Russian and Western relations have cooled off as the US wages its campaign in hopes of slamming and shaming Moscow for how it handled the recent Malaysian Airlines’ MH17 crash in eastern Ukraine. Meanwhile, much political and economic turbulence has taken place due to almost a year long conflict between Ukraine’s army forces and Ukrainian rebels, whom the West accuses Russia’s Putin of arming with advanced weaponry, including surface to air missiles, which are rumored to be what brought down MH17 in Eastern Ukraine on July 17th.
Recently, Russian-Western relations have taken a sharper and nastier turn. The United States and most of the European Union member nations have imposed sanctions on Russia, hurting Russia’s energy, arms, and banking sectors. European sanctions in particular have targeted high profile Russian oligarchs.
Russia’s strongman Putin has retaliated by placing his own sanctions on the West. Russian banks’ capacities to invest in financial markets abroad, especially in the West, have waned, and VTB Bank, Russian Agricultural Bank, and Bank of Moscow are all expected to be hit.
What Exactly Does the Ban Cover?
Russian sanctions have been directed towards banning a diverse range of Western food imports. This will undoubtedly force Russians to confront tough economic decisions, a stark reminder of the Soviet period for some. Russia will have to find a new market from which to import foods, or Russian farmers will have to resort to farming a lot of the banned products.
South American nations, especially Brazil and Argentina, are going to benefit with this food ban, as they can export beef, pork, and poultry to Russia at this time. Turkey and New Zealand might also hop on the bandwagon and export dairy products to Russian markets.
According to the Wall Street Journal, Russia has imposed a ban on fish/seafood products from Norway, fruits from Poland and Spain, cheese from the Netherlands and Finland, pork from Germany, Denmark, France, and Canada, and lastly, poultry from the US.
This comes as a blow to most European nations, and especially Finland as the nation relies on Russia for its natural gas needs, and when considering 10% of its exports are to Russia, Finland’s Prime Minister, Alexander Stubb, has stated that the Russian sanctions could choke its anemic economy.
Impact on Europe and Russia’s Economy
Europe’s markets and banks have already seen lots of setbacks since the imposed food bans, with the German DAX stock exchange falling almost 10% from June, per CNBC. This in turn has affected American markets as the Dow Jones was also down for the majority yesterday before slightly recovering before the close.
Russian ETFs and equities have also suffered under the fresh wave of sanctions on Russia. The Van Eck Russia ETF (RSX - ETF report), maintains a Zacks ETF Rank #4 (Sell), and it carries a high level of risk. iShares MSCI Russia Capped ETF (ERUS) also maintains a Zacks Rank #4 (Sell) and a high risk.
Same scenario goes for Russian ETF SPDR SP Russia (RBL). The iShares MSCI Poland Capped ETF (EPOL - ETF report) is currently a Zacks ETF Rank #3 (Hold), but carries a high risk, just like the Market Vectors Poland ETF (PLND - ETF report). German Market Vectors small-cap ETF (GERJ) is also suffering but does not maintain any Zacks ETF Rank currently. Norwegian Global X MSCI ETF (NORW - ETF report) as of now is faring just like the aforementioned Polish ETFs. In general almost all of the European and Russian ETFs are taking a hit, but they are expected to improve when the tensions ease.
If matters escalate regarding the Ukrainian crisis, European investors will not be too comfortable and might start looking to soothe their worries through gold, platinum, or even palladium, which coincidentally is one of Russia’s largest exports. This in turn, might start a ripple effect for American investors, despite the fact that the Russian sanctions are not directly biting the US economy.
Investors should err on the side of caution or think more long-term, and make sure that they are attentive to geopolitical matters and if there will be any further escalation regarding the situation in Ukraine. Time will reveal how effective sanctions are against both Russia and the West.
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