Are Sanctions Against Russia Effective?
The Long Game
Every time I speak with a journalist or participate in a webcast, I get the same question: Are sanctions an effective tool against Russia? After all, Putin is still in Ukraine, and his troops are still attacking. He has not released any illegally seized territory, and despite an unprecedented slew of sanctions and other economic restrictions unleashed against Russia during the past year, Putin’s war on Ukraine rages on.
I have addressed this question superficially several times. Yes, sanctions are an effective tool. Yes, they are accomplishing their goal. But we need to remember that sanctions are a long game.
In a recent testimony in front of the Senate Committee on Banking, Housing, and Urban Affairs, former Deputy National Security Advisor for International Economics, Daleep Singh, thoughtfully outlined the goals of the Biden administration’s sanctions program in response to Russia’s aggression.
Once the invasion began last February, the purpose of sanctions evolved along three dimensions: in the short term, maximize the costs on Putin for the continuation of the war, subject to an acceptable amount of spillovers to the US and global economy; over the medium term, degrade Putin’s ability to exert influence and project power on the world stage (i.e., ensure his “strategic failure”); and, long term, generate a negative demonstration effect for any autocrat that might consider redrawing borders by force to create his own backyard. (Emphasis mine)
I will note that nothing in Singh’s testimony specifies that the purpose of sanctions and export restrictions against Russia is to stop the war. Stopping the war is, of course, a desirable outcome, and these strategies certainly aim to facilitate that goal. But sanctions are a tool, and they are not the only tool the administration has been using this year to pressure Moscow to end its aggression.
So, when people ask me whether sanctions are/have been successful, my answer is yes. Our goals—clearly listed above—were not to end the war, although it’s a desirable outcome, but to make this aggression as unpalatable and difficult for Russia as possible.
In his testimony, Singh mentioned five methods to reach the stated goals.
Hit the money. The delivery of a capital account shock unlike any seen in modern economic history.
Hit the war machine. Denial of cutting-edge technology Putin needs to sustain the invasion of Ukraine and the sophistication of his military-industrial base.
Hit Russia’s participation in the international economic order. Degrade Moscow’s borrowing ability, remove Russia’s most-favored nation trading status, and eject Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), among others.
Degrade Russia’s status as a dominant energy supplier over time. Over time is the operative phrase here. The reality of the situation is that despite repeated warnings, Europe was and continues to be heavily reliant upon Russia’s energy exports. This goal was a gradual one that included (finally) sanctioning Nord Stream 2, banning Russian energy imports, releasing oil from domestic strategic reserves and encouraging domestic production, and increasing liquefied natural gas (LNG) exports to Europe, as well as export controls targeting Russia’s oil refining and other measures.
Hit the oligarchs. This one was a long time coming, but we finally began to focus on Russia’s kleptocrats, their ill-gotten gains, their access to the global financial system, and their support for Putin and his aggression.
I can already hear the shrieks that Russia’s economy is doing just fine, the ruble recovered from its initial freefall, and that China and India are buying up all the energy previously purchased by the Europeans, and therefore our restrictions are ineffective.
The ruble has recovered, sure, and Russia’s economic decline last year wasn’t as significant as was expected, but let’s take a look at the overall picture, shall we?
Inflation up to 20 percent.
Double-digit decline in retail sales.
GDP decline of 2.5 percent, compared with more than 4.5 percent growth during the previous year.
More than 130 “incidents” in Russia’s aviation sector during the past year, because the country can no longer procure the components and parts it needs to keep its aircraft flying safely.
Russia cannibalizing washing machines and other appliances because they’re unable to get components for their military equipment.
The oil price cap adopted a few months ago wasn’t intended to stop Russian oil flows, but rather reduce Russia’s revenues from oil sales. Russia’s Deputy Prime Minister Alexander Novak last month announced that Russia would cut oil production by about 5 percent starting this month, and considering that Russia’s budget estimates are based on oil selling at $70 per barrel, Russia’s budget isn’t looking good. At last glance, Urals crude was trading below $60 per barrel and below $50 in January.
