How Russia's Sanctions Can Affect the Forex Market

My, my! Is there no end to all this drama between Russia and the West? The violent rallies seem to have subsided for the meantime, but the political tension is getting worse by the day. Here’s a quick recap of how this conflict came about:

Large protest in Ukraine broke out nearly a month ago, as several civilians urged then President Yanukovych to step down after turning down a bailout deal from the European Union. This was followed by a formation of a unity government, headed by interim President Oleksandr Turchynov. However, Russia was displeased about this new leadership and threatened to take over Ukraine’s Crimea territory.

The US government and the European Union then warned Russian President Vladimir Putin that economic and political sanctions would be dealt against Russia in its annexation of Crimea. Last week, US President Obama signed an executive order to give the government power to impose sanctions on Russian companies in the energy, mining, financial services, and defense sectors. Prior to this, the US and the EU already imposed travel restrictions and froze the assets of several Russian officials and the leaders involved in Crimea’s annexation.

Of course, Putin didn’t take this lightly as he retaliated by releasing a list of US lawmakers that would be banned from entering Russia, including Senator John McCain and House Speaker John Boehner. The West is likely to respond with another round of sanctions, which some analysts believe might be much worse than the first one.

Market watchers are wary that this exchange of sanctions might soon evolve into a trade war, as both parties could target large companies instead of individuals. The US already plans to take action against the Bank Rossiya, which is Russia’s 17th largest bank with $10 million in assets. Interestingly enough, the bank’s largest shareholder is Yuri Kovalchuk, who is known as the “personal banker” of Putin and several top Russian officials.

Although a full-blown trade war could be very damaging to Russia’s economy, many fear that more economic sanctions might eventually backfire on the US and the EU. Bear in mind that Russia is largely dependent on its oil and natural gas exports, with energy trade accounting for nearly 70% of its trade activity, and the West seems keen on hurting this industry. By imposing measures that could restrict Russia’s oil production though, the EU might end up losing its largest energy supplier.

By the looks of it, the EU is putting its own fragile economic recovery at stake if it decides to impose more economic sanctions on Russia. The West is definitely skating on thin ice from here! After all, Russia is the EU’s third largest trade partner, with trade activity amounting to 336 billion EUR in 2012. The EU also happens to be the third largest investor in Russia, with close to 75% of foreign direct investment coming from EU member nations.

With that, do keep close tabs on any movements on euro pairs if the tension between Russia and the West escalates to what analysts predict could be another Cold War. Do you think we’ll see another round of sanctions between the two this week? Cast your votes in our poll below!