Understanding Market Implications from the Sanctions in Russia

Welcome to part two of our interview with Tim White, a Special Advisor at AML RightSource and our global sanctions expert, where we delve into the market outlook and what the long-term effects could be from the sanctions on Russia.

Please note the situation in Russia and Ukraine is fast-moving and this interview took place on February 28^th. Read part one here.

Market outlook

We've seen the price of oil surpass a hundred dollars a barrel now, so, how could the sanctions affect both the Russian economy and global stock markets? And will Russian stocks be banned to Western investors? 

I would say it’s on the table to ban all stock investments. But the challenge with that is the ripple effect of forcing divestments on the Western World, including those who will have to divest from Russian sovereign debt and several dozen joint stock companies within their respective wind down periods as defined in the directives and general licenses. Furthermore, if everyone is forced to sell, it will drive the market down even further. The price of oil acts as a lifeline of the influx of capital for Russia, so they will likely need to divert its oil reserves and gas reserves to China.

What are the longer-term ramifications of these global sanctions against Russia and how will they affect how both entities and individuals do their business? 

From a long-term perspective, it’s going to be hard to read. Russia is one of the five permanent members of the UN security council. We are now seeing that being eroded, looking at both the eroding of power and the nature of the global structure being defined and controlled by the United Nations.

There are big questions like how Germany can backfill their oil demand? What is the ripple effect of Western investors having to divest? And what will the hardship be for Russia? 

You discussed the sanctions programs including blocking off the Central Bank of Russia from SWIFT to Iran back in 2010, how do you think this sanctions strategy and impact will be different?

I think it’s a very different situation compared with Iran and the concerns surrounding this. This is an outright war and an act of imperialism, whereas in Iran it was; proliferation of weapon of mass destruction, support of terrorism and human rights violations. With Putin being so involved and following through with his belief he can take a country, it could cause greater erosion for the Russian people on their human rights and the control of power. Russia has removed some of the people in Moscow who had Ukrainian ties, so I anticipate that continuing.

How do you see what's happening now impacting the sanctions regime in the future?

This is the greatest test of sanctions as a foreign policy tool, as in the past, they had been implemented retroactively after an action had already happened. It’s dreadful to think sanctions are our strongest and maybe only political tool of diplomacy versus war. If the application of economic sanctions against a country with such a large economy fail it may point to the fact that the future of economic sanctions may only be effective against smaller countries, such as Iran and Venezuela. It raises a question as to what happens next time they try and invade a country after the sanctions didn’t work the first time?

Are there any more thoughts that you'd be willing to share with me with regards to what's happening?

I believe there could have been tighter coordination in place between the UK, the United States, and the EU. While there is rhetoric that it in fact was very tight, there were differences in the number of banks that sanctions were implemented on. There may be very good reasons for these discrepancies, but it will be very interesting to see where the EU comes into play as it needs 27 members to offer a unanimous decision on sanctions. You have members such as Hungary or Italy who may take a softer stance against Russia for fear of future events, so the EU sanctions may be more watered down.

I also would have expected Putin to wait until the Nord Stream 2 Pipeline Project went online before choosing to invade so Europe would have been even more dependent on their fuel. It looks like Putin is attempting to recreate the footprint of the former Soviet Union.

Some of the questions and responses have been edited for brevity and clarity.

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