Proposed US, EU sanctions on Russia could slash grain exports

27 Jan 2022 | Mark Shenk

The US and European allies have threatened to impose additional sanctions on Russia if the country’s forces enter Ukraine, something that’s sure to curb grain exports, according to Howard Shatz, a senior economist at the RAND Corporation.

“Sanctions would make it harder to buy Russian products,” said Shatz. “There’s talk of cutting Russian access to SWIFT. An alternative would be to prohibit transactions with the US and European financial systems.”

The two proposals that would have the most impact on Russian exports would be cutting off Russia’s access to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a global communication system linking financial institutions, and the other would be to block the country’s ability to use the US dollar and the euro.  

Both Russia and China have tried to build alternatives to SWIFT, but they are a fraction of the size and only are used regionally.

“If you are cut off from SWIFT, you are largely cut off from the global financial system because banks in all major western economies use SWIFT to facilitate transfers,” Shatz said. “Not using SWIFT introduces risk and would draw negative attention from national regulators. This action would be particularly harmful to the Russian economy, but it wouldn’t necessarily cut off Russian trade. “

When Iran’s banks were blocked from using SWIFT in 2012 the country’s oil exports tumbled, falling 46% between 2011 and 2014, according to the US Energy Information Administration. Iran's oil exports didn’t recover until its financial institutions could use SWIFT again in 2016.

Iran had to accept payments in gold and less-desirable currencies during this period as it struggled to sell even limited amounts of oil and natural gas at often discounted prices.

“Buyers might want discounted prices,” Shatz said. “Nobody is going to give anyone a deal.”

The US can also stop Russia from using the dollar, something it has already done to other countries such as Iran, the global reserve currency that is used to settle far-more global financial transactions than any other.

The European Union could block Russia’s ability to use the euro, making it even harder for the country to conduct financial transactions needed to conduct trade. 

“The majority of trade is conducted in US dollars; at some point, it would be very hard for Russian businesses to transact in dollars if the US takes certain steps,” Shatz said.  “The US could make it impossible for Russia to use the US banking system. The US could put in place secondary sanctions against those who do business with Russia. That’s what the United States has done with the Caesar Syria Civilian Protection Act, and it’s been highly effective at blocking investment into Syria.”

The European Union could block Russia’s ability to use the euro, making it even harder for the country to conduct financial transactions needed to conduct trade. 

“Some trade partners might set up companies just to trade with Russia,” Shatz said. “China might continue to trade, but Russia would have to accept payment in Renminbi. Others might make purchases from Russia and put payment in an escrow account like Iraq does with its gas and electricity imports from Iran. The customers might put the payment in an escrow account that Russia can access when the sanctions are lifted.”

In the past, the US and its allies have given waivers to sanctions for countries that were dependent on Iranian oil exports to lessen the pain and allow for a reorientation of trade flows to make up for the supplies, something that could be offered to big importers of Russian wheat such as Turkey and Egypt.

While the waiver is in place the US and EU might then work to redirect the flow of grain to countries that now import Russian cereals.