Sanctions against Russia: are they working?

For nearly a century the democracies of Europe and North America have responded to the transgressors of international order by imposing economic sanctions. When Mussolini invaded Abyssinia in 1935, the Council of the League of Nations imposed an oil embargo against Italy. A year later France and the United Kingdom tried to prevent outside interference in the Spanish Civil War by declaring an arms embargo against Spain as part of their policy of non-intervention. Hitler’s Germany and Mussolini’s Italy unfortunately refused to go along and supported Franco and his insurrection with troops, equipment and air power. By 1939 the Republican cause had collapsed and Franco ruled Spain with an iron fist until his death in 1975. Later in the 1930s the Roosevelt administration in the United States imposed an oil embargo of its own, this time against Imperial Japan. Yet, rather than constrain Tokyo, it pushed its militarist regime to lash out against the US at Pearl Harbor.

These shaky precedents did not discourage democracies from resorting to sanctions. During the Cold War, a Western grouping in Paris called the Coordinating Committee for Multilateral Export Controls (COCOM) managed a blacklist of military technologies that could not be transferred to the Soviet Union and its Warsaw Pact allies. Governments responded to public and media pressure by denying arms and investments to countries abusing the human rights of their citizens. Sanctions were a convenient instrument of foreign policy: easier to decide on than the use of force and offering a broad palette of options from which to choose. Sanctions were a means of inflicting maximum pain on the targeted country at minimum cost to the country imposing them.

Advocates of sanctions as a tool to actually stop aggression and make aggressors change their behaviour traditionally argue that if only sanctions can be made truly comprehensive and far-reaching, they will ultimately succeed. It is just a matter of involving as many countries as possible and staying the course long enough for the sanctions to bite. Russia’s invasion of Ukraine has provided the advocates of sanctions the opportunity to prove this theory. There are some precedents to inspire optimism. The international sanctions against South Africa starting in the late 1970s certainly pushed the National Party leaders to realise that the Apartheid system had reached a dead end. The sanctions extended from mining to investments to sport, barring white South African teams from many competitions. They made South Africa an international pariah. By 1994 the Apartheid regime had released Nelson Mandela from Victor Verster prison and agreed to elections that would usher in black majority rule.

Another example is Libya, which faced a ban on Western investments in its energy sector and a ban on spare parts for its aircraft. These began in the late 1980s when Libya was implicated in a series of terrorist attacks against US and UK targets, particularly the blowing up of a Pan Am plane over Lockerbie in 1988. By the turn of the century the Libyan dictator, Colonel Gaddafi, had had enough and was willing to hand over some of his intelligence agents to face justice in The Hague, as well as to invite international inspectors into Libya to destroy his remaining chemical weapons stocks. The problem with both the South African and Libyan cases is that it took 20 years of consistent sanctions against two countries – that were economically weaker and far more isolated than Russia is today – before the regimes in Pretoria and Tripoli were ready to raise the white flag.

In the wake of Russia’s invasion of Ukraine last year, Western democracies have imposed sanctions on an unprecedented scale in an effort to make Moscow change course. Over 1,000 Western companies have left the Russian market, Russian banks have been denied access to the Swift bank clearance system, the assets of the Russian central bank abroad have been frozen, Russian seaborne oil can only be sold at a heavily discounted price if it is transported in Western ships, and the overseas properties and yachts of several Russian oligarchs have been impounded. A list of proscribed products, especially electronic components and computer chips, has become ever longer as Western democracies try to stifle Moscow’s military production. All this is in addition to the travel bans and foreign asset freezes that the US, the European Union and their partners have imposed on individual Russians implicated in criminal or malicious activity for some years already. The sanctions against Russia have not only been deep but also wide as the US and EU have persuaded many of their partners in the Asia-Pacific to join the sanctions regime. Even neutral Switzerland has gone along in the financial sector but is still not willing to allow Swiss arms and ammunition to be transferred to Ukraine. While no Western leader would expect sanctions even on this scale to crash the Russian economy overnight, the hope was that Putin would at least need to scale back his war aims in Ukraine and seek a quick exit from the conflict. A secondary hope was that Russians hard hit by falling living standards would turn against the regime in the Kremlin.

