Russia-Ukraine Crisis | Unintended impact of sanctions on Moscow

It is clear that sanctions have triggered an economic chaos in Russia, and now disruptions in linkages with a major energy, commodity, and arms-producing country are showing many unintended consequences

The western sanctions against Russia are designed to cripple Moscow’s economy, restrict the use of foreign reserves, damage the Russian Ruble, as well as denial of technologies to key sectors. While looking at the Ruble slide, exit by large number of foreign firms as well as stock market freeze, it is clear that sanctions have triggered an economic chaos in Russia.

Now disruptions in linkages with a major energy, commodity, and arms-producing country are showing many unintended consequences.

There is a surge in energy and commodity prices, along with possibilities of supply chain disruptions. These factors will lead to inflationary pressures, and may affect growth prospects in many countries, including India. The International Monetary Fund (IMF) has warned that the global economic outlook is now subject to “extraordinary uncertainty”.

The sanctions were not designed to affect energy trade. The European Union did not include Gazprombank and Sberbank — banks which handle most energy transactions, in its SWIFT cut off list. Gazprombank is also not mentioned on the United States list. However, ‘self-sanctioning’ by most global firms is likely to affect Russian oil and gas production, and exports.

Russian firms find difficulties not only in accessing payment processing, but also insurance and software services. Major shipping companies are halting cargo bookings to and from Russia. Any firm, which has exposure in the US and Europe simply does not want to deal with Russia at the moment. These developments have led Russian President Vladimir Putin to announce that these sanctions are like a declaration of war.

Russian non-pipeline energy exports may now find disruptions as the product may simply not be sold due to lack of logistics and ‘self-sanctioning’ of firms.

In recent months, Russia’s oil production has been about 11 million b/d, and it exported about 8 million b/d. A recent study by the Oxford Institute for Energy Studies indicates that post-sanctions, Russian oil production could face disruptions between 3-4 million b/d.

In recent months, Russia has been reducing piped gas supplies to Europe. These reductions have been compensated by LNG inflows from the US and Northeast Asia. There are also discussions about the possibility of the US and some of its allies banning Russian oil. All these disruptions are making oil markets nervous, and prices are close to all-time high.

As both Europe and Russia are preparing for diversification, China could be a main beneficiary. Gazprom has now signed a deal to design the Soyuz Vostok pipeline across Mongolia towards China. The project could enable Russia to build an interconnector between its European and Asian pipeline networks. After Visa and Mastercard suspended its Russian operations, many Russian banks are now planning to turn towards China’s UnionPay system.

In 2014, Gazprom signed a 30-year contract to supply up to 38 billion cubic meters of gas per year to China. Russia already exported 16.5 billion cubic meters of gas to China in 2021 through Power of Siberia gas pipeline, which started operation in 2019. Though gas supply to Europe was decreased by Russia in recent months, its gas exports to China were above agreed contracts. In 2021, China also imported 1.6 million b/day of oil from Russia. This accounted for 15.5 percent of Chinese crude imports. More than 40 percent of this crude is imported by China through the East Siberia Pacific Ocean (ESPO) pipeline.

Although Japan, South Korea, and Vietnam also import significant amounts of Russian energy, India imported only about 40,000 b/day of oil from Russia in 2021. GAIL has signed a 20-year contract with Gazprom to buy 2.5 million tonnes of LNG a year. Now, Russia would be looking more towards Asian markets.

Building on its strong partnership and tilt towards Moscow during the Ukraine crisis, New Delhi could tap into Russian energy sources through bilateral payment mechanisms at discounted prices. But first, India has to find ways to manage its bilateral trade and arms purchase transactions. Due to a wide range of unprecedented sanctions, it is not going to be easy for most Indian banks and other players to bypass restrictions.

While intended to punish Russia for its action in Ukraine, sanctions are endangering fragile global recovery, and may further strengthen Russia-China strategic alliance economically. In most foreseeable scenarios, sanctions are likely to continue. Since India is vulnerable to high energy prices, the Indian Rupee is now at all-time low.

New Delhi will have to prepare itself for a rough ride ahead, and recalculate its import bill as well as inflation, fiscal deficit, and growth numbers.

Gulshan Sachdeva is Professor at the Centre for European Studies and & Coordinator, Jean Monnet Centre of Excellence, Jawaharlal Nehru University. Views are personal, and do not represent the stand of this publication.