The Western sanctions imposed on Russia have adversely impacted the country’s foreign currency payments and have instigated a series of countermeasures from Russia. The article explores the impact of these sanctions on the economy.
The Collapse of the Russian Economy:
The sanction imposed on Russia have frozen the country’s foreign currency reserves and begun to ban the Russian banks from using the SWIFT international payment network. The rouble has fallen to more than 50% against the dollar since the invasion began. To keep the rouble from collapsing further, the Russian central bank has imposed capital controls on foreign currency transactions. These sanctions and their countermeasures are likely to result in Russia’s isolation from the global economy, further lowering its export competitiveness and GDP. (Werker 2022).
The war has added concerns of inflation to an already inflationary economy recovering from the impact of the pandemic. This puts central banks in a dilemma of choosing between inflation and incentivising economic growth dampened by the pandemic.
Russia is a major exporter of hydrocarbons and Ukraine of food grains such as wheat. The prices of energy, petrol, commodities, and durable goods have risen because of the crisis. The U, K’s inflation is at a 30 year high of 6.2%. The Bank of England has raised interest rates in three consecutive meetings and brought it back to its pre-Covid level of 0.75%. (Strauss 2022)
The U.S consumer price inflation has soared to a 40 year high of almost 8% in February. This prompted the Federal Reserve to increase the interest rate by a quarter of a percentage point. The Fed has also indicated the likelihood of six further increases in 2022. (Smith 2022)
The inflation in the Eurozone has also been close to 6%. However, the European Central Bank (ECB) has maintained its hawkish stand and refused to raise interest rates until the end of its bond-buying programming. This would give the ECB some time to gradually increase its interest rate in tune with its sequencing logic for a smoother monetary policy transition.
Global Supply Chain Disruption:
Global supply chains were barely recovered from the adverse impact of the covid-19 pandemic. The disruption caused by the Ukraine war would act as a double blow to the supply chains. The war in Ukraine is unlikely to have a direct effect on global supply chains as Russia and Ukraine do not contribute a significant proportion to the global supply chains. However, they have increased the transport costs. As the price of oil rises, transport costs rise. This rise in transport costs has indirectly impacted the global supply chains adversely. Shipment going through the China Europe railway has been affected due to the war. A crucial component at the heart of the electronics supply chain such as semiconductor chips are transported through this route. (Segal 2022)
Thus far, the economic outcome of the crisis has been negative for the Russian as well as the global economy. A prolonged crisis is likely to cause higher inflationary pressures and inhibit economic growth. The fears of impending stagflation are looming.
· Colby, S. (2022). Fed announces first rate rise since 2018 amid surging inflation. The Financial Times.
· Segal, E. (2022). Ukraine Crisis Creates New Strains On Global Supply Chains. Forbes. Retrieved March 24, 2022, from https://www.forbes.com/sites/edwardsegal/2022/03/06/ukraine-crisis-creates-new-strains-on-global-supply-chains/?sh=5db14bd510af
· Strauss, D. (2022). Bank of England raises interest rates again to curb inflation. The
· Werker, E. (2022). The Russian economy is headed for collapse. The Conversation. Retrieved March 24, 2022, from https://theconversation.com/the-russian-economy-is-headed-for-collapse-178605