Russian energy sanctions could push UK inflation to 7.5%

·Finance Reporter, Yahoo Finance UK
·4 min read
Russian energy sanctions
Russian energy sanctions could push UK inflation to 7.5%. Photo: Henry Nicholls/Reuters

Russia’s invasion of Ukraine risks hammering UK consumers with higher costs as families already face the largest cost of living squeeze in a generation.

War in Ukraine risks pushing inflation in the UK by 1% or even 2% to 7.5% from the current 5.5% recorded in January.

“It is going to push up inflation, contributing to what has been called the cost of living crisis. I think the increase in global commodity prices will push up inflation by another 1% compared to a pre-conflict baseline," Neil Shearing, group chief economist at Capital Economics, told MPs from the Treasury select committee.

This is based on current sanctions, which include those on Russian banks and oligarchs, however any future potential sanctions on energy are not included.

Read more: Oil price hits $139 as UK and US consider banning Russian crude

Should the west sanction Russian oil and gas, the extra inflation hit could reach 2%.

“If you bring energy into the scope of sanctions and we see further increases in commodity prices… you can easily double that,” Shearing said.

Shearing added that there is a cost to the UK economy when implementing sanctions on one of the world’s largest economies.

“It could shrink the UK economy between 0.25% and 0.5%. So the economy still grows but it’s a bit weaker and again you can potentially double that if you bring energy into play.”

The US and European allies are exploring banning imports of Russian oil.

Europe relies on Russia for crude oil and natural gas but has become more open to the idea of banning Russian products.

Prime minister Boris Johnson said that the UK could not simply close down imports of oil and gas from Russia overnight but all countries should be moving in the same direction.

Germany already said it is ready should Russia stop exporting gas to the country as Berlin develops a new energy battle plan to end that reliance. 

Russia supplies around 40% of Europe’s gas.

“If energy prices go up, someone will bear the cost. That can either be the government, the companies or households,” Shearing warned.

Read more: How to save hundreds of pounds on your energy bill

Tom Keatinge, director director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, said there was still room to ramp up sanctions, with measures targeting Russia’s energy exports key to apply pressure on the Kremlin.

“We will ask countries around the world to make very negative decisions for themselves on behalf of Ukraine,” he said.

It would cost the Treasury up to 1% of GDP to fully protect households from higher energy prices. Shearing said that cutting VAT on energy would not be enough, adding that it would have to be direct transfers to households.

He also hinted at the possibility of a windfall tax on energy companies to cushion the blow of higher energy prices but highlighted that the costs for those companies are going up as well.

Keatinge warned MPs that governments cannot introduce “sanctions on the hoof” and then rely on the private sector to implement them without proper guidance.

He said banks need to be given more guidance on how to sever ties with Russia because they have never before had to process sanctions on a country so integrated with the west.

“We are in uncharted territory,” Keatinge said.

Justine Walker, head of global sanctions and risk at the Association of Certified Anti-Money Laundering Specialists said the ambiguities made it harder for banks and asset managers to quickly close Russian positions worth billions of pounds.

“There are a whole lot of unknowns everyone is trying to work through,” she said, adding that some would need more time.

“We need detail, we cannot continue to have generalisations … There is quite a lot of self-sanction,” Keatinge added.

Britain, the European Union, the US and other G7 countries have agreed on sanctions to sever the Russian economy’s links to the international financial system.

Watch: Why are gas prices rising