Economic sanctions and other coercive economic policies, including boycotts, have become a frequently-used tool in diplomacy. In the last few months, the U.S. has passed new sanctions on Russia, Iran, Venezuela and North Korea, including secondary sanctions targeting foreign companies investing in these economies or banks providing finance. Meanwhile, Saudi Arabia and several other Middle Eastern countries have imposed economic restrictions on Qatar, forcing it to draw on its past savings and increasing transaction costs. Monitoring these measures and their links to the global economy is crucial for investment in these countries and in assessing the supply chains of key companies and banks in other countries. In particular, diverging policies between the U.S, Asian and European allies are likely to add to the uncertainty for long-term investors and may keep local borrowing costs elevated.
While economic sanctions have been used for some time, they have become more widespread in the last few years, as key economies have sought to influence foreign policy by limiting other economies’ access to financing and trade rather than by utilizing security tools. Thus, investors may monitor the resilience of targeted countries’ balance sheets to assess their exposure, looking at their banks, FX reserves, overall business environments and levels of political violence.
Further economic pressure is likely, as in all key sanctions cases, to affect the targeted countries themselves, and also those that tend to have pre-existing high levels of political risk. In North Korea, the companies investing in and facilitating its trade remains as the most meaningful risk to global and regional investors. Not only have chances of conflict increased, though war remains far from a baseline, but threats to sanction Chinese financial institutions and to engage in major trade restrictions could impact global risk sentiment. Already some reports suggest that insurance costs are going up across parts of the region.
The oil market is the main transmission mechanism for other key countries. Russia, with the lowest level of political risk is also most resilient to sanctions, in part because the economy has already adjusted itself to sanctions and to the oil price shock. However, sanctions have reinforced the inward turn of many Russian companies and have undermined the relative outlook for the private sector, exacerbating pre-existing challenges.
Continuum Ecnonomics' view is that Russia will see only limited economic and market impacts from the new sanctions, as they mostly reinforce previously implemented sanctions. This suggests little impact on the oil output in the near-term (the primary global link) and will keep some major companies struggling to access finance. This may restrain energy sector growth in the medium-term.
Similarly, Iran has adjusted on a macro basis to sanctions, but the measures only reinforce the vulnerabilities posed by weak governance, high non-performing loans and sizeable government and military intervention in the economy. Moreover, the tail risk of the Iran deal imploding and additional sanctions being imposed is rising. These measures will at best complicate and increase the costs for foreign long-term investors.
As for Venezuela, we expect economic pressure to increase, exacerbating its very high country risk rating, and imploding economy. New sanctions will make it even harder for an orderly debt restructuring of its unsustainable debt burden. Outages of oil output are likely to be offset by ample supplies globally.
The economic pressure on Qatar by contrast is fading. Qatar, meanwhile, has been quite able to deploy its cash reserves to shore up its banking system and pay for imports, at the cost of weakening its sovereign balance sheet. Globally, the stress could add to natural gas exports and add to the glut in supply.