The Russian invasion of Ukraine has sparked global economic uncertainty and a range of financial sanctions by key economic players such as the United States, the European Union and the United Kingdom. With Russia being the third-largest oil producer in the world behind the United States and Saudi Arabia, fears of supply constraints in retaliation to financial sanctions have resulted in a spike in oil and gas prices across the globe.
Coming at a time of global inflationary pressures in the aftermath of the COVID-19 pandemic, the spike in oil and gas prices has brought pump prices to an all-time high for Britons.
Although the sanctions are expected to have affected key UK financial players and various industries across the country, the adverse impact of the invasion is expected to have been hardest felt by UK citizens.
Oil & gas
The UK’s reliance on Russian gas is far less significant than that of Europe.
Russia is Europe's largest supplier of natural gas, providing approximately 35% of the gas used across the continent, whereas the United Kingdom sources just 3% of its gas from Russia, instead sourcing the majority of gas from the North Sea and Norway.
Nevertheless, the Russia-Ukraine conflict is expected to indirectly affect the UK oil and gas sector. Russian imports account for 8% of total UK oil demand, according to UK government data.
On 27 February 2022, three days after Russia’s invasion of Ukraine, UK petrol prices passed the grim milestone of 150p a litre for the first time, significantly inflating the cost of living for Britons. Since then, the price of petrol in the United Kingdom has kept climbing, reaching a record-high of 167p a litre on 20 March. The prospect of disruption in supply from Russia has been the driving force behind this spike.
Experts have stated that UK petrol prices could hit £2.50 and diesel £3 as Russia’s invasion of Ukraine persists, worsening pain for consumers.
In response to this forecast, leading economics and energy analysts called on the Chancellor of the Exchequer, Rishi Sunak, to subsidise lower-income households to cope with soaring home energy bills amid a broader cost of living crisis. There were also calls for the UK government to cut fuel duty, with the Chancellor ultimately announcing a 5p per litre drop in fuel duty until March 2023 in the Spring Statement.
Most affected UK industries
Finance & Insurance
Recent amendments made to the Russia (Sanctions) (EU Exit) Regulations 2019 are aimed at encouraging Russia to cease actions that destabilise Ukraine. These amendments have imposed asset freezes on persons responsible for engaging in, providing support for or promoting any policy or action that destabilises Ukraine.
There are also sectoral financial sanctions that prohibit and restrict dealing with transferable securities or money-market instruments issued by some of Russia’s largest banks such as Sberbank, VTB bank, Gazprombank, and granting or entering into arrangements to grant loans or credit. Investments in relation to Crimea and the provision of financial services for the purpose of foreign exchange reserve and asset management have also been prohibited.
HSBC, the UK's fourth largest bank, started to cut off relationships with a host of Russian banks on 28 February as western sanctions against Russia came into practice. This trend has been echoed across the world through a number of international and European banks.
From a global perspective, on 27 February, the United States, Britain, Europe and Canada agreed to remove some Russian banks from the SWIFT global payments messaging system, which has the potential to damaging Russia and its trading partners.
Additionally, the closure of Russia's stock market since 28 February is expected to have resulted in UK investors being unable to sell orders of Russian stocks. Nevertheless, according to Bank of England Deputy Governor Sam Woods, sanctions against Russia in response to its invasion of Ukraine are "manageable" for Britain's insurers and the wider financial sector. Many institutional investors are expected to shift their funds to defence manufacturers and other firms likely to benefit from the invasion.
The United Kingdom also banned Russian companies from the multi-billion-dollar aviation and space insurance market in London, the world's largest commercial and speciality insurance centre, resulting in no pay outs on existing or any new insurance or reinsurance policies. This measure is expected to somewhat adversely affect the UK insurance sector.
Most affected UK industries
Stock & Commodity Exchanges in the UK
Security & Commodity Contracts Brokerage in the UK
Aerospace
On 25 February, British airlines were banned from landing at Russia's airports and crossing its airspace. This move was a response to the United Kingdom banning Russia's national airline, Aeroflot, from landing in Britain on 24 February.
On 3 March, the UK government published legislation implementing new sanctions relating to the aviation industry. This framework prohibits a Russian aircraft that is owned, chartered or operated by persons connected with Russia or other designated persons from operating in UK airspace or landing and taking off in the United Kingdom. This framework is expected to have eliminated all flights routes involving Russia. However, the impact on UK airlines is expected to be minimal.
Most affected UK industries
Scheduled Passenger Air Transport in the UK
Freight Air Transport in the UK
Other
Recent amendments to the Russia (Sanctions) (EU Exit) Regulations 2019 also imposed trade prohibitions on Russian imports and exports of various goods and services, including military, critical-industry, aviation and space and energy-related goods and technology.
There are currently 31 Russian companies listed on the London Stock Exchange, with a combined market value of £468 billion, according to S&P Global. According to latest government figures, Russia is the UK’s 19th largest trading partner with international trade worth £15.9 billion during 2021. The top exports to Russia are cars, pharmaceuticals, power generators, specialised machinery and general machinery.
The main products imported into the United Kingdom by Russia are oil, gas and metals.
The United Kingdom introduced additional 35% tariffs on imports of a few Russian metals on 15 March. The UK's exposure to Russian metals is minimal, with the United Kingdom accounting for only 0.5% of aluminum, 1.7% of steel, and 10% of iron ore exports from Russia, according to S&P Global. As a result, the move is not expected to create a breach in the UK market supply.
The imposition of trade sanctions is expected to take a toll on the value of exports to Russia over 2022-23, adversely affecting a number of industries. Russia accounts for only 1.3% of total UK trade; therefore, the adverse impact is expected to be substantial but manageable.
Most affected UK industries
Motor Vehicle Manufacturing in the UK
Basic Pharmaceutical Product Manufacturing in the UK
Electric Motor, Generator & Transformer Manufacturing in the UK
Mining, Quarrying & Construction Machinery Manufacturing in the UK
Overall effects
In summary, the financial sanctions imposed by the United Kingdom on Russia are expected to adversely affect the UK economy, but a low trade and importing dependence on Russia is expected to constrain the effect. Nevertheless, this global economic disruption comes at a difficult time for Britons, who have already felt the adverse impact of inflationary pressures in the aftermath of the COVID-19 pandemic. Spiking pump and gas prices are expected to have significantly inflated living costs for UK citizens. Additionally, uncertainty surrounding how long the conflict will persist is expected to cause further rises in UK energy costs.
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