The impact of sanctions against Russia on your savings

The Russian invasion of the Ukraine has escalated beyond most people’s wildest nightmares. The bombing of civilian areas in key Ukrainian cities, war atrocities and the explosion at the Zaporizhzhia nuclear plant sent shock waves throughout the world, including financial markets, and equity prices sold off dramatically.

Russia is the world’s largest exporter of oil and third-largest oil producer in the world, and Europe buys around 60% of Russia’s oil exports, but the escalation of the war is forcing Western powers to put more pressure on the Russian economy. Beyond its energy exports, Russia is not a major player in the global economy, and the West has to date not placed sanctions on Russian oil or natural gas exports, which would have a severe impact on global consumers, particularly in the UK and EU. That pain may become necessary soon, however, and precipitated this week’s market collapse.

Oil reached its highest level since 2008 this week, at $139/bbl, as US Secretary of State Antony Blinken said that the US was in active discussions with European partners and Japan over a potential ban of Russian oil imports. The US has previously said it will not sanction Russian oil exports given the impact it would have on US consumers. But if oil sanctions do come into effect, OPEC (Saudi Arabia, the UAE and Kuwait) should be able to increase production above and beyond the volumes they agreed to in a July 2021 deal. In the short term, oil price volatility is highly likely if this takes place, but in the longer term, the US and Iran rejoining the 2015 nuclear deal would return another 1.0mm b/d from Iran. At this point no mention has been made of a target of Russian gas imports, which would pose major issues for European economies, given that 40% of their gas needs are met by Russia. Sanctions on the export of natural gas from Russia to the EU or UK are thus unlikely.

Higher energy prices will obviously have a global impact, including in South Africa, and quickly raise inflation. The silver lining to an economy with growth as low as South Africa’s is that inflation pressures are muted, and while the SARB will continue to raise rates, they are unlikely to raise too quickly, and we think bond yields will not price in inflation concerns for too long. The best hedge against inflation is equities, and these are getting cheaper by the day. Of course, the major concern is how far Putin is willing to go. He has committed to regime change in Kyiv, and anything less will be seen as a defeat. However, success will result in a long-term drain on Russian resources and extended sanctions, which would lower Russian living standards and Putin’s internal support. If he doesn’t succeed, there is a growing risk that he will decide no one else should win either, but it is hoped that internal pressure would stop nuclear escalation.

While the probability of a civilisation-ending nuclear war is not zero, it is also not something you can invest for. For now, we are being highly conservative and keeping our powder dry, but we have started to nibble at select opportunities. While day traders may profit by selling at distressed levels and buying back lower, long-term investors should wait for a decent buying point.

Chart: EU natural gas imports