A rapid escalation in sanctions against Russia could further deepen a cost of living crisis in the UK, pushing energy bills and inflation to new peaks and keeping prices higher for longer, experts have warned.
While measures announced on Tuesday by Boris Johnson against three Russian individuals and five banks are not expected to impact UK households, it is feared that further sanctions could put already stretched gas and oil supplies under further strain.
However, major question marks remain over European leaders’ resolve to follow through on their rhetoric and enact tough sanctions on Vladimir Putin’s regime, not least because the continent is so reliant on Russian imports.
Britain has also been particularly welcoming to Russian money, hampering its ability to credibly threaten Russia, analysts said.
Russia supplies 10 per cent of the world’s oil, and 40 per cent of Europe’s gas. Russia and Ukraine are also the source of a quarter of global wheat exports.
EU member states met on Tuesday to discuss retaliatory measures after Mr Putin ordered troops into eastern Ukraine on Sunday night.
Any measures that reduce the flow of vital commodities could have a major destabilising impact on the world economy and cause further pain for European consumers already hit by unprecedented jumps in energy costs.
Susannah Streeter, a senior analyst for Hargreaves Lansdown, said an escalation of tensions could push up food prices by disrupting grain supplies from Russia, Ukraine and Romania, which ship wheat through ports on the Black Sea.
“Oil demand is likely to stay high, gas prices will be elevated for longer if the Ukraine situation erupts and wheat prices will support food price inflation,” Ms Streeter told The Independent.
“It exacerbates the problems that we’ve already got. Tough sanctions would cause pain for UK consumers”.
The world’s largest food company, Nestlé last week added its name to a long list of firms that have lifted their prices after costs surged. Ms Streeter said more increases were in the pipeline.
Escalation of sanctions on Russia could cause inflation to spike even higher than the 7 per cent economists had been predicting, with price increases likely to persist for longer, Ms Streeter said.
Others questioned how likely it was the EU would be willing to take an economic hit in order to stand up to Putin over Ukraine.
“Personally, I doubt that you will find a consensus within the EU,” said Oksana Antonenko, director of global political risk at the consultancy Control Risks.
“To stop imports of Russian oil and gas is just, in my view, is impossible to imagine. But it is possible to imagine that Russia will suspend supply of gas for Europe.
“They’ve done that before, so the disruption is possible. If that is to happen, I think we will see increased prices for sure.”
On Monday night, EU leaders agreed sanctions they said would “hurt Russia” including blacklisting more politicians and officials, as well as banning EU investors from trading in Russian state bonds.
All members of the lower house of the Russian parliament who voted to recognise the breakaway regions, are banned from travelling to the EU and any assets they have within the trading bloc have been frozen.
Such measures would have little discernible impact on UK households and, concerningly, may not change the Russian president’s behaviour either, Ms Antonenko warned.
“I generally think that the sanctions have very little power over Putin’s actions. He doesn’t seem to be deterred by sanctions at all himself.”
Meanwhile, other world leaders look more vulnerable to the economic ripples from any major action against Russia.
Boris Johnson is under immense political pressure after a string of scandals and France’s Emmanuel Macron is up for re-election in April.
“Are any of these leaders going to want cause massive energy spikes for their own people? I think it’s unlikely,” said Dan Arenson, associate director at political risk consultancy GPW.
UK and EU governments are “not going to be willing to take the pain that is required” by major economic sanctions, Arenson said. “In practice we are not going to ruin our economy over this.”
However, if Putin were to launch a full-scale invasion “that would trigger far more comprehensive, far more sweeping sanctions,” said Arenson.
What sanctions have been announced?
Boris Johnson unveiled limited sanctions freezing the UK assets of three Russian billionaires and five banks closely linked to the Russian military or secret services.
The most significant measure so far is Germany’s confirmation it has halted approval of the Nord Stream 2 pipeline. The route would have allowed more Russian gas into Europe, deepening the continent’s reliance on Moscow and bypassing existing pipelines which are a major source of revenue for Ukraine.
While it is an important move it does not mean any immediate hit to the Kremlin as the pipeline was not in operation in any case.
On Monday night, EU leaders agreed sanctions they said would “hurt Russia” including blacklisting more politicians and officials, as well as banning EU investors from trading in Russian state bonds.
All members of the lower house of the Russian parliament who voted to recognise the breakaway regions, are banned from travelling to the EU and any assets they have within the trading bloc have been frozen.
Joe Biden signed an executive order on Monday sanctioning two of Russia’s state-owned banks – VEB and Promsvyazbank – and blocked it from trading in its debt on US and European markets.
All of those banks assets held in the US have been frozen.
What further sanctions could be enacted?
One way to apply pressure on Putin is to target the extremely wealthy group of people from whom he derives his power.
Stopping wealthy Russians travelling to Europe or bringing their money here “would have a major destabilising effect on Moscow,” said Arenson.
“The business elite props up the Kremlin and Putin is quite weak and reliant on their support, despite how things can appear.
“If things start to hit their wealth and they can’t do what they want to do then that would strike a big blow to Putin.
But the UK in particular may be reluctant to clamp down on rich Russians.
“I don’t think this UK government wants to take action,” said Arenson. “There is too much dirty money here and too many people have an interest in maintaining things as they are.”
Targeting Russia’s energy industry
The EU could take targeted measures against Russia’s energy industry, depriving Putin of revenue.
However, that would have major impacts on European gas and petrol prices at a time when living costs are already rising rapidly. It also requires a consensus to be reached among member states. Most experts think this is unlikely at present.
Targeting the financial system
The US could enact further and more powerful curbs on the ability of Russian banks to use the global financial system. Washington is reportedly drawing up plans to stop major Russian banks using US “correspondent” banks which facilitate international financial payments. It would make it difficult for Russian banks to transact in dollars.
An even tougher weapon would be to place financial institutions on the Specially Designated Nationals (SDN) list, which would freeze their US assets and effectively kicking them out of the US banking system, banning their trade with Americans.