Russian publishers are having to summarize or retell foreign books.
Russians are buying used cars thanks to plummeting production and rising prices, preferring used foreign models rather than cheaply made Russian or Chinese vehicles. And driving a Lada without modern technology and safety features? That’s a hard nope.
The fact that it took an outright war for the world to realize that Russia is not a reliable supplier of energy is a shame. As I mentioned recently, Russia had turned off gas deliveries to Ukraine and the EU several times during the past two decades, but the bloc continued its reliance on Russian energy, assessing that Moscow would always restore them.
Regardless, Singh is correct when he testifies that Russia’s standing as a global supplier of energy has been irreparably damaged, maybe for good - and not just because of a shift to renewables.
The International Energy Agency (IEA) estimates that by 2025, Russia’s oil production will be two million barrels a day lower than in 2021, and its gas production will fall by 200 billion cubic meters. Putin’s revenues from these reduced sales will be crimped by the oil price cap implemented by the U.S. and its coalition partners – which gives non-G7 countries every opportunity to ride the coattails of the cap and insist on paying Russia no more than $60 a barrel, especially since the Kremlin has nowhere else to go with its oil exports. Even if oil importing countries agree to pay Russia more than the price of the cap – going against their own economic interest – Putin would have to construct and finance from scratch a global network of intermediaries for oil shipping, insurance, trade finance to substitute for G7 service providers, which currently dominate the market with a 90 percent share. Taking all of this together, the IEA projects that Russia’s fossil fuel revenues will never return to their pre-invasion baseline, with its global market share falling in half by 2030.
Further, Russia’s participation in the global anti-money laundering watchdog, the Financial Action Task Force, has been suspended.
Russia’s credit ratings this month were downgraded to junk by both Moody’s and Fitch.
Russia has lost borrowing privileges from the IMF and other global financial bodies.
The United States and its allies are collectively going after Russian kleptocrats and networks that are helping Moscow evade sanctions and export restrictions. The multinational Russian Elites, Proxies, and Oligarchs (REPO) Task Force this week reported that members have blocked or frozen more than $58 billion in sanctioned Russians’ assets.
OFAC this week has sanctioned a network that helps Iran’s unmanned aerial systems (UAS) program that, among other things, helps Tehran manufacture and ship the Shahed-136 drones that Russia has been using to attack civilians in Ukraine.
Since Russia’s invasion began last year, OFAC and the State Department have designated more than 200 targets associated with Russian sanctions evasion, including key transshipment jurisdictions in the Middle East, the Eurasian Economic Union, and East Asia.
The list goes on and on. Sanctions are a tool, despite what some will claim, and not the magic bullet that will end Russia’s misadventures in Ukraine. But without sanctions, coupled with our military support to Ukraine, the country would no doubt have fallen to the Russians by now.
Sanctions need to be smart and flexible, giving us the ability to ratchet pressure up or down when needed. They need to do as little harm to civilian populations as possible, and they need to be aimed at specific targets, not slapped down in a maximum pressure campaign with no wiggle room. And sanctions, when coupled with coordination from our partners and allies, are most effective. This is something I flagged in an interview with Thomson Reuters when the Treasury Department did its sanctions policy reassessment in 2021.
According to Irene Kenyon, Director of Risk Intelligence at FiveBy Solutions and a former senior intelligence officer for the U.S. Treasury’s Office of Intelligence and Analysis, the Biden administration is trying to implement a more “thoughtful, introspective” sanctions regime — that is, one that features “a more functional interagency process and the willingness to coordinate not just with other government agencies, but with our allies as well.”
Let’s not ask if sanctions against Russia were effective. It’s a broad question asked without any context.
Sanctions have been effective. They have done what we want them to do. But they’re one tool in a toolbox of many options, and not the nuclear bomb of statecraft.