- Moscow is facing some of the most brutal U.S. sanctions since its invasion of Ukraine late in February.
- The Russian economy immediately felt the effects, with the ruble toppling in value.
- Together with Russia, the global economy immediately felt the effects of commodities and energy prices, and supply chains were affected.
- Sanctions are not just hurting Russia’s economy but might affect the U.S. economy in several ways.
Several countries immediately joined the U.S. to announce sanctions against Moscow as it moved its military might against neighboring Ukraine. Sanctions are a powerful tool, and those imposed by the U.S. make it difficult for Russian transactions to run through the U.S., where most payments must pass because of the dollar’s dominance as the world’s reserve currency.
NBC News reported that sanctions would prevent the flow of approximately $1 trillion in Russian banking assets in the U.S. and other financial systems. Russia is already feeling the effects of these sanctions as its currency, technology industry, and stock markets tumble.
However, cutting Russia does not come without consequences to the U.S. economy.
Soaring Costs and Inflation
Russia is a small player within the global economy despite its substantial energy exports, with just 1.7% of the total output. The sanctions were designed not to affect Russia’s energy exports to its largest market, Europe, but the uncertainty about disruptions to these supplies pushed oil prices higher.
Worries about shortages are not just isolated to its oil and gas, but also commodities like corn, wheat, cooking oil, and the various metals from Russia and Ukraine. The result is soaring costs for these commodities, including gasoline. Transport costs have also increased since Russia closed its airspace to several counties, meaning cargo planes must take longer routes to get products to other countries, and the price of shipping goods could more than double.
The effect of the sanctions is soaring costs for consumers buying end products, with increased inflation (currently at its highest point in several decades).
According to analysts from Wall Street, they cannot assess yet what the economic fallout will be from the sanctions. Both the sanctions and the rising transportation costs will affect supply chains. As the summer months approach, companies in America are speeding up their production to meet market demands. Product shortages caused by the disrupted supply chains will result in some economic fallout and suppressed growth, but it’s still hard to fathom by how much.
Losing Financial System Control
Since the U.S. dollar is the world’s reserve currency, few countries can exist without using it. As a result, sanctions can help end wars or force people to negotiate. Still, they also turn people away from the dollar, placing the United States at risk of reducing the control over the financial and payment system they gained during the previous century’s European instability. One example is when Venezuela tried to evade U.S. sanctions by floating its own cryptocurrency.
Importance of SWIFT
SWIFT is an essential element of coordinating and processing banking transactions between the central banks of countries and the more than 10,000 banks that use them. Cutting Russia out of SWIFT as part of these sanctions makes it more difficult for Russian businesses to move money around. The effects were immediate to the ruble, even though Russia tried to counteract with a sharp increase in interest rates.
As an alternative to SWIFT, China is developing a system known as CIPS. Additionally, blockchain technology and cryptocurrencies now let banks move payments needing SWIFT or dollars.
Therefore, there is a very high risk of driving Russia and others into using alternative payment methods, reducing their reliance on the U.S. financial system and harming the financial strength of the U.S.
The consequences of the economic war against Russia in the form of sanctions are as terrible as any military force, especially over the long term. However, even as the average Russian feels their brunt, these sanctions are being felt by everyone worldwide, including Americans. Rising food prices, increasing inflation, and disruptions to the supply chains have repercussions that are already worrisome. Still, in light of the pain and destruction felt by Ukrainians, it feels like a small price to pay right now.