Can sanctions against Russia ever work?
November 1, 2022
https://mondediplo.com/2022/11/03russia-sanctionsAAA few months ago, European leaders suggested that waging ‘all-out economic and financial war’ on Russia would be easy. ‘Russia’s a very large country with a great people ... but its GDP is barely more than Spain’s,’ EU internal market commissioner Thierry Breton told RTL on 1 March, insisting the impact of that economic war on Europe would be slight. Six months after the West imposed sanctions, the Russian economy is suffering, but hasn’t collapsed. Back in March the IMF forecast an 8.5% contraction. The World Bank is now talking about a 4% drop in GDP — hardly an economy ‘on track to be cut in half’, as President Joe Biden predicted in Warsaw in late March.
The EU meanwhile faces double-digit inflation, driven by stratospheric energy prices. In late September, France allocated a sum equivalent to its national education budget to help ease the cost of living; Germany has announced a €200bn support plan to protect its industry. To free up more aid for businesses and households hit by inflation running at over 20%, Lithuania’s parliament approved a 2023 budget that increases the totalamount of aid to more than 6% of GDP.None of these figures includes arms supplies and financial aid to Ukraine, which, according to the IMF, needs $7bn a month to keep its administration afloat.
Against the backdrop of the energy crisis, energy-intensive sectors (chemicals, steel, fertilisers, paper), which were already suffering post-pandemic, are operating at reduced capacity or shutting down because they are now loss-making. Some companies have said they intend to relocate production to Vietnam, North Africa or even the US. The US has increased deliveries of (high-priced) liquefied natural gas to the EU and the UK by 63% to replace the Russian supply (1). Sixty German companies, including Lufthansa, Aldi, Fresenius and Siemens, are considering relocating some of their production to Oklahoma, whose governor has talked up its competitive advantages to investors in the German business daily Handelsblatt.
On 3 October, however, French MP Aurore Bergé congratulated her boss Emmanuel Macron on his record during the French presidency of the EU: ‘Our presidency has backed the idea of European strategic autonomy.’ In view of the looming disaster, this may cause a raised eyebrow or two, as the (comparative) unity of the EU praised by Bergé is only matched by its alignment with US objectives and interests. Deliberate strategy or miscalibration?
EU-US shuttle diplomacy
The shock of the invasion partly explains this obliviousness: the day after it began, Berlin definitively suspended the opening of the Nord Stream 2 gas pipeline, fulfilling a demand Washington has made for years. But this move was facilitated by a close, EU-orchestrated transatlantic collaboration. According to a Financial Timesinvestigation (2), Biden administration officials spent ‘an average of 10 to 15 hours a week on secure calls or video conferences with the EU and member states’ between November 2021 and February 2022 (when the invasion started) preparing a package of sanctions in case an invasion took place. Bjoern Seibert, the head of cabinet of European Commission president Ursula von der Leyen, had a key role in this shuttle diplomacy between Washington and member states. ‘We have never had in the history of the European Union such close contacts with the Americans on a security issue as we have now — it’s really unprecedented,’ one senior EU official said.
The Russian economy is now suffering, six months after the West imposed sanctions, but it hasn't collapsed: it's not ‘on track to be cut in half' as Biden warned
For their first salvo, the transatlantic allies agreed on a strategy of massive financial retaliation (3). Seven Russian banks were excluded from the SWIFT interbank messaging system and half of Russia’s central bank’s foreign assets (around $300bn) were frozen (in other words, requisitioned) to prevent a rescue of the rouble. But against all odds, the Russian banking system held up. Damage was limited through capital controls and compelling exporters to convert 80% of their cash into the national currency. And the Russian people, who are used to crises (having experienced them in 1988, 1998, 2008 and 2014), didn’t rush to the cash machines.
After the relative failure of this financial blitzkrieg, the taboo on energy sanctions began to disintegrate. When the Russian army’s atrocities against civilians in the Ukrainian town of Bucha were revealed in April, the pressure was stepped up. When Germany’s finance minister asserted that ‘there is no short-term substitute for Russian gas supplies’ and that interrupting them ‘would harm us more than Russia’, Thomas Pellerin-Carlin, head of the Energy Centre at the Delors Institute, called this ‘a lie, pure and simple’ (4); he did not clarify the alternatives. Pellerin-Carlin criticised Germany for being unable to ‘give up two points of GDP to save [Ukrainian] lives’ when ‘the most important thing is depriving Vladimir Putin of money to fight his war.’