One year on, these hopes have not been fulfilled. The Russian economy has held up well, and Putin and his ministers have been defiant. In the armaments sector, Russian Defence Minister Sergei Shoigu has denied that Moscow is running out of computer chips and missile components and declared that Russia’s defence industries, working day and night, will double production rates this year to replace the losses from the war in Ukraine. The rouble has maintained its value against the dollar. Russian GDP has contracted but not by the dramatic 20% to 30% or so that the sanctioning countries were hoping for. The Russian economy ministry claims that the contraction has been as small as 0.2% of GDP. Certainly, shops are well stocked even if the Russian consumer has to be content with a locally produced burger rather than a McDonald’s Big Mac or a homemade sofa rather than the Ikea version. Inflation has increased significantly but the state has been careful to raise pensions and peg the prices of basic foodstuffs and monthly energy bills. So far there are no signs of social unrest despite the squeezed living standards. The Kremlin has greeted the sanctions as a stimulus to increase domestic production, particularly of foodstuffs and consumer goods and many Russians, bombarded with state propaganda about foreign threats to the country and the ‘Great Patriotic War’ to eliminate the fascist regime in Ukraine, seem willing to tighten their belts and do their patriotic duty, at least for now. The Kremlin’s contention that the sanctions have had no effect thus far is of course untrue. Yet it does point to a number of factors that make Russia a harder country to sanction than many others.

In first place is the fact that well before invading Ukraine, Putin had worked hard to reduce Russia’s vulnerability to Western economic pressures. As a young KGB agent in Dresden and Saint Petersburg, he had seen how spiralling debt and the need for loans and hard currency had forced his predecessors, Mikhail Gorbachev and Boris Yeltsin, to make humiliating concessions to the West, especially in accepting German unification and the withdrawal of Soviet forces from central and eastern Europe. Putin, therefore, reduced Russia’s debt and established a sovereign wealth fund of around $150bn as a cushion against balance of payments shortfalls. He ordered oligarchs already five years ago to bring their financial holdings back to Russia and to be prepared to lend to the state if they did not want their murky dealings to be investigated by the Russian tax authorities. Putin has also diversified Russia’s energy markets away from Europe, building the Power of Siberia pipeline to carry natural gas east to northern China. He has restored Russia’s traditional place as the world’s second largest exporter of arms and encouraged direct foreign investment as Western companies have been eager to take advantage of Russia’s burgeoning middle classes.

In addition to the specific policies of the Putin government to increase Russia’s economic autonomy, the country has obvious advantages when it comes to resisting sanctions. Being so geographically vast and with so many land borders, most of which are with non-Western neighbours, Russia can easily import sanctioned products. It has too much coastline to be subjected to maritime embargoes. Moreover, its extensive diplomatic network across the globe and the presence of Russian troops or mercenaries in many countries in the Middle East, Africa and Central Asia allows the Kremlin to put political pressure on many countries to help it evade sanctions or to grant it mining and raw materials rights in exchange for its security services. It is difficult to isolate a country when you need its assets.

We have seen this most clearly with Russian oil and gas exports. Just before Putin invaded Ukraine last year, Germany suspended the NordStream 2 pipeline project to bring Russian gas to Western Europe via the Baltic Sea. Europe then sharply reduced its imports of Russian gas and proceeded to fill its storage tanks with natural gas bought from a number of different sources, such as gas from North Africa and Norway or liquefied natural gas (LNG) from Qatar and the US. To some extent, Europe had no choice but to reduce its dependency on Russia as the Kremlin had already stopped supplying many EU member states as part of its policy of counter-sanctions. After one year of Putin’s war against Ukraine, Germany had already cut its imports of Russian gas from around 50% of total consumption to just 15%. Yet Russia has still managed to sell enough oil and gas abroad to finance its war effort in Ukraine. As Russian piped gas exports have gone down, Russian LNG and liquefied petroleum gas (LPG) exports to the EU have gone up, from 16bn cm³ in 2016 to 22bn cm³ in 2022. Even the Baltic states, which are among the hardest of the hardliners when it comes to sanctions against Moscow, have increased their LPG imports from Russia. The European Commission has been trying to convince EU member states not to sign any new gas contracts with Russia.

