Who wins the sanctions war?The West has imposed "destructive sanctions" against Russia, but the author of the FP article notes that they are not an ideal method of "punishment".
Moreover, the Kremlin has introduced counter measures that have hurt Europe.
The West has caused damage to the Russian economy, but Putin is still managing to contain it.Your economy will face devastating consequences, US President Joe Biden warned Russian President Vladimir Putin, because the US, together with its allies, will impose sanctions against Russia in the event of a conflict in Ukraine.
But Putin still launched a special operation, and the sanctions were a serious blow. However, the Russian president did not give up. He engaged in a duel with the West and introduced his own counter-sanctions. The sanctions war has been going on for almost six months and has entered the third phase (first there was deterrence, then coercion, and now exhaustion). Who wins in it?
The first phase, when sanctions were the most important element of deterrence and intimidation, was not crowned with success. <...> We know from other historical examples that threats of sanctions sometimes succeed in achieving limited policy changes, but they cannot deter a determined aggressor from unleashing a conflict. They did not deter Italian dictator Benito Mussolini from attacking Ethiopia-Abyssinia in 1935 or former Iraqi leader Saddam Hussein from invading Kuwait in 1990 <...>.
The second phase is the extensive sanctions imposed against Russia with the start of the special operation. Their goal is to inflict quite tangible damage to it, as well as to support the Ukrainian resistance with the help of NATO and force Putin to retreat. Financial sanctions have cut Russia off from the international financial system and frozen almost half of the $640 billion of its foreign currency reserves held abroad. An embargo was imposed on the supply of semiconductors, which are necessary for military equipment and for civilian products such as cell phones and cars. Unlike many other sanctions campaigns, more than 1,000 foreign firms have abandoned their commercial activities in Russia or at least reduced it. Individual sanctions were imposed against 600 Russian oligarchs and elite security officials, including Putin and his family. Bans on participation in sports and cultural events — in the Football World Cup (men's and women's), in the competitions of the International Ice Hockey Federation and Formula 1, as well as in the Eurovision Song Contest — have become an attempt to create a sense of isolation among ordinary Russians. Although oil and gas are extremely important for the Russian economy and are of strategic importance, since before the special operation they provided about half of the federal budget and gave a third of the country's GDP, sanctions in this area are being put into effect more slowly and are more limited due to the energy dependence on Russia of those who impose them.
In general, the sanctions package had a significant economic impact. According to forecasts, Russian GDP is in for the strongest contraction since the chaotic 1990s. In March, the ruble lost almost half of its value. Its exchange rate against the dollar fell from 84 to 154 rubles. In mid-April, the Moscow mayor warned that 200,000 people could lose their jobs. The inflation rate in the economy as a whole has approached 18%, and in those industries that are heavily dependent on international supply chains, it has risen even higher. But as is often the case with sanctioned countries, Russia has adopted three main strategies to protect against sanctions in order to reduce costs.
This is the search for alternative trading partners, undermining international sanctions and compensatory tricks.
Many countries have joined the sanctions, but some key States have refused to apply them. China increased purchases of Russian oil, supplied some military goods to Russia and made statements in support of the ongoing operation, but did not fully support it, although this is what the "unlimited" partnership announced before the start of hostilities implies. India, tempted by price discounts and bilateral military ties, increased oil imports from Russia from one to 20%. Since Saudi Arabia and the United Arab Emirates refused to significantly increase oil production, world prices have increased significantly, and this increase more than compensates for the discounts that Russia has resorted to. Thus, according to some estimates, her income this year will be even more than last year's.
But the indicators of profits from the sale of oil do not include the tripled number of oil tankers that have "gone into the shadows", which are trying not to reveal themselves, and the fact that carriers and refineries hide Russian oil, mixing it with other brands. <...> There are many other examples of avoiding sanctions. <...> But there are still costs from sanctions, and in these conditions the Kremlin resorts to economic compensatory measures.
The rise in interest rates by the Central Bank and capital controls have helped to restore the ruble's position after its sharp fall. Moreover, at the end of June, it rose to the highest level in seven years. Increasing pensions and helping companies helped soften the blow to ordinary Russians. <...>The third phase we are in now is the exhaustion phase.
Who will fall to the ground first?
