The market reaction to repeated sanctions against Russia has tended to follow a pattern, with investors shrugging off the news after an initial sell-off. Still, the cumulative impact of sanctions is getting harder to ignore, and -- particularly given the reports of the downing of a passenger plane in Ukrainian airspace -- it could yet get much worse.
Citing the Kremlin’s continued interference in Ukraine, President Barack Obama announced yesterday that the U.S. would intensify its sanctions in the areas of defense, energy and finance, including placing restrictions on the financing of state-owned companies such as oil giant Rosneft. European leaders followed suit, restricting new funding from the European Investment Bank and seeking to do the same for the European Bank for Reconstruction and Development. The moves represent another step along a well-specified path toward targeting first individuals, then companies and ultimately whole sectors where the Russian economy is particularly vulnerable.
The market's immediate negative reaction is well justified. The Russian economy will suffer from the reduced availability of financing and supplies, and from an increasingly uncertain operating environment. An impaired Russian economy will have spillover effects on major trading partners such as Europe, which will in turn weigh to some extent on the global economy.
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For stock markets, the shock waves from an escalating conflict occurring in a specific region such as the Russia-Ukraine border are understandably felt most strongly in proportion to their proximity. This latest incident is bad news for Europe, highlighting its energy vulnerability in addition to ongoing economic problems. The USA is also affected somewhat because of its participation in the sanctions.
Russia’s recovery rally since mid-March was rolling over before the latest increase in sanctions and the crashed Malaysian airline produced a downward break today.Back to top