Russia’s unprovoked invasion of Ukraine triggered an unprecedented set of financial restrictions and export controls from the West that are meant to cripple the aggressor nation’s economy and make its war effort unsustainable.

The powerful sanctions regime, led by the United States, landed during an already tumultuous time for global supply chains. Countries are just now beginning to deal with the policy reactions to COVID-19 and the bloody conflict in Eastern Europe.

Western countries are largely looking for alternatives to Russian commodities, and many Western companies and financial institutions are steering clear of doing business with Moscow for fear of violating sanctions, export controls, or facing the moral pressure from stakeholders. But not every country can or even wants to isolate Russia and eschew its commodities. Russia remains a huge energy supplier and exports vast amounts of grain and fertilizer.

China and India, the two largest countries by population, intend to continue business with Russia despite significant obstacles in the realm of currency and logistics.

China

China needs Russia’s energy and other commodities, is concerned about Western sanctions, and has an interest in reducing its exposure to the U.S. dollar and U.S. extraterritorial sanctions. How much of a challenge it will pose will depend on its other economic policies — including currency stability, its trade with Western countries, and its desire to avoid reliance on any one supplier.

China and Russia both have an interest in reducing the power of Western sanctions and may set up some financial pathways to maintain trade. However, their interests vary — Russia may be much more willing than China to forgo economic growth and investment. It remains to be seen to what extent countries like India, Turkey, or Brazil would use those channels for Russian trade, and whether those would be circumscribed by China’s own economic policy priorities.

Still, Chinese banks are among those worried about directly violating sanctions. They don’t want to be slapped with fines for using the U.S. dollar financial markets to trade with Russia.

The country also doesn’t want to become too reliant on Russia as a supplier, which makes it likely that China will continue to balance its trade relationships while looking for long-term alternatives to U.S.-linked financial transactions and de-Americanizing its supply chains.

India

India has been a sizable consumer of food products from Russia and Ukraine, and wants to take advantage of discounted Russian fuel that European buyers and some Asian refiners are refusing.

India’s energy transactions are theoretically legal but difficult. Because of the size of Russia’s energy market, the sanctions were crafted to allow for many energy transactions, even using the U.S. dollar and related currencies. However, India, fearing being boxed in, may still seek new payment channels.

The big challenge for India’s continued trade with Russia is in dealing with two semi-convertible currencies: the ruble and the rupee. The ruble has become increasingly unconvertible because of Russian government capital controls. It’s unclear how it will work, but India will be a bellwether for countries with an interest in ensuring low food and fuel prices while not running afoul of extremely complicated sanctions, capital controls, and restrictions on shipping and logistics.

The Role of Cryptocurrency

Some countries could be tempted to use alternate transactions, like cryptocurrencies, to make trade work. To be sure, there has been a flight to bitcoin and other cryptocurrencies just before and since the invasion. But these transactions are not large enough in scale to handle the degree of financial transactions still likely to come in and out of Russia. Furthermore, Russia’s government capital controls have restricted some of the degree to which Russian entities could take advantage of cryptocurrency because it increases pressure on the ruble.

Supply Chain and Inflation

The war in Ukraine and the sanctions on Russia affect more than currency markets and economic policy, however. One of the biggest impacts may be on energy and food prices.

There are several dynamics at play in the food supply chain. For example, some shipping companies have decided to cease operations with Russia, which means that even if another country wants to buy Russian wheat, it’s not clear how it’ll get there. Conflict may limit planting in Ukraine. Previous sanctions on Belarus and rising prices for natural gas are also increasing the cost of fertilizer.

All these question marks about financing and logistics complicate what was already going to be tough year in which the world was adjusting to global policy normalization and continued COVID-19 lockdowns in China.

Don’t forget: The pandemic is still ongoing, particularly in China, and associated lockdowns might re-snarl some of the supply chains that have only just started to become more predictable recently. The collision of these different dynamics of the pandemic and the conflict are threatening to make what was already going to be a higher food price and fertilizer environment potentially worse.

That has a lot of people talking about inflation and stagflation, and in the United States, the Federal Reserve has begun its rate hikes and telegraphed them clearly.

Winners and Losers in Emerging Markets

Overall, inflation and stagflation are not great for emerging markets, which already have to withdraw accommodation and hike interest rates. This puts more pressure on fiscal authorities too.

Of course, within emerging markets, there are some relative winners and losers.

Exporters of commodities may do relatively better. Look at oil and gas producers — countries like Saudi Arabia and the United Arab Emirates can weather some of these trends. Metals like platinum and palladium, in the case of South Africa, or other agricultural products, in the case of Brazil, have also provided some insulation.

Among the losers are countries that might have been having fiscal challenges before the pandemic who are now seeing additional stress. Countries who relied on Russian or Ukrainian food and fuel supplies are particularly challenged.

Turkey is already seeing pressure because of domestic economic choices. Egypt was forced to devalue its currency and has a rising subsidy and import bill. Many countries that rely on commodity imports with Russia will find themselves in a growth crisis.

Few countries will be left untouched by the conflict in Ukraine. Russia’s decision to invade prompted Western countries to respond with tremendous economic force. Russia tried to steel itself against such actions before invading but miscalculated, and now the Russians are poised to suffer more than anyone else. But the consequences of their bad behavior hurt everyone.

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About Rachel Ziemba

Rachel Ziemba is a global macro strategist and country risk expert. She specializes in developing economic and policy scenarios for asset managers across short-, medium-, and long-term horizons. Her expertise is particularly strong in the impacts of economic sanctions, export controls, and trade restrictions. She is currently an Adjunct Senior Fellow for the Center for a New American Security, a policy think tank, where she contributes to work on the impacts of economic sanctions, trade policy, and energy security. She is also Senior Advisor at Horizon Client Access and a non-resident fellow for the Gulf International Forum. She previously worked for Roubini Global Economics for over a decade, culminating in a four-year period where she led Emerging Market macro strategy research. She sits on the board of Enquire.AI, Pamela Harriman Foreign Service Fellowships, and the Heart and Soul Charitable Trust.

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This geopolitical article is adapted from the GLG teleconference “Russia’s Invasion of Ukraine: Lasting Effects of Sanctions.” If you would like to speak with geopolitical experts like Rachel Ziemba, or any of our approximately 1 million Network Members, please contact us.