Sanctions Have Been Announced. Now We’ll See If The EU Can Make Them Stick.

It’s hard to open a website or scan the headlines without hearing about a new round of sanctions aimed at Russia by the U.S., UK, EU, or others trying to punish Russia for the War in Ukraine. These sanctions have primarily arisen in three sectors: financial account freezes, export/import bans, and the end of U.S. and EU imports of Russian energy in the form of oil and natural gas.

The Central Bank of Russia and other Russian banks have been excluded from global payments systems and had their accounts frozen. Sales of semiconductors and high-tech equipment to Russia have been banned. The U.S. has ended imports of oil from Russia, and the EU has announced that it intends to ban imports of Russian coal, oil, and natural gas as well.

What is not well known is that there is much less than meets the eye in these sanctions. Many of the sanctions had 30-, 60- or 90-day delayed effective dates. This means that March 2022 sanctions are just coming into effect now if they are not extended further.

The EU ban on imports of oil from Russia is not effective until December 31, 2022, and the EU ban on coal imports is not effective before the end of August. Beyond that, many of the sanctions have been announced, but effectiveness is not achieved until all of the member nations of the EU agree.

That unanimity has not been forthcoming. For now, many of these sanctions are still in the talking stages, despite banner announcements. This has led to confusion in global markets about whether these sanctions are coming or not.

Uncertainty about these on again, off again sanctions is described well in this article. For example, one sanction on Russia is to prohibit international insurance syndicates from insuring Russian vessels and cargoes. That’s inconvenient, but a simple solution is self-insurance or captive insurance companies controlled by Russian interests.

These techniques have been used successfully for decades and work well. Self-insurance pools on vessels were even featured in William Shakespeare’s play, The Merchant of Venice, written in 1596.

Taking into account the delayed effective dates, the lack of unanimity, and the easy workarounds by Russia, it’s clear that the sanctions are having a much greater negative impact on the West (in the form of higher prices) than they are on Russia.

Still, there’s a danger here for investors. If prices are skyrocketing and growth is slowing even though the sanctions are not in full force, what happens later this year if the sanctions do become fully effective? The answer is: nothing good.

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