Will escalating sanctions shift Fortress Russia? It’s not a given

New York, United States–Even as Western allies unleash new economic pressures on Russia with businesses announcing market pullouts, and an intensification of cyberattacks against Russian government entities, experts warn that these measures may not be enough to curb President Vladimir Putin’s escalating war on Ukraine.

“New sanctions are designed to bog Russia down in the long-term,” says Dr Nikolas Gvosdev, Russia expert and editor of world affairs journal Orbis, “but not to impose enough pain for Putin to pull out of Ukraine.”

While Ukraine’s yellow and blue flag has waved in protest from New York to St Petersburg, Putin has so far responded by ordering nuclear deterrent forces on high alert and continuing missile attacks on key Ukrainian cities.

Sanction resilience has been part of Putin’s long-term calculus, along with his understanding of the West’s pain points if sanctions boomerang. Experts agree little will change as long as the goal is to “minimize the impact on the United States and our Allies” as United States President Joe Biden stated when he announced stricter sanctions on Thursday. “Putin feels emboldened by the West’s trepidation,” says Gvosdev.

Since 2014 when Russia forcibly annexed Crimea, Western governments focused on deterrence over restraint to prevent further Russian encroachment into Ukraine. Sanctions were meant to convince Russia it was not in the country’s interest to be an aggressor. Pain points were identified – certain banks and specific individuals operating in the regions of contention were called out. They stung, but had little lasting effect.

‘Workarounds’

Over time, Putin was able to find “workarounds”, says Rachel Ziemba, adjunct senior fellow at the Center for a New American Security who has written extensively on sanctions.

One of the workarounds was Putin’s decision to pursue “selective de-globalization”, she says. “Even at its most open, Russia was closed off to foreign capital.”

The country created barriers to trade by imposing high import tariffs and barriers to communication by launching its own alternative to the internet in 2019. Putin has also pivoted away from the West to Asia by decreasing dollar reserves, increasing bilateral trade with China, and working on an alternative international payments system to the US-dominated SWIFT. These moves were meant to shield the economy from external shocks like the harsh sanctions playing out now.

Putin’s other gamble was to forego growth of the Russian economy, says Ziemba. By putting off investments and maintaining a tight monetary policy, Russia’s balance sheet (including $630bn in foreign currency reserves) looked strong in the lead up to the Ukraine invasion, providing it with an early buffer for any upcoming economic pain.

These external and internal fortification measures may be one reason why Putin was not swayed by sanctions threats Western governments waived at him earlier this year. By the time Putin recognized two Ukrainian regions as independent and Western allies began to escalate sanctions, he felt emboldened, says Gvosdev.

So much so that Germany’s decision to stop certification of Nord Stream 2 was more symbolic than substantive, according to Capital Economics analyst William Jackson. Because Russia had already slowed European gas sales, losing Nord Stream did not hit as hard as the West wanted.

Putin’s inner circle has also been bracing itself, says Ziemba. The list of sanctioned individuals appears to grow daily, but many have been moving assets from places like the US, where they can be frozen, and hiding them in offshore accounts where they can be retrieved at will.

Some pain

This next tranche of sanctions may have more teeth, but it remains unclear if they will be enough to get Putin to leave Ukraine.

On Sunday, the G7 announced certain, as yet unnamed Russian banks, would be barred from the global inter-banking communications system, SWIFT, with a transatlantic task force to coordinate next steps. However, the difference between real effect and more lives lost in Ukraine will depend on which banks are affected, how long these sanctions take to implement, and if they continue to exempt oil and gas exports. In other words, unless the sanctions are really very strong, it will not reduce the loss of Ukrainian lives.

That said, Russia has started to feel some pain, says Ziemba. In the past few days, Russian entities have had problems receiving letters of credit, making commodities trading difficult. Even Chinese banks, despite the Putin-Xi partnership, are restricting financing. Physical chokepoints like closed ports and compromised infrastructure are also starting to add to trading costs. Western countries are beginning to seize Russian ships, and many have announced they are closing off airspace to Russian carriers. And late Friday, the US announced it would join allies in sanctioning Putin, Foreign Minister Sergey Lavrov, and members of Russia’s national security team.

But it will be the long-term effects of sanctions that will hurt Russia most, says Govsdev.

Cutting off more than 50 percent of Russia’s high-tech imports for example will affect innovation in the military sector and its military effectiveness over time. Severing Russia from international banking and finance will also spread the pain across its economy. Ancillary effects such as a declining Russian stock market and weakening rouble will cause business disruptions and consumer hardship.

And when sanctions hit the Russian doorstep, expect there to be problems, adds Gvosdev. If the rouble precipitously declines and inflation soars, Gvosdev expects pensioners might be the first to protest. In 2018, Russian pensioners marched against pension reforms that would have raised retirement ages. Putin’s popularity plummeted and he made concessions. Since then, Putin has tightened the noose on dissent, silencing political opponents like Alexei Navalny and clamping down on independent media.

Still, says Gvosdev, if economic pain gets too great, pensioners have the least to lose and will take the fight to the streets. Protests are already taking place across Russia against the Ukraine invasion – thousands have been arrested and more protests are planned. These protests may serve as the nexus for change if people continue to come out in greater numbers.

How much pain is the West willing to take with pandemic malaise and inflation already causing domestic turmoil? Analysts agree that sanctioning Russia’s oil and gas sectors will have severe ramifications for Russia’s economy. Companies like energy giant BP, which Sunday announced it was exiting its shareholding in Russia’s Rosneft, may be a prelude to more energy penalties down the line. But sanctions that boomerang and raise oil and gas prices in the West and lead to greater inflationary pressures may never be on the table. In the US, where President Biden faces mid-term elections and the potential loss of Congress and his legislative agenda, the political will for extreme sanctions is low.

The threat of retaliatory sanctions also looms large, says Ziemba. Putin may counter by weaponizing any number of sectors from gas to oil to grain to fertilizer. “That would be bad for Russia, bad for the Russian people and bad for the global economy,” says Ziemba.