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Exploding Inflation: Why Anti-Russia Sanctions are Self-Inflicted Disaster for US & EU

“The effect of these sanctions, which are mind-numbingly shortsighted, is that they will actually have a very detrimental effect on energy prices, and not only energy prices, but food prices as well, which will precipitate a profound economic crisis in Europe, which is already in a crisis”, says Alex Krainer, founder of Krainer Analytics and creator of I-System Trend Following.

“It will exacerbate inflationary pressures throughout Western economies. They will hurt not only Russia, they will also hurt the working people of Western Europe and the United States, and particularly small businesses and medium-sized businesses, which is the main economic engine”.

On 24 February, the EU took aim at Russia’s transport and energy sectors, 70% of the Russian banking market and key state owned companies, including in defence.

The White House targeted Russia’s financial and technological sectors, cut off Russia’s access to high-tech imports and froze assets from four major Russian banks, among other measures.

Nevertheless, the US and the EU fell short of severing Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) as Washington and Brussels had earlier threatened.

Since 2014, Washington and Brussels have progressively imposed restrictive measures against Moscow following Crimea’s reunification with Russia in the wake of the illegitimate 2014 coup d’etat in Ukraine.

Prior to Thursday’s batch of restrictions, the US and its European partners introduced a limited package of sanctions over Russia’s recognition of the Donetsk and Lugansk People’s Republics (DPR and LPR), with the US barring Nord Stream AG, a company operating Nord Stream 2 pipeline.

According to Krainer, the restrictive measures imposed by Washington and Brussels have already backfired. In particular, the economist says that the oil traders are apparently having difficulty financing oil cargoes from Russia, which is normally done by means of letters of credit.

“At least four major oil traders have reported that the banks would not guarantee these letters of credit”, Krainer says.

“What we also learned from shipping companies is that they will not transport oil cargoes from Russia. This is not official, but it is apparently being done”.

Germany’s decision to freeze Nord Stream 2 earlier this week is also a massive problem for Europe, since European natural gas reserves are at record lows, according to the economic expert.

Russian gas is crucial for heating of European households and European industries, he says. In particular, food supply and food production may suffer: “Natural gas is one of the most important ingredients in producing artificial fertilisers”, Krainer says.

“And so this will inevitably impact food prices.”

While Russia’s energy supplies account for more than 40% of the EU gas needs and 27% of crude oil, the US imports, on average, more than 100,000 barrels per day.

“If [the US] dooes not receive that, it will be felt in the markets”, Krainer warns, stressing that crude prices have already mounted to over $105 per barrel.

Sanctions could trigger a devastating domino effect as soaring gas and oil prices are likely to accelerate already soaring inflation caused by the COVID pandemic and disrupted supply chains, according to the economic expert.

“I think that inflation could explode in Europe, but also in the United States”, says Krainer.

As of January 2022, the annual inflation rate rose to 7.5% in the US, the highest since February of 1982, while 19 Eurozone countries saw consumer prices increase by an annual 5.1%.

The states that will suffer the most are Germany, France, and the United Kingdom, according to the expert.

“By implementing these real sanctions, the Europeans are for short-term effects and long-term damage to their economies… at the same time massively bolstering Russia’s negotiating positions because Russia is today the most important supplier of natural gas to Europe, and it is also the number one exporter of crude oil for the United States and the world’s largest exporter of wheat”, says Krainer.

Meanwhile, one should bear in mind that Russia may introduce counter-sanctions, which will make matters even worse for the EU and the US, Krainer notes.

“The dangers for the West of serious counter sanctions would be devastating”, warns Rodney Atkinson, a British academic and political economist.

“Germany without gas and export markets, the US and the West in general without critical minerals and gases used in chip manufacture, titanium used in aircraft manufacture, and supplies of palladium from Russia. The car industry is particularly vulnerable to export restrictions and any further problems for chip manufacture”.

Atkinson stresses that the world economy is very fragile after the COVID shut downs, which would make trade embargoes on Russia nothing short of a self-inflicted disaster.