Investors beware: The West is going to hit Russia with more sanctions

By Charles Riley, CNN Business

Western sanctions are decimating Russia’s economy and sending shockwaves through global markets. Still, there is more to come from the United States and its allies.

President Joe Biden flies to Europe on Wednesday on a trip that includes meetings with EU, NATO and G7 leaders. On Thursday, Biden will announce “a further package of sanctions,” according to National Security Adviser Jake Sullivan.

And that’s not all.

“One of the key elements of that announcement will focus not just on adding new sanctions, but on ensuring that there is a joint effort to crack down on evasion, on sanctions busting, on any attempt by any country to help Russia basically undermine, weaken, or get around the sanctions,” said Sullivan.

Western sanctions have crushed the ruble and prevented Russia’s central bank from accessing hundreds of billions of dollars in reserves. They have targeted Russia’s oligarchs and cover nearly 80% of its banking assets.

The sanctions have helped push the price of commodities including oil and wheat up sharply, benefitting energy and agricultural stocks while slamming airlines and travel companies. Rising inflation is also boosting bank stocks as central banks line up multiple rate hikes.

Sanctions already announced by the West mean that Russia’s economy will be isolated for years. The country is facing its deepest recession since the 1990s, and gross domestic product will plummet 22% over 2022, according to a forecast published by S&P Global Market Intelligence on Tuesday.

Not just Russia: S&P also slashed its forecast for global GDP growth this year to 3.3% from 4.1%. Europe will be hit particularly hard, it warned.

You may be wondering, what’s left to sanction?

Plenty, is the answer. But doing so without producing much more severe blowback for Western economies will be difficult.

“There is still room for more targeting before these sanctions reach a level comparable to those against Iran or North Korea,” Brian O’Toole and Daniel Fried of the Atlantic Council wrote earlier this month.

Here’s a few areas the West could target:

Oligarchs: The United States and its allies could greatly expand the number of oligarchs and business tycoons subject to sanctions. The basic idea is that doing so would encourage them to break with the Kremlin.

“It may be somewhat symbolic … but symbols can help sow uncertainty and panic in Russian markets and further diminish confidence in the Russian economy,” said O’Toole and Fried.

Companies: Some Russian banks have been hit with sanctions, but more could be targeted. The West could also hit companies that deal in insurance, manufacturing and transportation, to name a few sectors.

“Carveouts might be needed to manage spillover effects, but there is a wide swath of the Russian private and state-controlled economy that remains an attractive target,” said O’Toole and Fried.

More: The West could sanction Russian stock markets, and target state-owned companies. The White House has banned new investment in Russian energy projects, but that could be expanded to include the entire economy.

The most punishing sanctions would amount to a “full financial embargo,” according to O’Toole and Fried. This would ban all transactions and trade with Russia, putting the country in the same category as Iran.

For now, the West will likely spare Russia’s energy industry further pain. Momentum was gathering earlier this week for the EU to join a US-led embargo on Russian oil, but that appears to have faded due to the huge costs for major economies including Germany.

Fast food chains struggle to close Russian restaurants

A few weeks after Russian President Vladimir Putin began his assault on Ukraine, American restaurants said they would pull out of Russia. But many of them remain open, reports CNN Business’ Danielle Wiener-Bronner.

McDonald’s, Starbucks, Papa Johns and the owner of Burger King, among others, have said that they would either shut down operations in the country or pull support from restaurants there. Making good on those promises, however, is proving easier said than done.

One example: Burger King. Restaurant Brands International says it has pulled corporate support from the roughly 800 Burger King locations in Russia. But it can’t force those locations to close. That’s because they aren’t operated by the company — instead, they’re controlled by an operator who, according to RBI, has “refused” to close the restaurants.

Some Russian McDonald’s restaurants are reportedly still open, too, even after the company said it was closing its Russian locations. McDonald’s did not immediately respond to a request for comment for this story.

And a Papa Johns franchisee who operates locations in Russia recently told the New York Times that he has no plans to shut his restaurants down, even after Papa Johns said that it would pull corporate support from Russia.

“We do not own any assets or have any employees in Russia,” a Papa Johns spokesperson said in a statement, adding that Papa Johns is not currently earning any income from Russia. “That being said, we cannot unilaterally cause the independent franchisees that operate there to stop operations.”

So why is it so hard for these companies to shut down in Russia?

When big corporations decide to expand internationally, they usually set up franchise agreements. Generally, the franchisor, the brand’s corporate owner, has the same goal as the franchisee, the operator on the ground: Both want to sell food and make money.

But the Russian assault on Ukraine has shifted those priorities. Now, US companies have decided — whether because of public pressure, reputational risk or for ethical reasons — that closing restaurants is more important than selling food. But franchise operators may not agree.

That’s where things fall apart.

New union boss could start the biggest strike in decades

You might not know Sean O’Brien. But he is poised to shake up the US economy in a way no one else has in recent memory, reports my CNN Business colleague Chris Isidore.

O’Brien was sworn in Tuesday as the new general president of the 1.3-million member International Brotherhood of Teamsters, succeeding James Hoffa, son of the union’s most infamous president.

O’Brien, a self-described “militant,” is vowing to take a much harsher line with employers than his predecessor did. And that could lead to a strike at the nation’s largest union employer when the Teamsters’ UPS contract expires on July 31 2023.

If that happens, it would be the nation’s largest and most disruptive strike in several decades.

The Teamsters union no longer has a chokehold on the nation’s trucking system, as it did in the 1960s when Hoffa’s father ran it. But it still represents 327,000 employees at UPS, by far the nation’s largest trucking and supply management company.

Huge impact: A strike at UPS would be big enough to take a bite out of the overall US economy. UPS estimates its trucks carry more than 6% of the US gross domestic product, the broadest measure of the nation’s economic activity. The company also handles 2% of global GDP.

O’Brien seems to be spoiling for a fight. “You don’t go into any situation wanting a strike,” he told CNN Business this week. “But these employers have to understand we’re not going to be afraid to pull that trigger if necessary.”

UPS wouldn’t comment directly on O’Brien’s stance, but said the company believes it can find a way to work with the union.

“UPS and the Teamsters have worked cooperatively for almost 100 years to meet the needs of UPS employees, customers and the communities where we live and work,” the company said in a statement to CNN Business.

Up next

Markets Now: Watch the live digital show at a new time, every Wednesday 12 p.m. to 12:15 p.m. ET. On today’s show: The Satori Fund’s Dan Niles shares where he sees buying opportunities. Plus, Microstrategy CEO Michael Saylor explains why he’s so bullish on bitcoin. JP Morgan’s Gabriela Santos offers strategy for navigating your portfolio.

US new home sales data will be published at 10:00 a.m. ET. A report on crude oil inventories follows at 10:30 a.m. ET.

Also today: Earnings from General Mills and KB Home

Coming tomorrow: US unemployment claims. President Joe Biden meets with European allies.

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