Economic sanctions and investing

By Jason Crumley 3 March 2022 4 min read

Following the invasion of Ukraine by Russia on Feb. 24, 2022, we at ATB Wealth have continued to watch this crisis unfold while trying to comprehend the magnitude this event will have both on a humanitarian and economic scale. Above all, we are thinking of the people in Ukraine and those with close ties in our communities, and hope a peaceful end to the invasion is still achievable. 

Part of the strategy to end this crisis without further violence has been the use of economic sanctions. Rather than sending military forces to the region and risking potential escalation, the response from countries and companies worldwide has been to condemn the attack and immediately impose coordinated sanctions on Russia. In this article we explain what a sanction is, the types of sanctions commonly used, the desired outcome when sanctions are imposed and finally, what the implications of economic sanctions may be to an investment portfolio. 

What is a sanction and when are they considered?

Economic sanctions are imposed by one group against another to deter action or change certain behaviours. Sanctions usually arise when there are significant political, moral or ideological differences between countries and are intended to shift policies or behaviors of the targeted country, group or individual. When sanctions are made from countries or groups with significant influence over global trade such as the United Nations (UN), the European Union (EU), or the United States (US), they can have a significant economic and emotional impact on their targets. When considering sanctions, the United Nations Security Council, EU and other countries generally have the following objectives:

  • Promoting international peace and security
  • Preventing conflicts
  • Supporting democracy and human rights
  • Defending the principles of international law

Sanctions can be targeted or extremely broad

Sanctions can take many forms depending on the desired outcome and can either be broad or targeted. The long-standing sanctions the US imposed on Cuba since February 1962 are an example of more broad-based sanctions, which includes restrictions on trade, travel and various types of business dealings. 

A more targeted measure often taken by countries is to restrict the flow of military weapons into specific regions on security concerns. Other targeted measures are financial including banking restrictions for individuals, groups or governments in addition to limitations on trade. These financial and economic restrictions are typically what first come to mind when thinking of sanctions, but restrictions can extend into the cultural and athletic areas as well, by excluding the target country from various events.

As we can see, there are a variety of measures that can be taken to exert pressure on a target country to change its harmful actions or policies. Sanctions fall on a spectrum of severity and the more impactful the measures, the more likely the desired policy shift is to occur.

Examples of current sanctions imposed on Russia 

Current sanctions against Russia extend back to 2014 over its actions to annex Crimea, and have been increased in order to respond to the gravity of Russia’s violation of the sovereignty and territorial integrity of Ukraine along with the associated human rights violations. 

The growing list includes financial sanctions against Russian banks, prohibiting some of the world’s largest economies from conducting business with them. The US also extended this sanction to block Americans from any dealings with the Russian Central Bank, and also removed Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT). These economic sanctions effectively limit Russia’s access to capital, which will significantly impair its ability to raise money and finance its economy and war efforts. This is akin to cutting off oxygen to a fire.

A variety of countries have also introduced trade sanctions to limit, and in some cases eliminate, the shipment of military equipment to Russia as well as technology-based equipment such as semiconductors. Major state-owned companies such as Gazprom and Sberbank have been denied access to raising money in the US and have experienced significant declines in market value. Finally, sport and cultural activities have also been affected with European football’s governing bodies expelling Russia from the 2022 World Cup. The International Ice Hockey Federation has banned both Russia and Belarus from competing in tournaments until further notice, and other sporting bodies including those in skiing, curling and figure skating have also banned Russian athletes.

Portfolio impacts 

So far these sanctions have had a crippling effect on the Russian economy with the value of the Ruble hitting all-time lows and the Russian Central Bank responding by drastically increasing key interest rates from 9.5 per cent to 20 per cent. A weak Ruble may cause inflation to surge while higher key rates will increase borrowing costs, both of which will further strain the Russian economy.

Russian ruble collapse

Source: Bloomberg

Sanctions have already been painful for the Russian economy but what will the impacts be to the global economy? It is impossible to say with certainty, however, we expect a period of increased market volatility as the conflict continues to play out. The potential of sanctions on Russian oil trade has also caused increased prices and volatility in energy markets. Any restrictions on imports of Russian oil could have a dramatic effect on global supply and demand given Russia’s prominence in the sector. 

Rather than trying to forecast the future and make significant portfolio changes, it would be prudent for investors to understand their portfolio exposures and to ensure they are invested in alignment with their goals and risk-tolerance. 

It's also important to stay focused on your long-term goals even when emotions run high. A well-diversified portfolio with a wide array of asset classes across different geographies and sectors can help mitigate unnecessary investment risks. A diversified approach will not immunize a portfolio from exhibiting short-term declines during periods of significant wartime market volatility, but using history as a guide, it should minimize any unfavorable long-term impacts.

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