Blocking Effect Of Sanctions

The subject and purpose of the sanctions… The dimensions of the sanctions, which aim to isolate Russia from the financial system and especially to limit the revenues most of which derive from commodity exports, have developed a new dimension with the steps regarding the prevention of reserve accessibility of SWIFT and the Central Bank of Russia. While the USA and its allies, continuing their sanctions due to Russias ongoing military operation in Ukraine, activated the card for some Russian banks to be removed from the international payment system SWIFT with additional penalties, Gazprombank, which makes large gas and oil payments, and some Russian banks are not subject to full blocking sanctions for now. On the other hand, if the energy-related fund transfers become widespread, the shift to the Russian system or old technology will increase costs and will not be useful for the counterparty of commercial transactions. Therefore, even in its current form, it will have a significant impact on export revenues for Russian commercial system and the banks.

Energy, metals, raw materials... Russia has a decisive position in world commodity trade. Russia, which has a 19% share in the worlds natural gas reserves, has a share of nearly half (41%) in the natural gas imported by Europe. In addition, Russia holds 13% of world oil production and ranks third in wheat production and world aluminum production. While many materials such as grain, fertilizer, palladium, nickel, steel, coal, wood are of strategic importance in terms of being used as inputs in both industry, construction and agricultural production, Russia is one of the leading global players in the trade of these input items. This shows that the situation in Russia will directly affect both input inflation, energy inflation and food inflation globally.

A significant deficit may occur in oil and gas trade flows if alternative sources of supply do not replace Russia. While we are in a critical inflation period, we have to talk about the possibility of stratification of the effect caused by high energy prices. At the same time, this is an important risk for global economic growth, a potential for crisis and at the same time, a phenomenon that paves the way for 2022 global stagflation.

Russias export partners… Source: Bloomberg

 Possible planning of Russia, difficulties… As it is known, SWIFT (Society for Worldwide Interbank Financial Telecommunication) system is a secure communication system used in financing international trade, transferring trillions of dollars annually and used in cross-border payments. In a sense, SWIFT is in a monopoly position in the global banking system as it is preferable. Therefore, for an effective commercial exchange, it is important who uses the systems rather than the content or technology. The counterparty may not want to take steps to circumvent the SWIFT prohibition, as it does not want to be subject to cost, availability or any US financial authority sanctions in this commercial transaction. This may also indirectly affect trade in goods groups such as Russian banks or energy, which are not currently generally sanctioned. There is uncertainty about the sanctions reaching these areas or other banks, and any counter country bank does not want to be subject to OFAC investigation or sanction.

Both China and Russia are working on alternatives to the SWIFT system and are already using some systems. While China promotes the use of the CIPS money transfer system it has developed, Russia sometimes uses its own banking communication system, SPFS.

Conclusion? Factors such as switching to alternative systems or trading in local currencies will not solve supply problems either. We still have to consider the effect of energy supply on both sides. Because, substituting Russian energy from multiple sources will cause some difficulties in terms of both transportation and the use of industry, as well as the change and complexity in the input source may cause some problems in terms of efficiency and quality of the output. For Russia, although developing trade with China is an option, China does not need as much as Europe as a market, nor does Russia want to be an economy that is overly integrated with China. The fact that China becomes overly powerful in terms of economy and dominates the markets is a situation that the Western world does not want. While the Russian economy will suffer a significant contraction by being directly affected by these sanctions, the world will suffer much more from the high inflation environment.

Kaynak: Tera Yatırım
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