Far from achieving this, the energy embargoes approved in April and May (with immediate effect on 90% of oil, and staggered in the case of gas) did the opposite. The ensuing rush for alternative suppliers (Norway, Algeria, US) sent prices soaring, offsetting the drop in Russia’s export volumes. From oil alone, Moscow has been earning an average of $20bn per month in 2022, compared to $14.6bn in 2021 (5). Instead of being bled dry, ‘Russia is swimming in cash,’ according to Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance (6). In February she had predicted ‘a fall [in the currency], pressure on reserves and potentially a total collapse of the Russian financial system’ (7). In fact, boosted by hydrocarbon prices, the rouble briefly soared before settling at around 60 to the dollar, similar to its pre-war level.
Division in the eurozone
The boomerang effect of sanctions has heightened tensions in Europe. To protect German industry, Berlin has taken on massive debt at rates unavailable to Italy and Greece, which has caused division in the eurozone. The disagreement also extends to capping gas prices, backed by 24 countries including France, which believe that the Europeans can dictate the price to their suppliers, particularly the US. ‘The conflict in Ukraine mustn’t result in American economic domination and a weakening of the EU,’ economy minister Bruno Lemaire told the National Assembly (somewhat too late). ‘We cannot accept our American partners selling their LNG at four times the price they sell it to their own manufacturers.’ Germany, Denmark and the Netherlands have rejected the cap, worried it will divert energy from an already undersupplied European market.
There is no doubt that the hardest part is yet to come for Russia: its economy is being structurally weakened. Asia will only be able to take up some of the slack in the hydrocarbons market. China is wary of circumventing an embargo on providing Russia with Western technologies and facing US reprisals. The EU’s top diplomat Josep Borrell has called for ‘strategic patience’. But will he be able to declare sanctions a success when Russia’s recession deepens in 2023? It all depends on the objective: Russian military defeat? Or the fall of Putin’s regime? There’s no guarantee that measures that failed in Iran and North Korea will work in Russia.
Especially as some countries have refused to bleed the world’s 11th largest economy dry. Despite its rapprochement with Washington, India — a longtime rival of China — has added huge orders for Russian oil (nearly a million barrels a day) to its ongoing arms purchases. And Saudi Arabia, the pillar of US influence in the Middle East, has allied itself with Russia within OPEC+ to scupper an oil price cap initiative. The organisation decided to defy Washington and cut production, despite a visit to Riyadh in mid-July from Biden, who is now threatening ‘consequences’.
Such is the paradox of ‘a new kind of economic statecraft with the power to inflict damage that rivals military might’, which Biden praised in March (8). By applying this strategy to Russia, the world’s second largest oil exporter and a major supplier of essential commodities such as fertiliser and wheat, Washington and its allies have put a tourniquet on the global economy. Yet according to an IMF study, ‘increased financial market integration makes capital flows from advanced economies crucial to growth and investment in emerging market and developing economies ... Unsurprisingly, these are precisely the countries that have not joined the sanctions against Russia, since they are most at risk of a balance of payments crisis if sanctions on Russian exports are tightened over an extended period’ (9). As a result, there are a growing number of ways to circumvent the restrictions via countries not aligned with Washington, making the goal of hermetically isolating Russia a fantasy.
In early October, Brazil’s far-right president Jair Bolsonaro for once championed ordinary people: ‘We do not believe the best course is to adopt unilateral and targeted sanctions, which are contrary to international law. These measures have hampered economic recovery [after the pandemic], they violate the human rights of vulnerable populations, including in Europe’ (10). During a meeting with Putin in June (itself viewed as provocative by Paris), Senegal’s president Macky Sall called on the West to exclude the food sector from its sanctions to avoid creating ‘serious threats to the continent’s food security’. This echoes warnings from the UN of a possible ‘hurricane of famines’. Nearly 20 million Afghans face acute food insecurity since the US withdrawal, according to the UN Food and Agriculture Organisation (FAO). Sanctions have not yet saved any Ukrainian lives, but they are already causing deaths.