U.S. Increases Sanctions on Russia, Hurting Global Markets

by Evan Gao ’16

After President Vladimir Putin blatantly violated international law last week and annexed Crimea, the western powers implemented economic sanctions on many of Russia’s companies, government officials, members of the inner circle. These sanctions, ordered on March 17th, banned the listed individuals’ entry into the U.S., froze any assets they may have in the country, and prevented them from doing business with any American company or institution.

Obama’s sanctions, which targeted individuals, have thus far had little effect on altering Putin’s firm stance on Crimea. Many of the officials threatened, who owe their fortunes and power to Putin, have refused to break rank and remained loyal to the Kremlin. Obama, however, recently signed another executive order, which authorized sanctions on many of the major sectors including financial services, energy, defense, and engineering that play key roles in the strength of Russia’s economy. Moreover, the G-8, the eight wealthiest nations in the world based on GDP has now become the G-7 as world leaders have ostracized Russia from the elite group. In less than a week, these sanctions have already made a significant impact and are pushing Russia towards an economic recession. Russia’s Micex stock index plunged 13.7% this year and declined 0.7 % to a one-week low. Many credit rating agencies have also downgraded the country’s credit rating. S&P, for instance, rated Russia’s credit to BBB, the second-lowest investment grade because of the increased risks posed by the conflict. Investors are now wary of placing their money into an “isolated” Russia, as they pulled $5.5 billion from Russian equities and bonds this year through March 20. The total outflow for all of 2013 was $6.1 billion  according to data compiled by EPFR Global, a Cambridge, Massachusetts-based firm tracking fund flows. In fact, based on Bloomberg, the ruble is now the second-worst performer against the dollar behind Argentina’s peso.

The Russian government, nevertheless, is unfazed by the effects of the sanctions. Dmitry O. Rogozin, a deputy prime minister, who was among one of the first to be targeted, declared in a twitter post: “All these sanctions aren’t worth a grain of sand of the Crimean land that returned to Russia.” To an extent, Rogozin is correct because the G-7 is not looking to collapse the Russian economy. Russia will not nearly be damaged enough to convince Putin to reverse his actions especially when so many countries depend on Russia. The EU, for example, relies on Russia for a third of its energy imports, thereby risking the health of its own economy if Russia’s economy plummets. With a cold war on the rise and neither side willing to budge, who will “win” the proverbial game of chicken with the health of the global economy at stake?

http://www.bloomberg.com/news/2014-03-25/u-s-targets-russian-markets-with-sanctions-over-ukraine.html

http://www.bloomberg.com/news/2014-03-23/russia-staring-at-recession-on-sanctions-that-could-get-tougher.html

http://www.nytimes.com/2014/03/22/world/europe/russia-starts-to-feel-effect-of-sanctions.html?ref=economy

http://www.bloomberg.com/news/2014-03-24/russia-reality-check-stocks-to-bonds-advance-as-leaders-gather.html

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