Russia: Additional Economic Measures
Private banks? Visa Bans? Oligarchs?
Every time I do a speaking engagement, the question that invariably comes up is whether sanctions against Russia are effective. It’s a question lacking in certain nuances and specifics.
What do sanctions hope to accomplish? What were our goals when we began a very fast-paced, multilateral sanctions program against Russia after the invasion of Ukraine began in February? If the goal was to force Putin to withdraw his troops, then sanctions haven’t been successful… yet. If the goal was to punish Russia, sanctions have definitely worked.
Sanctions are a long game. Will sanctions eventually force Putin to withdraw from Ukraine? It’s entirely possible, but it’s not a quick process, and it will require not just a change in attitude on the part of the Russian public, but also some economic pain for the West, where countries have too long relied on Russian energy exports and enjoy the profits from Russian shopping trips, real estate purchases, and luxury exports.
Reduced support from Russians. Until now, regular Russians either shrugged off the invasion, cheered it, or complained about not being able to buy stuff they normally bought or go on vacation where they normally go. Witness this woman crying because she had to leave her Crimean paradise early after military bases were bombed in the illegally annexed region.
Russians are also flocking to get Schengen visas in anticipation of at least some EU countries banning Russians from crossing their borders.
We know what is important to the Russian people, so barring them from purchasing their favorite things and traveling to their favorite destinations may erode their support for Putin’s war in Ukraine.
But will that alone be enough? Probably not.
Economic pain. No matter what messaging the Kremlin is disseminating, the Russian economy has been significantly impacted by the western sanctions imposed after Putin’s invasion. A recent Yale study reveals that the Russian economy is actually being catastrophically crippled not just by sanctions, but by western companies derisking and withdrawing from the country of their own volition.
- Russia’s strategic positioning as a commodities exporter has irrevocably deteriorated, as it now deals from a position of weakness with the loss of its erstwhile main markets, and faces steep challenges executing a “pivot to Asia” with non-fungible exports such as piped gas
- Despite some lingering leakiness, Russian imports have largely collapsed, and the country faces stark challenges securing crucial inputs, parts, and technology from hesitant trade partners, leading to widespread supply shortages within its domestic economy
- Despite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent; the hollowing out of Russia’s domestic innovation and production base has led to soaring prices and consumer angst
- As a result of the business retreat, Russia has lost companies representing ~40% of its GDP, reversing nearly all of three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base
- Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses, which has already sent his government budget into deficit for the first time in years and drained his foreign reserves even with high energy prices – and Kremlin finances are in much, much more dire straits than conventionally understood
- Russian domestic financial markets, as an indicator of both present conditions and future outlook, are the worst performing markets in the entire world this year despite strict capital controls, and have priced in sustained, persistent weakness within the economy with liquidity and credit contracting – in addition to Russia being substantively cut off from international financial markets, limiting its ability to tap into pools of capital needed for the revitalization of its crippled economy.
So far, even these drastic impacts have not changed Putin’s calculus even as the war in Ukraine enters its sixth month.
So what is it going to take?
Eight years of sanctions have failed to boot Russia out of Crimea after Moscow illegally annexed Ukrainian territory. Even a full embargo of the region only caused a drain of between $1 and $2.7 billion per year in subsidies for Russia by 2019—five years after the Crimea invasion.
Although Putin cannot contain the effects of sanctions forever, and the economic costs are already becoming visible (which is why I believe key economic indicators are all of a sudden concealed, and only cherry-picked positive economic news is being revealed to the world), just what will it take to turn this war around?
Erode popular support by increasing the pain for the average Russian, who doesn’t seem to care about the slaughter and atrocities being committed by their government against their neighbors?
Sanction private banks, which are helping Russia continue funding its war? Ukraine is asking the Biden administration to block a couple of Russian banks every week.
What about designating Russia as a state sponsor of terrorism? A bipartisan effort in the House of Representatives is already in the works, with a bill introduced by Representatives Ted Lieu, Joe Wilson, Jared Golden, Adam Kinzinger, and Tom Malinowski to designate Russia as a state sponsor of terrorism if the State Department takes no action on the issue. The designation has bipartisan support in the Senate as well.
