Over a Year of War: The Effectiveness of Sanctions on Russia

By Giorgio Corrias,

In December 2021, the Biden administration alerted Russian President Vladimir Putin that a Russian invasion of Ukrainian territory would result in “economic consequences like none he has ever seen.” President Biden prepared sanctions against Russia that aimed to thwart Russia’s access to bond markets, cripple significant commercial banks, and target powerful individuals.

The Biden administration, much like all Western countries for that matter, hoped the threat of unprecedented sanctions would dissuade Putin from an impending incursion. A few months later however, the world would learn that President Biden’s warnings were not enough to change Russia’s calculus.

Following Russia’s invasion of Ukraine on the 24th of February 2022, many Western nations — in addition to the European Union (EU) — were quick to impose a wide array of sanctions on Russia in an attempt to cripple its economy and consequently stop its belligerent behavior.

Sanctions are defined as penalties imposed by one country to another, to stop them acting aggressively or breaking international law.

Sanctions are among the strongest economic measures a nation can take.

Insofar, Western nations employed various financial measures intended to restrict Russia’s access to money. Most notably banning major Russian banks from Swift — the global financial artery that allows for the smooth and seamless transfer of funds across borders — delaying remittance for Russian exports like oil and gas. The UK has also excluded Russian banks from its financial system, freezing their assets and prohibiting firms from borrowing funds.

Accordingly, the West also placed various sanctions on Russian oil and gas. The US banned all imports of Russian oil and gas soon after the invasion, as President Biden sought to target “the main artery of Russia’s economy.” The UK followed suit, phasing out Russian oil imports by the end of 2022. Though the EU is much more reliant on Russian energy — formerly obtaining roughly 40% of its gas from Russia — it nonetheless stopped importing Russian coal, and just last month banned all imports of refined oil products. 

The above countries and the EU also sanctioned over 1,000 Russian individuals and firms. These comprise wealthy business leaders who were thought to be privy to the Kremlin. Assets belonging to President Putin and Foreign Minister Lavrov were frozen in the US, EU, UK, and Canada.

Sanctions on goods and services encompass: a ban on Russian flights from the US, UK, EU, and Canadian airspace; bans on the exports of luxury goods to Russia; as well as import bans on Russian gold. Additionally, over 1,000 companies have publicly curtailed operations in Russia.

Yet, over a year later, Russia’s economy weathered the sanctions much better than anticipated. In fact, last March, the Institute of International Finance predicted that Putin’s economy would shrink by as much as 15% before year’s end. In actuality, quite the contrary occurred, as Russia’s economy contracted merely by 3%, significantly lower than the forecast. In 2023, the International Monetary Fund (IMF) expects the Russian economy to experience a small recovery of 0.3%, while other European economies, like the UK’s, to contract by 0.6%.

Why has Russia’s downturn proved shallower than anticipated?

In the spring of 2022, Russia’s policy response blunted the short-term impact of Western sanctions. Central banks and regulators raised concerns of surging inflation to the public, causing inflation expectations to jump. Aggressive interest rates compelled Russians to return money previously taken from their bank accounts, helping prevent a catastrophic financial crisis. 

The Russian central bank also responded with a massive sale of foreign-exchange reserves to prevent the rouble from collapsing. The Russian Minister of Finance, Anton Siluanov, stated Russia has a “financial shield in the form of gold and forex reserves.” Thus, despite foreign sanctions having frozen approximately $300bn out of $640bn that Russia had in its gold and forex reserves, the strategic buildup of foreign currency reserves and gold allowed the Russian central bank to prop up the rouble back to its value prior to the invasion.

Last year, Russia had a current account surplus of an estimated $220bn. Twice its level from the year prior. These reserves will provide a safety net for some time. 

Although Russia conceded that revenues will become “less predictable,” planning to cut its oil production by about 5% or 500,000 barrels a day next month, its oil output so far has held up better than most analysts expected. To compensate for the loss of Western trading partners, Russian companies found markets in India and Turkey among other nations. 

The International Energy Agency fueled widespread expectations of economic Armageddon when claiming sanctions on the Kremlin would likely cause the “biggest supply crisis in decades.” Yet, last January, the monthly average of Russia’s crude export volumes were at their highest level since June.

These underwhelming outcomes should certainly not be attributed to lack of trying. On the contrary, the volume of and speed with which Western sanctions were imposed throughout the past year have undoubtedly impressed. Just days after the invasion, the Russian central bank saw $300bn in foreign assets frozen. In the coming weeks and months, the West would block all foreign investment and exports of high-tech companies; ban major Russian banks from Swift; block flights, shipping, maintenance, and insurance services to Russia; all the while waning from Russian energy.

Though Russia proved very resilient to the West’s methods, its sanctions have nevertheless presented significant ramifications. Contractions in GDP — despite being much smaller than the forecast — still means the Russian economy is notably below its long-term growth trend. It is unlikely that Russia will recover its 2021 income level.

The economic damage is also far from over. The loss of foreign capital, investment, and technology will strongly hinder the country’s development. Russia’s energy sector heavily depends on Western expertise, and although Putin has found fixes to mitigate short-term damage, it will be difficult to maintain — not to mention expand — production in the long-run. Yet what is often overlooked in the long-run is the brain drain of talented, educated professionals. Hundreds of thousands of academics, engineers, and I.T. specialists now live elsewhere in exile.

Ultimately, while Western sanctions have undoubtedly impacted the Russian economy, they failed to induce the kind of insurmountable problems which cripple the Russian economy to the extent that forces Putin to halt its invasion of Ukraine.

Yet, the most urgent lesson to take from the sanctions’ holistic failure is what they make the world turn a blind eye to: Ukraine’s alarming economic position and what the West should do to help it. By lavishing public opinion on Russia — one of the world’s largest economies — attention is drawn away from the infinitely more damaging effects of Russia’s war on Ukraine’s economy. Above all else, the West needs to focus on its lasting aid and assistance to Ukraine. Although military assistance has been and will remain vital, the challenge at hand is integrating the Ukrainian economy into the Western sphere of influence. Until then, it must be supported to prevent collapse. 

After all, which is in more trouble, the 11th largest economy (2021) that has contracted by merely 3%, or an economy under siege that has lost one third of its GDP?

This is no small task; the financial strengthening of Ukraine will demand sizable investments across all economic sectors, in addition to assistance within areas of health care, education, and social services. To get Ukraine’s Eastern European neighbors to reach their current level of development, it took the EU 3 decades and trillions of dollars. A commensurate challenge awaits if the West wishes to do the same with Ukraine.

In essence, sanctions are an important method for the West to fend off Russia and demonstrate its support from Ukraine. But, they ultimately lavish public opinion away from the much more important economic struggle in this conflict.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

Image Rights: Reuters

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