At the same time, Moscow has been redirecting its oil and gas exports to what Russian Energy Minister Nikolay Shulginov calls “friendly countries”. India, for instance, has taken advantage of cheap Russian oil and increased its imports 22 times last year compared to 2021. India now accounts for over 50% of Russian Urals crude sales. The Kremlin has also been seeking new markets in Latin America and Africa. China has been taking more Russian oil and gas, although no new announcements regarding the construction of a Power of Siberia 2 pipeline were made when President Xi visited Moscow recently. This would allow Beijing to import an additional 50bn cm³ of Russian gas a year; a significant boost to the Kremlin’s finances but still not a substitute for the 180bn cm³ of gas that Russia previously supplied to Europe. The sanctions have actually increased the percentage of oil and gas revenues in Russia’s state budget – from 36% to 41%. So, Russia is becoming even more of a fossil fuel economy at a time when most of the industrialised countries have pledged to be carbon neutral and switch to non-carbon fuels by mid-century. The EU has so far also been unable to agree on a ban on the import of nuclear fuel and technology from Russia. Hungary has been particularly opposed to this measure given that Rosatom is currently expanding Hungary’s Paks nuclear power complex. France is lukewarm too as it has a contract with Rosatom for the supply of enriched uranium.

The bigger the country, the more the rest of the world needs to impose sanctions to make them truly encircling and effective. Here there is a major weakness in the Western sanctions regime as 41 countries have sat on the fence in votes in the United Nations General Assembly and refused to condemn Moscow for its invasion of Ukraine. This is in contrast to the 140 countries that did vote in favour, but the 41 recalcitrants represent over two-thirds of the world’s population. Other countries that have called on Russia to withdraw its forces from Ukraine, such as Turkey and Serbia, have nonetheless refused to impose sanctions. Indeed, Turkey is going ahead with a major deal with Rosatom for the building of civil nuclear power plants. This again makes it easier for Moscow to find workarounds to evade sanctions. For instance, it has bought or hired a large number of old tanker ships so that it can export its crude oil without having to use Western vessels and submit to price-per-barrel restrictions. This so called ‘Dark Fleet’ has jumped from 200 to 450 vessels since Russia’s invasion of Ukraine. It organises ship-to-ship transfers of Russian oil in international waters particularly off the coast of Africa. Russia is also seeking to develop its own maritime insurance market to circumvent the international dominance of Lloyd’s and other Western brokerages.

Additionally, Putin has linked Moscow’s willingness to allow Ukraine to export its grain by sea from its remaining Black Sea ports to the willingness of the UN and Western democracies to allow Russia to export its own grain and fertiliser without limitations on its access to shipping and insurance. To increase pressure here, the Kremlin was prepared only to extend the current UN- and Turkey-brokered Black Sea grain deal by 60 days, contrary to the 180 days sought by the UN Secretary-General and Kyiv. Many countries have already been identified as useful transit countries for the Kremlin to access Western products. Suspicions were raised when Armenia, Turkey, Georgia and Kazakhstan began to import eight times more refrigerators and iPhones than they had previously and that these were for re-export to Russia. Moscow was using these seemingly innocuous products to cannibalise them for chips and electronic components for its missiles. Although Western intelligence agencies report that they have not found evidence that Beijing is supplying Moscow with lethal weapons so far, there are numerous indications that it is giving Moscow chips and electronics, as well as soft loans. Putin has accordingly boasted of the ‘parallel system’ that Moscow had established to trade outside the Western economic zone and de-link itself from dollar-denominated transactions. The Chinese and Russians were also trying to come up with an alternative to the Swift bank clearing system. During the recent Russia-China summit in Moscow, Putin declared that the Chinese yuan was Russia’s “currency of choice” for its international trade.

