Russia continues into Ukraine undeterred by the West’s sanctions

Exhausted by the Covid-19 pandemic and hit by rising inflation, Western countries will find it difficult to implement powerful sanctions that will only hit Russia.

Even if they did so, it appears President Vladimir Putin’s risk-benefit analysis is not following an accepted logic. For him, the cost of this major war in Europe – human, economic, military, reputational – appear prices worth paying if it re-establishes the Russian sphere of power and influence. A renewed, strong, and feared Eurasian empire. Putin has been openly demanding that Ukraine be demilitarize–even though it is the only country in the world to have completely abandoned its nuclear arsenal.

We know that sanctions will take at least a month to have their intended impact. Indeed, leaders including Joe Biden have stressed their long-term impact in punishing Russia. Moreover, the Russian state has been preparing Russian companies for the expected sanctions (including an alternative to the SWIFT international payments system).

The EU said today that its enhanced sanctions regime, details of which will follow in the coming days, is intended as a “package of massive and targeted sanctions”, which will hit five key areas: the financial sector, the energy sector, the transport sector, export controls, and visa policy. They follow the UK and US sanctions which are similar in scope: targeting individuals and entities with regime connections; limiting Russian access to capital; and limiting trade in key strategic areas of the Russian economy that inhibit modernization and stop foreign support for military reinforcements.

The EU hopes that an export ban will make it impossible for Russia to upgrade its oil refineries and war machine. The EU will also prevent the sale of aircraft spare parts and equipment to Russian airlines and limit Russia’s access to crucial technologies, such as semiconductors.

The EU’s biggest sanctions seem to be targeted at Russia’s financial system, however. EU leaders will cut Russia’s access to the bloc’s capital markets, raising Russia’s borrowing costs and inflation. The EU is also targeting 70% of the Russian banking market as well as state-owned companies, including companies in the defence field. The EU will also focus on Russian elites by curbing deposits and limiting them from leaving their money in EU member states.

There is currently no western consensus on expelling Russia from the SWIFT international payments system. The exclusion of Iran from SWIFT in 2012 required EU legislation that directed the Belgium-based organisation to act. After giving up the Nordsteam II gas pipeline, Germany seems reluctant to trigger a disconnection from SWIFT at this stage, too. That said, the West’s sanctions stance will continue to evolve, and Russia’s exclusion from SWIFT certainly remains an option.

These sanctions will hurt Russia. But clearly, they won’t be enough to stop Russia from attacking its neighbor. And while countries including the UK and US have provided military aid and training, both are holding firm to the stance that their forces will not directly engage with Russia. So, with the Russian army advancing in Ukraine, three scenarios dominate:

  • Creation of East-South transmission belt between Russia and Crimea
  • Annexation of Eastern Ukraine (which already started on Monday night)
  • Full occupation of Ukraine with resistance fighting (possibly for months to come)

All actors operating in the region therefore will need to consider how their supply chains would be impacted if Russia completely controlled the Black Sea region. An obvious consequence for us all is a further increase in food, energy and resources (for instance: nickel and pallidum) prices.

Along with what evolving sanctions could mean (including from Russia’s side), there is much for companies and their supply chains to consider. We are providing updates to our affected clients through our network of offices and political experts in Brussels, Berlin, Dublin and London. If you are a company that is or could be affected by the conflict and need help navigating these changes, please contact InstinctifPartnersBrussels@instinctif.com