Author DM Celley

ARE THE ECONOMIC SANCTIONS ON RUSSIA WORKING?

It’s been nearly seven months since Russia’s military forces invaded sovereign Ukraine.  The response in Western Europe and North America has been to levy sanctions against Russia in an effort to hobble its economy, and force it to seek peace in the region.  These sanctions have also unleashed a backlash from Russia that’s resulted in first dwindling and finally cutting off a major source of Western Europe’s energy supply.  Economic warfare as retaliation would send a powerful message that could impact a lot of the affected population, but how effective is it in the final analysis?

Least Effective Sanctions:  The most physically apparent sanctions are generally the least effective.  Many of the ultra-rich Russian oligarchs have had their assets in Western countries frozen or confiscated and their travel permissions limited.  These sanctions make great copy in Western news media and afford little in the way of retaliation since most Western firms have sold or written off their Russian investments.  In some cases, the oligarchs have given these assets disguised ownerships such as shell companies and proxy owners to help protect them from confiscation.  However, there is some debate that Vladimir Putin even cares whether the oligarchs are targeted for sanctions or not.

Financial Sanctions:  Financial sanctions are not readily apparent in the media, but have turned out to be only modestly effective.  The banning of Russian banks and currencies from the SWIFT system that facilitates international monetary transactions has restricted money transfers to the point of collapse in some cases.  The blocking of dollar transactions sometimes forces Russian buyers to barter, as certain currency standards rely on the dollar to act as a point of departure for valuation in transactions involving trade with second-tier currencies.  However, Russia’s leadership prepared ahead of time for an expected onslaught of financial sanctions.  Expecting to be locked out of most international banking they put together a large foreign-exchange currency reserve.  China has developed an international money processing system by the name of CIPS that is similar to SWIFT, and provides a nominal amount of foreign processing of ruble transactions particularly with the oil trading between China and Russia. 

Central Bank’s Reserves:  The financial sanctions also called for freezing the Central Bank of Russia’s reserves held in Western banks.  This caused some short-term consternation as the ruble crashed more than 30%.  The Central Bank then raised interest rates as high as 20% to arrest the decline, but also put the Russian economy into a recession.  A few months afterward in June, the Russian government engendered its first foreign-debt default in over 100 years.  But in less than a month after the default, the ruble rallied and the Central Bank lowered interest rates back down to about 8%.  Relief came from energy exports to places like China and India, bringing in badly needed hard currency and keeping the government from needing to borrow. 

Crude Oil Trade:  The oil trade is working for Russia at least for now, as they are shipping oil to their remaining trading partners on a regular basis.  The issue here is that their pricing is undercutting the current world markets by about 25%.  This will give them the business, but they will be earning way less than before per volume shipped.  Europe plans to make its oil embargo complete in a few months, and will further ban insurers from Britain and the EU from insuring any petrochemical shiploads.  This should cut the volume of crude shipped by Russia as the number of insurers willing to pick up the slack will decline, and many ports, canals, and shipping terminals won’t handle a shipload of crude oil that is not insured for fires or spills. 

Most Effective Sanctions:  The least discussed sanctions are generally the most effective.  Western governments have set requirements that exporting products to Russia from a wide range of industries must be licensed giving the government the final say.  Although this applies to an ever-increasing range of products, thanks to the Foreign Direct Product Rule in the U.S. it can also apply to non-U.S. manufacturers or suppliers that use American technology or other inputs to make the exported item.  Russian industry has been unable to pick up the slack for these sanctioned products, and some sectors such as transportation might show major disruptions in services without the parts required for maintenance or expansion.  The chip shortage is especially crucial as it can reach into many parts of the Russian economy. 

Departing Human Resources:  In the face of an autocratic government, a prolonged foreign war, and paralyzing trade sanctions, perhaps as many as several hundred thousand skilled workers and members of the Russian intelligentsia have left the country.  If this brain drain continues, it would have a major impact on Russian industry and economy in the far-reaching future.  During the reform years of Mikhail Gorbachev, the enlightenment came from an effort to modernize (Westernize) Russian society.  With the rise of Vladimir Putin to never ending terms as president, this modernization has fallen by the wayside in favor of traditionalism, imperial nationalism, and war.

Conclusions:  The most effective sanctions are the ones that don’t meet the eye—particularly export controls.  Mr. Putin went to great lengths to prepare Russia for the financial sanctioning, but could not prevent the loss of imported materials and products that the Russian economy needs to survive and grow.  Further, he either underestimated, or doesn’t care about, the massive brain drain to the economy’s human resources—a problem that may persist for Russia for generations to come.

Sources:         Split Reality, The Economist, August 27th, 2022.

                        The Best and the Brightest, The Economist, August 13, 2022.

1 thought on “ARE THE ECONOMIC SANCTIONS ON RUSSIA WORKING?”

  1. Greetings from Los angeles! I’m bored to death at work so I decided to browse your blog on my iphone during lunch break.
    I love the information you provide here and can’t wait to take
    a look when I get home. I’m shocked at how quick your blog loaded on my
    phone .. I’m not even using WIFI, just 3G .. Anyways, amazing
    blog!

Leave a Comment

Your email address will not be published. Required fields are marked *