You may have heard about several countries imposing sanctions on Russia after their invasion of Ukraine. But what are sanctions? Why are countries using them? And how does this affect Russia? We've got you covered.
Before we begin, let us make this very clear. We do not have a geopolitical background, have zero experience in war/strategy and feel terrible for the people of Ukraine. We are simply explaining the sanctions and the possible effects on Russia and global trade.
What Are Economic Sanctions?
Economic sanctions are penalties levied against a country, its officials or private citizens, either as punishment or in an effort to provide disincentives for the targeted policies and actions. Sanctions can range from travel bans to export restrictions to trade embargos and are typically used in lieu of military force.
These restrictions are placed on individuals or entities and prevent them from doing business with the country imposing those sanctions. Sanctions put in place by the U.S. government cut off an individual or entities from the American financial system, meaning they can no longer do business in the U.S. and all their assets under U.S. jurisdiction are frozen.
Why Are Countries Using Sanctions Against Russia?
Countries want to punish Russia for its invasion of Ukraine, but no one wants to start World War 3. The goal is to hurt Russia economically in the hopes they can't continue the invasion. There's a few issues with this thought process that we will get into shortly.
List of Sanctions
Here are the list of sanction from around the world:
United States
Individuals - Vladimir Putin, Sergei Lavrov, Alexander Vedyakhin, Andrey Puchkov and Yuriy Alekseyevich Soloviev, Denis Bortnikov, Petr Fradkov and Vladimir Kiriyenko
Banks - Sberbank, VTB Bank, Otkritie, Novikom, and Sovcom, Vnesheconombank, Promsvyazbank
Other - export blocks on technology, including semiconductors, telecom, encryption security, lasers, sensors, navigation, avionics and maritime technologies
United Kingdom
Individuals - Vladimir Putin, Sergei Lavrov, Kirill Shamalov, Denis Bortnikov, Petr Fradkov, Yuri Slyusar, Elena Georgieva, Gennady Timchenko, Boris Rotenberg, Igor Rotenberg
Politicians - any members of Russian parliament, the Duma, and Federation Council who voted to recognize the independence of Donetsk and Luhansk
Banks - VTB Bank, Rossiya Bank, IS Bank, GenBank, Promsvyazbank, Black Sea Bank
Companies - JSC Research, United Aircraft Corporation, United Shipbuilding Corporation, Rostec, Tactical Missiles Corporation
Other - all Russian aircrafts are banned from UK airspace, all dual-use export licenses to Russia are suspended, key Russian state-owned and private companies will be prevented from borrowing or raising capital on UK markets
European Union
Individuals - Vladimir Putin, Sergei Lavrov, Sergei Shoigu, Anton Vaino, Marat Khusnullin, Dmitry Grigorenko, Maxim Reshetnikov, Nikolay Yevmenov, Vladimir Lvovich Kasatonov, Igor Osipov, Oleg Salyukov, Sergei Surovikin, Sergey Dronov, Yevgeny Prigozhina, Violetta Prigozhina, Lyubov Valentinovna Prigozhina, Denis Bortnikov, Andrey Kostin, Igor Shuvalov, Margarita Simonyan, Maria Zakharova, Vladimir Solovyov, Konstantin Knyrik, Aleksey Pushkov, Pyotr Tolstoy
Banks - Rossiya Bank, Promsvyazbank, Vnesheconombank
Companies - Internet Research Agency
Japan, Australia, New Zealand and Taiwan also imposed sanctions targeting individuals, banks, military organizations and exports.
To read more about the list and who the individuals, banks or companies are, the Guardian has a great breakdown.
Notable Exclusions from Sanction List
While the sanctions seem extensive from the outside, there a few notable exclusions.
Energy
The largest exclusion from the sanctions is oil and gas. Energy is Russia's largest export and in essence, Russia's key economic driver. So you would think this would be the first place other countries would want to sanction.
But with oil shortages globally and energy prices where they are already, countries can't afford to do this. It would drive up energy costs and put tremendous strain on their own economies. I'm sure Putin took this into account and played a role in the timing of the invasion.
As long as Russia is selling its oil and gas, the country will not be hurt too much financially.
SWIFT
I can try to simplify and give you a better understanding of what SWIFT is, but I won't be able to do it any better than this Twitter thread from Sahil Bloom.
SWIFT is short for the Society for Worldwide Interbank Financial Telecommunications. It’s a global cooperative of financial institutions based in Belgium. It was formed in 1973 when 239 banks from 15 countries came together to establish a way to handle cross-border payments.
Today, SWIFT connects more than 11,000 financial institutions across 200+ countries. Think of it like a simple email system enabling secure messages across its members. An average of 40 million messages a day—including orders, payment confirmations, FX exchanges, and trades.
SWIFT doesn’t actually do any transfer or holding of funds, but it’s an critical part of the communication infrastructure that enables cross-border money flows. It’s a key part of the global financial system’s plumbing, if you will. So why is it in the spotlight right now?
While not a political organization, it’s importance to global flows means SWIFT is often looked at as a geopolitical tool as part of sanctions packages. Cutting off a nation’s banks from SWIFT access restricts flows into and out of that nation, resulting in real economic pain.
This happened in 2012 with the sanctions package on Iran in retaliation for it’s nuclear program. It was looked at in 2013-14 in response to Russia’s actions in Crimea. Cutting off SWIFT access is viewed as a VERY significant move, so the consideration alone is material.
With Russia’s most recent actions in Ukraine, cutting off SWIFT access is very much “on the table” as part of a sweeping sanctions package. The challenge is that it is a real double-edged sword. Russia is a massive economy with tentacles that reach all around the world…
It is a key energy supplier to Europe and the world. It is an exporter of materials critical to the manufacturing of jet engines, semiconductors, automotives, electronics, and fertilizers. Cutting off Russia from SWIFT would impact the flow of payments for these industries.
Russia has also been building an in-house system since 2014—the last time SWIFT cutoff was threatened—which may mean they are able to temper some of the impact a cutoff would have on its economy. Though it appears most experts still expect the impact would be significant.
A cutoff from SWIFT may also have longer-term second-order effects on Bitcoin and non-fiat currencies. The base logic: Russia may seek to circumvent the impact of the restrictions via a combination of its in-house system and a push away from the USD-reserve currency hegemony.
The U.S. and other countries have said that cutting off Russia from SWIFT is still on the table, but so far it looks like this in absolute last resort.
Update - The United States, European Union and Canada announced that they would expel certain Russian banks from SWIFT on Saturday night.
How Will This Affect Russia?
There is no doubt that these sanctions will have an effect on Russia and its economy. How big of an effect is the real question.
Russia has been preparing for this moment. Russia has been sanction-proofing itself since 2014, stockpiling gold and bringing down the debt to GDP to around 18%. For comparison, the United States debt to GDP is 130%.
Only time will tell if the sanctions are enough.
Conclusion
Now you know what sanctions are and why they are being used against Russia. Hope this answered all of your questions and got rid of any confusion around the term sanction.
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Disclosures
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