What Russian sanctions mean for the global economy and markets

Eylem Senyuz

Senior Global Macro Strategist

Truist Advisory Services, Inc.

Keith Lerner, CFA, CMT

Co-Chief Investment Officer

Chief Market Strategist

Truist Advisory Services, Inc.

What happened

On late Saturday, major global economic powers, including the U.S., UK, Canada, France, Germany, Italy, and the European Commission announced a new list of sanctions that would prevent Russia’s central bank from using its international reserves to undermine broader sanctions that were announced earlier in the week. The new list of sanctions will place Russia, especially from the U.S. point of view, on par with countries like Iran, North Korea, and Venezuela. Excluding some Russian institutions from the global banking messaging system called SWIFT is one thing and still manageable from Russia’s point of view but targeting the Russian central bank’s foreign reserves took the economic side of the crisis to another level.

Coupled with previously announced sanctions, the new list of constraints placed on the Russian economy is expected to have an effect not only on the Russian economy but also on the global economy, consumer sentiment, and broader financial conditions.

Our take

Our heart goes out to the people of Ukraine

With the Russian army deep in Ukraine and continuing its military operation, there are much more significant concerns than the economic fallout of the crisis. The events and the scenes unfolding can be described as the worst crisis in Europe since the Second World War. The human cost is a tragedy, with the loss of countless lives and the forceful immigration of millions. Our heart goes out to the people in Ukraine who are going through an ordeal hard to describe and bear.

Risk of Russia being removed from global bond and equity indices moved higher

Global wealth funds started to announce limits on Russian investments, with Norway’s sovereign wealth fund leading the charge. British Petroleum (BP) announced that it is planning to sell its shares in Russia’s oil giant, Rosneft. Subsequently, Russia announced that it would temporarily ban foreigners from selling securities in local markets in Russia. This announcement could put Russia on a watch list by major equity and bond index providers, leading to the eventual removal of the country from major global indices. Rating agencies downgraded Russian debt to junk status with sanctions creating havoc in Russian financial markets  and the economy.

Reverberations of the Russian currency crisis will be felt in neighboring regions

Like it did during the Crimean crisis, the Russian central bank raised interest rates, this time to 20% from 9.5%, to stop capital outflows. The Russian stock market was ordered to be closed on Monday to dampen the fallout. Nevertheless, the Ruble dropped another 20%, experiencing the steepest one-day drop of the current crisis.

There is no doubt that the epicenter of the economic crisis will be Russia, but neighboring countries that trade with Russia will also be affected. Russia is a top trading partner for many former Soviet Union nations and nearby countries. Tourism revenue of the nearby countries could be negatively affected with Russian tourists’ purchasing power diminished significantly, and the restrictions on travel could last much longer than the crisis itself. The Russian economy is deeply intertwined with major European economies, especially for Europe’s energy needs. Supply disruptions of energy to Europe could significantly impact the global economy.

To read the publication in its entirety, including our comprehensive view on what this means for global investors and consumers, please click the button below "Download PDF".

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