized crime in the EU. These are the challenges and consequences European leaders are likely to face.