All the above is not to imply that sanctions are useless and have no effect. The vituperative manner in which Putin denounces the Western sanctions on a regular basis makes it clear that they are more than just an irritant to him. Even if Russia began its invasion of Ukraine in a relatively strong position to ride out the effect of sanctions for a year or two, the sanctions will start to inflict serious and long-term damage on Russia’s economy and global competitiveness over time. The fall-off in direct foreign investment will limit the ability of Russian companies to grow. The more repressive political environment with a total absence of legal due process will discourage Western bankers or computer programmers from working in Russia. Already well over half a million young men have fled the country, many to escape conscription, but also many are economic refugees who see no prosperous future for themselves in their home country. Thousands of small Russian companies have relocated abroad, with Turkey, Serbia and Georgia being favoured destinations. The denial of advanced technology and in time falling fossil fuel revenues will also inhibit the ability of Russia to build a 21^st century green economy based on an advanced knowledge and skills base with good education and health care. This may not bother Putin, hellbent on his place in tsarist history as a builder of the Russian empire; but these dim prospects should worry the elites and middle-class strivers around him.

Given that Western support for Ukraine at its current level will not continue forever, the NATO and EU member states have a core interest in trying to tighten the sanctions and make them bite faster and harder. What can be done?

In the first instance, it is vital to give the Kremlin the impression that the sanctions have not yet run their course and that more is to come. If Russia thinks that the West has reached the limit of the pain that it can inflict on the Russian economy, it can hunker down and rewire its trading partnerships to survive a permanent regime of sanctions. Iran and North Korea have shown over several decades already how this can be done. So, the EU has adopted a clever strategy by agreeing thus far on ten packages of sanctions. After each one is adopted, the EU institutions begin the practical and legal work to prepare the next package. Consultations to build consensus among the EU27 begin too to identify the art of the possible. The G7, which has played a leadership role on the sanctions, helps to align the EU with the US, Canada and Japan.

Next, it is important to be crystal clear on the conditions for the lifting of the sanctions. If Russia comes to believe that Western diplomatic aims in Ukraine are fluid or unclear, it will be encouraged to think that it can obtain maximum sanctions relief for minimal concessions. This is currently a Western weakness. The supporters of Ukraine have been united and firm regarding short-term goals such as arming Ukraine and frustrating Putin in his goal of subjugating Ukraine. Yet they have been vague regarding long-term goals. What exactly does Russia have to do to meet the conditions for the lifting of sanctions: withdraw from all Ukrainian territory including Crimea, agree to a durable ceasefire or simply return to the negotiating table and show a willingness to compromise? Or does it have to agree to pay Ukraine war reparations before its foreign assets are unfrozen? As long as these Western aims are unclear, Russia will be encouraged to try to negotiate individual sanctions downwards as it has been doing by putting obstacles in the way of the Black Sea grain deal.

Closing the numerous sanctions loopholes must also be a priority. Much of this involves putting pressure on third countries to stop acting as transit countries to allow Moscow to import banned products. Turkey recently announced that it was tightening its border controls in this connection and would crack down harder on the networks that Russia uses for sanctions evasion. It may be more difficult to persuade China and Central Asian countries to cooperate, but Georgia, a country that aspires to EU candidate status and NATO membership, can certainly be pressured to do more rather than straddle the divide between Russia and the West.

The EU is seeking to tighten up sanctions implementation by its member states. Last week the Commission announced that it was working with a group of ten states that agreed to coordinate their sanctions implementation. Lithuania has just introduced a measure to fine sanctions violators €50,000 or 5% of their turnover, which doesn’t sound draconian but at least it is a start. Lithuania has also suggested a phased approach to the imposition of sanctions on Russia in the area of civil nuclear energy by giving Hungary a nine-year opt-out for the Paks nuclear complex in exchange for Hungary agreeing to ban all new contracts with Rosatom by EU member states. The Commission is also proposing a new measure to block Russian firms from booking capacity on the EU’s LNG infrastructure. Clamping down on the illicit finances of the oligarchs and their tax havens and other hiding places can also tighten the squeeze. Last week the second Summit of Democracy, convened by US President Biden, adopted a Corporate Transparency Initiative with 20 countries signing up in the first instance. This is similar to legislation already adopted in the UK and which obliges small- and medium-sized companies to disclose their beneficial owners using a special registry and by a given deadline. The idea is to prevent oligarchs from hiding their money, property and identity behind shell companies. This particularly applies to high-end properties, a market which in the US alone is valued at $50tn.

