Friday the 3rd of June marked the 100th day of the war in Ukraine after Russia invaded the country on the 24th of February. Although both countries suffered and continue to suffer tremendous loss, it seems that Russia totally overestimated their abilities. This is not only the case with the war itself but also include the major impact that sanctions had and continue to have on the country.
According to credible sources, the latest round of sanctions from the European Union (EU), that is set to be imposed on Russia, is the toughest yet. This includes the banning of Russian oil supplied by sea which accounts for almost two-thirds of all oil imports to the EU. However, this will exclude oil that is imported via pipeline due to opposition from Hungary.
Furthermore, both Germany and Poland agreed to stop their pipeline oil imports which means that a total of 90% of Russian oil imports will be blocked by the end of 2022. This is a huge blow to Russian revenue and their ability to finance the war in Ukraine if one considers that, according to the International Energy Agency (IEA), the EU imported 2.2 million barrels of crude oil per day in 2021. The US based Wall Street Journal also reported that the EU pays an estimated $10 billion per month for Russian crude oil – according to the Brussels-based think tank, Bruegel.
The imposed sanctions have pressed many firms to avoid doing business with Russia in the interest of preserving their reputations. This is evident in media reports indicating that almost one-third of Russian oil tankers are drifting around with no specific destination. However, according to statistics from TankerTracker.com, it seems that oil exports to China and India have increased by 15% and 22%, at the end of April 2022. This is due to an estimated 30% drop in Russia’s crude oil prices.
A downward spiral
The International Monetary Fund (IMF) projects that Russia’s economy will contract by 8.5% during 2022, inflation will reach 24%, and unemployment figures will double to reach 9.6%; an economic implosion that will take many years to recover from, if ever, and demonstrating the powerful impact of sanctions; directly and indirectly.
The latest sanctions also have Russia’s largest bank, Sberbank, in its sight by removing it from the Swift payment system and isolating the country even more from the global financial system. The Society for Worldwide Interbank Financial Telecommunications, better known as Swift, is used by thousands of global financial institutions to transfer money and with the exclusion of Russia, a clear message of intolerance was sent to world leaders.
One of the reasons why the sixth round of sanctions will have such a devastating impact on the Russian economy, is due to the specific inclusion of a ban on insurance for ships carrying Russian oil which will be implemented in six months’ time. According to British and European officials, ships that carry Russian oil will not be able to obtain insurance at the Lloyd’s of London market. Lloyd’s is regarded as the hub for global shipping insurance and given the enormous value linked to oil shipments, it is likely to cause a significant decrease in the sale and transport of Russian oil to global ports.
Considering the impact which similar restriction had on the export of Iranian oil, a decade ago, this ban could be a gamechanger for Russia. Analysts estimated that during 2012, Iran lost close to 1.5 million barrels of oil being exported, per day, due to the ban on shipping insurance.
Recently, a leading economist at the Institute for International Finance, indicated that the EU ban on oil imports does not prevent Russia from finding other global outlets, but the ban on insurance for Russian oil carrying tankers is set to severely curb Russian export efforts which could substantially weaken their economy over the short-term.
As international pressure mounts against Russia, one can only hope that this will bring about a major shift in responsible decision making. Witnessing the devastating consequences of a brutal war in our modern day and age almost seems unthinkable. The ripple effect is bound to be felt by all global firms, either directly or indirectly.
Lysis Group has the expertise and infrastructure to assist
We provide cost-effective, expert analysts to carry out the daily monitoring of the controls relating to regulatory screening, thereby protecting your firm from any reputational, legal, and regulatory perspective.
Our managed service platform for initial screening and on-going monitoring requirements is in a league of its own. All our staff are experienced in AML, Know Your Client (KYC) and other financial crime requirements. Using industry leading software partners, Lysis can also screen legal entities and individuals against all global watch lists and sanction lists, either in bulk or individually.
The effect of the recent financial sanctions against Russia is bound to impact firms across the globe which is why having a holistic client view has never been more important and one thing is certain: sanctions pack a powerful punch and even more so when enforced from a united front.