While Vladimir Putin’s army burns and kills in Ukraine, the United States and its European and Japanese allies have mounted a significant financial war on Russia. Whether the fighting drags on or the Russians secure something that Putin can call victory, the West’s financial assault seems likely to last a long time. The economic pain of the sanctions will intensify even if the allies do not add to them. In this battle, time is not on Russia’s side.
While debate continues over whether the West has done enough, there can be no denying that the sanctions go further than most observers would have expected only a few weeks ago. Certainly, they go further than most historical precedents. Building on the existing set of sanctions imposed on Russia following its 2014 seizure of Crimea, most of the new measures focus on financial matters, though some take direct economic hits as well. Primary among them are efforts to freeze the assets of Russia’s largest commercial banks, as well as the reserves of Russia’s central bank. The commercial banks in question account for some 80 percent of Russian banking assets. The action against the central bank will deprive Russia of much of its $630 billion worth of reserves held in dollars, yen, and additional currencies other than the ruble. This huge reserve—ironically built up to make Russia “sanctions proof” after the 2014 measures were put in place—is no longer at Putin’s disposal. Though Russia holds 15 percent of its central bank reserves in China and has some 2,300 tons of gold worth about $142 billion, the general freeze renders even these assets all but unusable to the Kremlin. As one Wall Street trader put it, now that Russian banking is basically shut out of world markets, “just try monetizing that gold hoard.”
Sanctions will also freeze or seize the assets outside Russia that belong to major members of the Russian elite, including Putin and his relatives. Rumor holds that several of these so-called oligarchs have already leaned on Putin to stop the war. The Europeans and Americans have also agreed to deny selective Russian agents access to SWIFT (the Society for Worldwide Interbank Financial Telecommunications). China’s CIPS (the Cross-Border Inter-Bank Payments System) offers an alternative to SWIFT, but it is miniscule by comparison. Because SWIFT is essential to the settlement of almost every financial transaction, this move, in addition to a ban on any Russian government financing on world markets, will make it nearly impossible for the Kremlin or Russian business to raise money outside of the relatively tiny Russian market.
Beyond such severe financial strictures, the allies have imposed a few direct economic measures, chief among them a ban on technology sales to Russia, including semiconductors. In time—and not a very long time, at that—this cutoff will limit Russian efforts to upgrade its industry and, critically, its military. Even before that, it will begin to hamstring Russian efforts to maintain what Moscow already has. To extend the ban beyond the allies who have agreed to it, the United States has made it clear that nothing with an American-made component can go to Russia, no matter where it is eventually assembled. There is very little in the world of technology, especially semiconductors, that does not have an American component.
Adding to this direct economic pressure, several countries, including the United States, have forbidden any commercial Russian aircraft to pass through their air space. Meantime, many Western commercial ventures have withdrawn from Russian ventures. Norway’s huge sovereign wealth fund has begun to divest its Russian holdings, while Norway’s premier energy producer, Equinor, has stepped away from its joint projects in Russia. Federal Express and UPS have halted all shipments to and from Russia, and British Petroleum (BP) is divesting itself from its 20 percent stake in Russian oil giant Rosneft.
Notable in all this is the absence of any direct efforts to stop the flow of Russian energy to world markets. Blocking these sales would certainly hurt the Russian economy; oil and gas account for more than half the country’s exports. The White House has explained this seeming oversight as being the result of President Biden’s desire to hurt the Russian elite but spare the Russian people. That explanation contains two evasions.
The first evasion is that the existing sanctions have already hurt the Russian people. A precipitous fall in the value of the ruble has destroyed the buying power of the average Russian. In just days, the asset freeze has created a liquidity crisis for ordinary Russian businesses and prompted the Russian people to empty ATMs across the country. Some estimates put Russian inflation at higher than 60 percent. The Russian central bank has already jacked up interest rates to 20 percent. All this hurts working men and women as well as oligarchs.
The second evasion is that, rather than being crafted to spare the Russian people, the mix of sanctions clearly aims to spare the West. Russia, after all, produces 10 percent of the world’s fossil-fuel supply. Europe gets 70 percent of its energy imports from Russia. Even without a formal ban, the price of energy has soared. In the United States, the price of a barrel of crude oil, already up in 2021, has jumped some 35 percent in just the last few weeks, and the price of natural gas has risen 28 percent. The price spike is not the result of a sudden shortfall in supplies but instead reflects uncertainty about the future. Traders worry that the West will impose a ban on Russian oil and gas, or that the Kremlin, in extremis, will punish its tormentors by blocking sales—an economically suicidal act, to be sure, but still a plausible one, with Russia’s economy approaching ruin.
Senior oil executives have assured markets and governments that sufficient global productive capacity exists to cover the shortfall if Russian supplies disappear from markets. That assurance offers some comfort, but markets and consumers of all types would nonetheless suffer during the time it would take to work up and deliver such marginal capacities. It does not help that one of President Biden’s first moves upon taking office was to kill the Keystone XL Pipeline and discourage conventional drilling and fracking in North America. If the U.S. had kept along its Trump administration path, it would have had excess capacity in both crude oil and natural gas to replace Russian supplies to Europe, thus tempering the immediate price impact of recent events. Under Biden, however, the U.S. has already slipped from being a net energy exporter to being a net importer. That is energy and national security malfeasance.
Even if the West feels pain, it will not compare with the cumulative effect of these measures on Russia. True, energy will cost more for the U.S. and its allies—a heavy burden on top of already-painful inflation. Germany will miss out on sales of machinery, autos, and auto parts to Russia. Britain and the United States will lag on sales of pharmaceuticals, and Italy on sales of furniture, but with time the strain will ease as the West adjusts to find other suppliers and other buyers. For Russia, however, the pain will only grow, making it increasingly harder for the Russian economy to support the war or, if it comes to it, an occupation.
The International Monetary Fund has estimated that the sanctions imposed on Russia after the 2014 seizure of the Crimea cost Russia 1 percent to 1.5 percent of real GDP growth. Stronger sanctions placed on Iran erased one-third of that country’s foreign trade. On this basis, preliminary estimates suggest that these still-stronger sanctions placed on Russia could in time cost its economy as much as 9 percent in real terms. That would be twice as bad as the loss America suffered during its Great Recession of 2008–2009. Whether the pain is enough to stop Russia’s military ambitions remains an open question, but there can be little doubt that Putin’s adventure will impose monumental costs on an economy that can little afford them.
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