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Treasury Committee publishes report on ‘Defeating Putin: The development, implementation and impact of economic sanctions on Russia’

23 March 2022

The Treasury Committee warns Russia that it is heading towards economic catastrophe, but that its invasion of Ukraine will have a significant economic impact on the cost of living in the UK.

The cross-party Committee of MPs deplores the illegal and unprovoked invasion of Ukraine and supports the imposition of severe economic sanctions against Russia, but cautions that the UK is likely to feel economic consequences and calls on the Government to provide additional financial assistance for those on the lowest incomes.

In a report on Defeating Putin: the development, implementation and impact of economic sanctions on Russia, the Committee warns that the UK is not protected from the economic consequences of sanctions on oil and gas, and that further sanctions will lead to higher prices, with knock-on effects for households and businesses.

The Committee also calls for guidance issued to businesses involved in implementing sanctions to be clearer, and resource for the Office of Financial Sanctions Implementation to be boosted.

The report considers the effectiveness of current measures, the scope for further action and the enforcement regime required to enact sanctions. The impact of the Government’s action on the UK economy, Russia and the wider world is also considered, as is the role of the financial services industry in implementing sanctions.

Chair's comments

Commenting on the report, Rt. Hon. Mel Stride MP, Chair of the Treasury Committee, said:

“Putin’s deplorable invasion of Ukraine has sent shockwaves around the world and the UK has rightly imposed considerable and unprecedented sanctions on Russia. As a Committee, we condemn the inhumane actions of President Putin and are united in the view that we must continue to press forward with significant sanctions to cause maximum damage to Russia’s economy in order to persuade Putin to stop.

The Committee will continue to investigate what additional tools we have in our armoury to bear down on Putin’s aggression and to further damage the Russian economy and its ability to fund this war.

This war will also have economic consequences here at home, and while these are worth bearing to support Ukraine in their fight for freedom, it’s becoming increasingly clear that the Government will need to support those who are hit hardest by price rises. Recent reports show that the public finances are in a stronger position than anticipated, and the Chancellor should use this additional fiscal firepower to bring forward support for those on the lowest incomes.”

Report summary

The Committee deplores the illegal and unprovoked invasion of Ukraine by Russia. The Prime Minister was right to insist that the UK, alongside its international partners, implement stringent economic sanctions against Russia.

The Russian economy, and its citizens, have already been substantially hit by the significant sanctions imposed by the UK and its international partners, and Russia faces both a significant hit to the size of its economy and significant inflation. One of the boldest moves in the financial sanctions package has been the sanctions levelled at the Russian Central Bank, which appear to have denied access by Russia to half of its reserves. The energy sanctions already imposed are likely to inflict significant damage on the Russian economy. If energy sanctions and reductions in demand are introduced in line with the statements made by the United States, EU, the UK and others then the impact on Russia’s economy could be catastrophic and long lasting.

Where there remain elements of the sanctions net around Russia not yet closed, including to allow energy payments and supplies, the Government should consider how to ensure there is minimal leakage.

The sanctions against Russia are without precedent given the size of its economy and its integration with the West. The Committee is concerned that guidance for those who have to implement sanctions has appeared to have lagged behind that available in the United States. The Government must, as a priority, ensure that its guidance is clear, precise and readily available, to allow the effective implementation of sanctions across the private sector.

The Government needs to consider increasing the Office of Financial Sanctions Implementation's (OFSI) resources without delay and to provide surge capacity in the form of staff with appropriate expertise.

The Committee welcomes the reminder from the regulatory authorities that cryptoassets are within the scope of the sanctions regime, and recommends that the Government take a watchful approach to how cryptocurrencies are used to potentially evade sanctions, and ensure it has the knowledge and expertise to effectively monitor developments in this area.

The Committee notes the caution expressed by witnesses about the impact of possible secondary sanctions. The Foreign, Commonwealth and Development Office will need to take into account the economic cost to the UK and the extent to which Russia circumvents Western sanctions through non-sanctioned Russian reserves and trade with other countries.

Despite producing significant amounts of oil and gas, the UK is not protected from the economic consequences of sanctioning Russian oil and gas production. The price paid for gas in the UK is dependent on the level of demand for gas in Europe and the price paid for oil is dependent on the global price. Further sanctions on Russian oil or gas will lead to higher prices, which in turn will feed through to UK households and businesses.

There will be a cost to the UK economy of the economic sanctions imposed on Russia. It is not possible yet to quantify that cost, but the Committee believes that, on the information currently available, it is most definitely a cost worth bearing in order to aid Ukraine in opposing Russian aggression. However, that cost, combined with the already present pressures in the UK on the cost of living, will impact the whole country, and will be felt particularly by low income households.

As the Government moves forward with its sanctions strategy, it must take further action to support UK households - in particular those on lower incomes - to manage the subsequent rise in energy and other costs.

Business confidence has wavered in response to Russia's invasion of Ukraine. The Government should consider what steps can be taken to boost business investment and growth and specifically how it can help firms which have been directly affected by the economic sanctions against Russia. The Government should also look to accelerate the UK's transition to a more secure energy supply whilst also reaffirming their commitment to net zero and a just transition.

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