A further step concerns the confiscation of Russian state and private assets to help fund the reconstruction of Ukraine. The World Bank and EU together have recently estimated the cost of repairing all the physical damage caused by Russia’s invasion at around $411bn, but many experts believe that this figure errs on the cautious side and that the final figure will be at least double this. The EU and G7 have both set up task forces to examine the legal parameters of confiscating, as opposed to simply freezing, the public and private assets of other countries. Confiscation of Russian assets is a key part of President Zelensky’s ten-point plan for a peace settlement and it has received a good deal of support among Ukraine’s supporters. Yet others are worried that an over-hasty confiscation of Russian assets without a rock-solid legal and procedural basis could encourage other states to do the same and undermine the trust and rule of law on which the international financial system is built. So, expect a difficult debate here.

Finally, a politically charged question will be which sanctions to make conditions based and directly linked to a Russian withdrawal from Ukraine; and which sanctions to maintain against Russia for the long term. Whatever the outcome of the war in Ukraine, Russia will remain an adversary of the West for some time to come: bitter, revisionist and intent on rearming and modernising its military. Western democracies will have an interest in using sanctions over the long term to constrain Russia and deter future hostile actions. They may well need to revive a body such as the previously referenced COCOM, which existed during the Cold War in order to blacklist sensitive technologies and impose controls on their export to the Soviet Union. Admittedly, restrictions on technology transfer will be more difficult today than during the Cold War years when the West had a leading edge in most advanced military technologies. Today, Russia obtains drones and missile parts from Iran and many countries outside the traditional West have high-end arms manufacturing capacity. China is also a complicating factor and involves a difficult debate across the Atlantic as to whether Chinese arms and component transfers to Moscow could trigger secondary sanctions against Beijing. Yet, since Russia invaded Ukraine, we have seen that many NATO countries – notably France, Germany and Italy – were still conducting a lively trade in military electronics and machine tools even after Russia annexed Crimea in 2014. So implementing a tighter and more transparent technology transfer regime vis-à-vis the Kremlin is a prudent policy, which will at least slow down Russia’s military modernisation even if it cannot halt it altogether. Western diplomacy will need to be agile to persuade other states such as Turkey, Israel, Brazil or South Korea to join such a mechanism.

In conclusion, ‘keep calm and carry on’ would seem the best motto here. Despite the Kremlin’s bravado, the sanctions are having an impact. Russian officials have begun to sound more pessimistic about the future. Revenues have been squeezed, Russia is losing valuable oil and gas customers, and GDP is set to fall more significantly in 2023 than it did last year. Oleg Deripaska, one of the more well-known oligarchs close to the Kremlin, has acknowledged that Russia is running out of money and may have only enough reserves to cover spending for one extra year. Even Putin adopted a less self-confident tone in a speech last week when he said: “the illegitimate restrictions imposed on the Russian economy may indeed have a negative impact on it in the medium term.” Certainly, the threat of sanctions on an unprecedented scale failed to deter Putin from invading Ukraine last year.

Sanctions are also the instrument for a long-term confrontation with a hostile power rather than the solution to a short-term crisis or temporary spat. But the West has clearly embarked on a protracted struggle against an aggressive and increasingly totalitarian Russia. In this context, sanctions are not a panacea; the West will need robust military deterrence, societal resilience, and skilful and patient diplomacy, as well as arms control and confidence-building agreements if they can be negotiated with the Kremlin. Yet sanctions, consistently applied and tied to clear compliance conditions, are still an essential element in inducing the Russian regime over time to abandon its confrontation with the democracies, and so they will need to preserve a central place in the West’s security toolbox.

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.