The White House and State Department are concerned that the designation would forever destroy diplomatic relations between the United States and Russia, but there’s a part of me that wonders why in the world we would want to maintain diplomatic relations with a country that threatens the sovereignty and territorial integrity of its neighbor, stages an invasion, slaughters its citizens, rapes toddlers, tortures innocent people, and specifically targets innocent civilians while committing what meets the definition of a genocide.
Only four countries are currently designated by the State Department as state sponsors of terrorism: Cuba, North Korea, Syria, and Iran. The designation includes restrictions on foreign aid; a ban on defense exports and sales; certain controls over exports of dual use items; and miscellaneous financial and other restrictions.
In addition, firms and financial institutions would have yet more incentive to stop doing business with any Russian entity. No one wants to be that company that transacts with a state sponsor of terror.
How about our allies stopping the flow of money into Putin’s pockets from European countries that refuse to stop buying Russian energy, from China and from India, who refuse to not only implement sanctions against Russia, but even condemn the invasion and atrocities against Ukrainians in which Russia is engaged, and from countries that are more than willing to obscure the origin of oil being ostensibly shipped from their shores, but that really comes from Russia?
"It turns out, an Indian ship met a Russian tanker in mid-seas, picked up oil in the mid-seas, came to a port in Gujarat, it was processed in that port and converted into a distillate which actually goes into making single-use plastic."
We have always known that sanctions work best when they’re multilateral, and the Biden administration recognized this fact in its sanctions review last year.
…multilateral coordination and engagement strategy: Where possible, sanctions should be coordinated with allies, incorporating shared intelligence and resources, and accompanied by engagement with relevant stakeholders including industry, financial institutions, allies, civil society, and the media.
When allies such as Germany, Italy, and other NATO allies and EU members refuse to punish Russia because it would cause them too much economic pain, the desired effects will obviously be delayed.
And then there’s the enforcement piece of the puzzle.
A sanctions regime is only as good as the government’s willingness to enforce the law. For now, Russian oligarchs and kleptocrats are still using shell companies and other corporate vehicles to hide their ownership of assets and access the US dollar and the global financial system.
They still use third parties, especially family members, to ostensibly divest from companies they have owned, but retain control of those entities, even as they hand controlling shares over to others.
The United States has created several task forces to seize assets that belong to sanctioned Russian oligarchs, and they’ve had a measure of success so far, but there’s a significant amount of work still to be done.
And then there are the oligarchs. Imprisoned opposition leader Alexey Navalny publicly wondered why so few Russian oligarchs have been sanctioned by the west. In a lengthy Twitter thread, Navalny wondered why, for example, Gazprom head, Alexei Miller, has not been sanctioned by the EU. Until recently, the United States refused to sanction Putin’s reported girlfriend, Alina Kabaeva, because the National Security Council felt that designation would be “too personal.” US sanctions also do not include oligarch Roman Abramovich, whose Evraz apparently does supply the Russian military, despite his ardent denials. Out of the 200 richest Russians included in Forbes, only 46 are subject to US, EU, or UK sanctions, according to Navalny.
Sanctions can be an effective tool to change policy, but they need to be applied correctly to pressure points that matter, and there can be no backsliding until the goals of the sanctions policy are achieved.
Sanctions have another effect. That effect is the screwing up Russian ability to make more weapons. More anything to be honest but weapons is the key. Missiles, tanks, drones and so much more need stuff from the West. Now of course Russia is willing to pay smugglers massive amounts of money for stuff that has been blocked but there are limits to how successful these attempts can be and without these key components all sorts of Russian military hardware is going to be impossible to make.
We're seeing the results of this in the mix of missiles used. At the start it was mostly "smart" modern ones, then these were combined with adequate late soviet ones (1980s vintage) and now we're seeing ancient 1960s era stuff being used. That works fine if you just want to destroy things (which seems to be part of the Russian strategy) but it doesn't really stop Ukraine from fighting back and it certainly suggests that in another month or two Russia may simply be out of missiles all together.
Note that even in good years pre-sanctions, Russia could only make about 2 smart missiles a day across all the modern systems. With sanctions it's probably unable to make even one per day. Russia can and has been using up a years worth of production of these in under a week (and that ignores the ones lost in "smoking accidents"). Just stopping those imports massively helps the war effort