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How efforts to decimate Russian economy could threaten to hit back?

As Russia’s invasion of Ukraine further unfolds, the Russian economy has begun to crumble after the US, UK, European Union and other partners impose unprecedented sanctions with stunning speed.

Withdrawl of Economic and Market Support

The Russian government and major financial firms have been cut off from much of the global financial system. Dozens of international companies have pulled out of Russia, and the value of the ruble has plunged as the Russian central bank scrambles to prevent a deeper crisis.

U.S. and allied officials have argued intense economic pain is essential to punish Russian President Vladimir Putin domestically for the invasion of Ukraine. The sanctions regime is designed to not only hinder the Russian economy but also limit Moscow’s ability to ease the economic pain.

The U.S. and its allies blocked transactions with the Central Bank of Russia and froze about half of the $600 billion in Russia’s foreign reserves, which Moscow had parked in other countries. The threat of future penalties has also prompted a mass exodus of international companies from Russia. Dozens of companies that may be able to operate outside of sanctions are leaving Russia instead of risking blowback from the U.S. government and losing access to the American dollar.

Bandwidth of the Support Withdrawl

The U.S. is a net exporter of oil, but higher demand for American crude would push up energy prices globally as European allies scramble to replace Russian petroleum and natural gas. Experts say the unprecedented nature of the penalties creates unpredictable risks for the U.S. economy. Energy and food prices are the quickest way Americans could feel shockwaves from Russia’s decline, particularly if Biden takes action against Russian oil imports.

Crude oil prices are up roughly 20 percent over the past two weeks, enough to knock 0.2 percentage points from U.S. gross domestic product, according to economists at Goldman Sachs. They also expect inflation as measured by the personal consumption expenditures price index to 0.2 percentage points thanks to higher food prices, increased production costs due to rising commodity prices and increased transport costs due to shipping disruptions. A ban on Russian oil imports would largely be symbolic and simply send barrels to other markets. However, lifting current exemptions for processing energy-related payments could strike a devastating blow to Russia’s energy industry. If U.S. firms and the U.S. dollar can no longer be used to buy Russian oil and gas, however, foreign firms would likely ditch Russia to protect their access to American markets.

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