Shifting objectives cloud the usefulness of sanctions against Russia

On September 26 and 27, the Fletcher School at Tufts University hosted a workplace about “global consequences of the economic war between Russia and the West.” It brought together about twenty experts, both academics and practitioners, to discuss the impact of the sweeping sanctions imposed on Russia by some fifty countries in the wake of the large-scale invasion of Ukraine.

The meeting, organized by Tufts professors Christopher Miller and Daniel Drezner, did not provide a decisive answer to the key question: are the sanctions working – and the related question: should they be lifted, continued or intensified?

In part, this is because Western leaders have been vague when it comes to defining the goals of the sanctions, which have changed over time. Initially the goal was to deter Russia would not be able to launch the invasion. That didn’t work. So then the goal was up crash the Russian economy, forcing a bank run and the collapse of the ruble, which would hopefully lead the Russian elites, and/or the Russian people, to rise up against Putin and force him to abandon the war. That seemed to work for a week or two. But the Russian Central Bank imposed strict controls to stop the outflow of capital and ended the convertibility of the ruble. The Russian economy did not collapse.

Then the goal shifted to one of wearincreasing costs for Putin in the hope that it will make him more willing to come to the negotiating table and end the war. By lowering stated targets, leaders can continue to insist that sanctions are working.

Edward Fishman, a former US Treasury official, said the “goal was to shock the system, create chaos and force Russian policymakers to shift attention to developments inside Russia.” But we underestimated the skills of Russian financial managers and the extent to which they had prepared for sanctions in the aftermath of the 2014 annexation of Crimea.

Maximilian Hess, author of the new book“Economic War: Ukraine and the Global Conflict Between Russia and the West” argues that Putin has been preparing Russia for an economic war with the West since the passage of the Magnitsky Law in 2012, which imposed sanctions on individuals involved in the death of Russian banker Sergei Magnitsky.

Historically, sanctions have done just that worked in about a third of cases. Success will only come if they are multilateral, involving a majority of the major economic players. In the case of Russia, there was unexpected solidarity among Europeans and between Europeans and the US, which hit Russia hard given its dependence on oil and gas exports to Europe. However, only a few countries outside the West joined the sanctions (Japan, South Korea, Singapore, Australia). China, India, Turkey and others expanded their trade with Russia and bought up the oil that no longer flowed to Europe.

Despite their relative lack of success, sanctions are a popular tool largely because they are better than the alternatives – doing nothing or going to war. They may be more important as a way to signal political commitment among allies than for their economic impact. Peter Harrell, a former National Security Council official, noted that “sanctions have been a growth industry over the past two decades,” starting with Bill Clinton’s use of sanctions to target drug cartels and expanding as part of the war on drugs after September 11. Terror.

The US was later encouraged by the success of the sanctions against Iranforcing the country to negotiate the Joint Comprehensive Plan of Action (JCPOA) in 2015, limiting its nuclear program. However, Russia’s economy is much larger, more diverse and globally integrated than Iran’s, so the impact of sanctions has been more modest. Harrell concluded that we “must be realistic about what sanctions can achieve, and not expect them to be a silver bullet.”

Although the sanctions were extensive, they mainly targeted the financial sector – excluding Russia from SWIFT’s financial transaction network, and banning transactions with most Russian banks. Interestingly, Fishman revealed that the decision to freeze the Central Bank’s assets had only just been made after the large-scale invasion. However, the West feared that an abrupt interruption of Russian energy exports would increase inflation, keeping oil and gas flowing into Europe until 2022. And the banks that handled payments for oil and gas exports were exempt from the sanctions.

The US controls crucial nodes in the financial sector, and the dollar remains the main currency for international trade and investment. But Elina Rybakova of the Peterson Institute pointed out that Washington does not have such critical influence over energy markets, and is still struggling to figure out ways to monitor and regulate exports of crucial dual-use technologies.

Meanwhile, Harvard’s Craig Kennedy alluded to the fact that sanctions can be a negative dollar game, where the country imposing them can suffer as much damage as the target. This certainly applies to Germany, hit by a 400% increase in natural gas prices in 2022.

Organizer Daniel Drezner pointed out that there have been a number of unintended consequences, the consequences of which have yet to be unpacked. They include the emergence of a “shadow fleet‘of uninsured tankers shipping Russian oil to India and China, and the expansion of a shadow network of financial transactions facilitating Russian evasion of sanctions.

By making it harder for Russians to export capital, the sanctions have boosted investment in the Russian economy and tied the business elite – the main proponents of Westernization – even more closely to the Kremlin. The war has further institutionalized the militarization of Russia’s economy, polity, and society, and it could be very difficult to turn the country off that path in a post-Putin future.

Finally, Drezner noted an important unintended consequence for Russia: that the war united the West, led Sweden and Finland to join NATO, and led Germany to rearmament. This negates a decades-long strategic goal by Russia to separate Europe and the US

Analysts agreed with claims that the sanctions, for all their limitations, are putting pressure on the Russian economy’s prospects for long-term economic growth, especially in terms of access to investment and technology to develop new oil fields. Sergei Vakulenko, a fellow at Carnegie’s Russia Eurasia Center, argued that Russia “faces a graceful decline (in oil production), but not a sudden decline.” That appears to be a price Putin is willing to pay to continue his war in Ukraine.

It is difficult to say how (and when) this conflict will end or what the end state will be. Will a future Russia ever rejoin the West? Or is Russia destined to become a resource base for China and other countries now disconnected from the West or willing to ‘multi-vector’ the geopolitical landscape?