Daily update
Daily update
- Sanctions against Russia impact the global economy through three main transmission mechanisms. The risk premium on commodity prices slows the decline in inflation, unless countered by other producers. Sanctions directly disrupt trade. If Russia is plunged into economic recession (or worse), demand for imports falls. However, at 2% to 3% of global GDP, Russia is not a very large part of the global economy. Generally, risk aversion may encourage liquidity demand; the path of quantitative policy tightening is less certain.
- Excluding Russia from the Swift system does not stop international transactions; it makes them more bureaucratic and expensive (like combining Brexit and the Trump trade taxes). That hits international companies trading with Russia. Iran’s exclusion from Swift cost roughly 30% of its trade.
- Swift and specific bank sanctions may cause bank runs. Many Russians have experienced both bank runs and hyperinflation, which will increase their nervousness. A systemic bank run would weaken the Russian economy significantly, reducing Russian demand for imports.
- Sanctions against a central bank are unusual but not unprecedented. This limits the Russian central bank’s defence of the ruble (although gold reserves could be sold). A weaker ruble and higher domestic inflation cut Russia’s ability to purchase imports. Sanctioning Russia’s central bank does not affect the US dollar’s reserve status—there is no alternative.