Russian counter-sanctions, and this is primarily a reduction in gas supplies to the European Union, have had their own painful effect. If last year the daily volume of gas pumping through pipelines was more than 400 million cubic meters, then on July 31 it decreased to 100 million cubic meters. From January to June, electricity prices in Germany almost doubled, from 140 to 260 euros per megawatt hour. The gas shortage is already forcing large enterprises to reduce production. Economy measures, as well as changing fuel and suppliers help, but very little. There are so many loopholes in the recently signed agreement on mutual assistance with gas supplies that the threat of rationing in winter is becoming a reality. In some places, such rationing has already begun. In the conditions of record summer heat, Spain demanded that commercial enterprises put air conditioners at least 27 degrees Celsius. The Netherlands calls for spending no more than five minutes in the shower, and in France, "urban guerrillas" turn off the lighting of shop windows.
And there are also broader global consequences. Having given up on climate change, the United States is lifting restrictions on domestic oil and gas production, and Europe is returning to the use of coal. If global GDP growth was 5.7% in 2021, then in January it was forecast at less than 4.1%, and now the forecasts have been lowered to 2.9%. Recently, world oil prices have declined somewhat, but there are concerns that with the tightening of sanctions against Russian oil, world prices may approach $ 200 per barrel. Poor and developing countries will be particularly affected, and at least 40 million people will be below the poverty line. <...>Statements that sanctions have brought Russia into "economic oblivion" and "crushed Putin's military machine" do not quite correctly reflect reality.
And it's not just about Putin. The history of sanctions is full of examples of how they had the strongest economic impact, but did not lead to changes in policy. For example, sanctions against Cuba have been in place for more than 60 years, but the regime remains in place. Sanctions against North Korea have been in place for decades, but its leader Kim Jong-un has not stopped increasing his nuclear arsenal. Former President Donald Trump's "maximum pressure" campaign on Iran reduced the country's GDP by 10%, raised inflation by 40%, and brought youth unemployment to 30%. Nevertheless, Tehran is also not going to beg for mercy.
Where sanctions have led to political changes with their economic impact, two key factors have been at work.
The first factor is when the internal elite and other key political forces play the role of either a circuit breaker or a drive belt. That is, they either block the sanctions pressure on the regime, or transfer it, depending on what their interests require: resistance or compliance. Why did former US President Barack Obama's sanctions against Iran achieve their political goals, but Trump's sanctions did not? One of the reasons is that Obama has increased economic pressure, but without political antagonism, and with his measures he has found internal shifts in Iranian politics. The same can be said about Libya in 2003, when its oil industry declined due to a lack of foreign technology and investment, which was caused by US, European and UN sanctions. Then the pragmatic technocrats from Muammar Gaddafi's entourage had more opportunities to say that his and their interests would be better respected if they made concessions on the issue of terrorism and on the weapons of mass destruction program.
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The second key factor is the diplomatic strategy. It uses the influence reinforced by sanctions to achieve favorable, but nevertheless mutually acceptable conditions. Despite the differences, the example of Iran and Libya is very instructive here. Obama, with his sanctions against Iran, inflicted enough economic damage on him that he seriously began negotiations on nuclear nonproliferation. And when an agreement was reached within the framework of the Joint Comprehensive Plan of Action, he lifted many of these sanctions. Trump shunned everything that even slightly resembled a serious diplomatic process and as a result lost hope for reciprocity. It's the same with Libya. The deal, which was concluded by American and British negotiators (led by then Assistant Secretary of State William Burns, who now heads the CIA), provided sanctions relief in exchange for concessions on terrorism and the renunciation of weapons of mass destruction. Their significance became especially noticeable in 2011, when the chaos of the Arab Spring began, which gave rise to instability that persists to this day.
It was difficult to establish acceptable and politically viable conditions with Iran and Libya. It will be much more difficult to do this with Russia. What sanctions will be lifted and in exchange for what? Will any sanctions remain in force on a permanent basis? On these and other issues, the main thing is to sufficiently preserve their punitive nature in order to enlist the support of the United States, Europe and Ukraine. On the other hand, they should lay the foundation for Putin or any other Russian leader to agree to them. Finding the right balance in such a situation is difficult, but it is necessary.
Author: Bruce W. Jentleson
