Russia’s decision to invade Ukraine has had a far-reaching impact on the worldwide economy, extending beyond the conflict region. Europe and the United States were swift to impose sanctions against Russia, and the repercussions have had a global impact.
Various countries have followed suit and announced new sanctions on Russia, such as New Zealand and South Korea. These punishment measures include restricted entry into various countries, blocking of assets, and prohibiting trade.
The impact of the sanctions on the Russian economy has been severe, with the ruble dropping at least 30 percent against the dollar. Stock markets have closed and assets have been frozen, but the impact has extended far beyond the Russian economy.
The US dollar and European Union’s euro have also been impacted by the sanctions, further affecting the financial decisions of investors.
Impact on the US dollar and euro
The ruble has taken a dive, stock values have dropped and world markets have increased in volatility. The value of certain commodities has risen in price, such as wheat futures hitting the highest in nearly 14 years.
When it comes to the impact of the sanctions on the dollar and euro, the different effects on the two currencies are stark.
Performance of the US dollar
During the first week of March, the US dollar rocketed, hitting the highest level since May 2020.
The sanctions on Russia have increased the U.S dollar borrowing costs in funding markets. Sanctions have increased the demand for the world’s reserve currency and the value of the dollar continues to strengthen.
In 2021, the dollar accounted for 60% of global reserves. The liquid currency is highly tradable and backed by a strong economy.
Even so, there is concern about how restricted trade will impact the dollar in the future. For example, the United States imported $13 billion worth of mineral fuels and $1.4 billion worth of iron and steel in 2019, putting them in a trade deficit with Russia. These resources are critical for manufacturing.
Performance of the euro
Sanctions imposed by the European Union were not necessarily a financially strategic decision, but rather a response to Russia’s military aggression.
While punishing Russia, European banks were also hit hard by the sanctions as various stocks experienced deep losses. Investors moved their assets to the dollar and more stable currencies, abandoning the euro.
- Stoxx Europe 600 fell 1.6%
- German DAX dropped 2.5%
- French CAC 40 dropped 3%
Consequences for investors
Investors have responded to the sanctions of the west just as rapidly as the sanctions were imposed. The US dollar is considered the safest currency to hold and conflict in Ukraine has ignited a scramble for the dollar.
Since the invasion of Ukraine on February 24, 2022, and the subsequent sanctions, the European markets have lost their appeal. Euros are being sold in exchange for dollars as investors fear Europe’s geographical proximity to the conflict.
The future impact of the sanctions on the global economy is uncertain, as several analysts suspect that the west could break first. If the conflict in Ukraine, and subsequent sanctions, have revealed any trends it’s that change can happen incredibly fast.
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only