For 100 days Ukrainians have been resisting a brutal Russian invasion; they fight alone but are financially backed by the West.
The US Senate just passed a $40bn aid package with bipartisan support, at least $15bn of which will go to the Ukrainian armed forces. Much of the remainder is earmarked for the other front in the conflict with Russia: the geo-economic war.
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Despite these efforts, however, Russia’s economy remains on its feet – largely thanks to record-high hydrocarbon prices and continued European gas purchases – allowing the bloody conflict which already claimed thousands of civilian lives and destroyed most of Ukraine to continue at full force. The dire fact that, after all this suffering, Ukrainians still seem to face at least another 100 days, if not more, of ruthless invasion, bloody offensives and unspeakable atrocities calls for a re-examination of the West’s strategy and tactics in its economic war against Russia.
Since the beginning, the West’s primary weapon on the economic front has been sanctions – severing key banking linkages, barring Russian businesses from dollar markets, and freezing a significant portion of Russia’s war chest. Russian exports, especially coal exports, have also been targeted. However, Europe is still having gruelling discussions over how to fully ban Russian fuel. So far, the West appears to have opted to pursue what can be defined as a “supply-side strategy” to weaken the Russian economy but simultaneously failed to efficiently plan for the predictable costs such a strategy would inflict on itself.
There are growing calls for further restrictions and heated discussions over whether – and how – to put in place a full embargo on Russian hydrocarbons and banking. But all parties to the discussions are aware that the added cost from such moves would be high. And as Western attention slowly moves away from the war – a luxury that Ukrainians cannot afford – there is a risk that the resolve for passing more sanctions may soon weaken.
Putin has demonstrated clearly, however, that no matter which direction the West decides to take, he will continue to prioritise military spending, even if it means resorting to autarky and impoverishing his own people.
All this means, that if it really wants to end Ukraine’s devastation promptly and hold Russia to account for its lawless actions, the West not only needs to tighten its sanctions regime against the Kremlin but also learn to use this effective weapon of economic warfare in a much smarter way.
Failure to envisage and prepare for the costs of the war’s economic impact thus far has already undermined the efficacy of sanctions. And failure to plan for the ramifications of still-to-be-introduced measures would risk further weakening the West’s hand in this economic battle.
If Europe implements further sanctions without developing strategies to protect European nations from their costs, it may end up bolstering far-right arguments against economic resistance to Putin’s regime, such as concerns raised by France’s Marine Le Pen over how hydrocarbon sanctions may result in inflation and economic devastation. Populist right-wing politicians like Hungary’s Viktor Orban or Italy’s Matteo Salvini are also chomping-at-the-bit for the opportunity to rush back into Putin’s arms, and would use any further costs acquired from new sanctions to try and turn public opinion against the Western efforts to economically punish and restrain Russia.
This is not to say in any way that the West should ease sanctions. On the contrary, while Ukrainians continue to fight for their country’s survival, not one inch should be conceded on the supply-side efforts. But to build the necessary political support for sustaining, and winning, the economic war against Russia, the West also needs to implement a demand-side strategy. State investment, international supply-chain and production coordination, and the underwriting of risk by leading Western nations can help Ukraine fight and bankrupt Putin’s war machine.
The West has a soft underbelly – from Greece’s opposition to Russian shipping sanctions, to the Netherlands’ refusal to pump more gas in Groningen, to the opposition in the United States from the Trumpist right as well as the far left to allocating more aid for Ukraine.
And while the West has had significant success building a sanctions alliance, including Singapore and Switzerland, the Global South – at risk from Russian threats to global agricultural markets and wary of previous Western policy disasters – is hesitant to fully put its weight behind a sanctions regime. To increase the success of its sanctions regime, the West needs the support of more nations, and to achieve this, it needs to ensure it has developed strategies to protect not only itself but any potential allies from costs. There is no way that the West can expect would-be allies such as Serbia to refuse Russian gas deals when no genuine alternative is on offer.
Nearly one-quarter of the funding authorised in US President Joe Biden’s Ukraine aid bill is earmarked for mitigating the war’s economic impact on Ukraine and third countries. It is a start, but it does not go far enough – Ukraine’s own reconstruction bill is already in the hundreds of billions of dollars. It is a band-aid approach, whereas what is required is the grafting of a new limb to replace the Russian one Putin has severed, for Putin’s war on Ukraine is a war against the current world order.
Several Western nations have already taken significant steps to try and preserve the status quo and protect themselves from potential future aggressions by Russia. For example, many European states re-embraced defence spending and Germany even altered constitutional debt limits to do so.
However, even this newfound sense of Western unity is insufficient in such a globalised era – India, for example, is happy to buy Russian oil at a discount to global prices. Furthermore, the longer the war drags on, the more enticing Moscow’s offers to jointly challenge the US-led order may seem to Beijing, which has so far refrained from offering Russia direct economic support.
The West needs to adopt a new “neomercantilist” approach to sanctions, embracing “the need for strategic trade protectionism and other forms of government economic activism to promote state wealth and power”. The nature of the geo-economic war is to remove Russia’s state wealth and power while avoiding the same for the West and its allies. That does not mean the ultimate aim should be to end liberalism and the free-trading world, but neomercantilist tools can and should be employed to protect it in the long run from Russia’s existential threat.
Some of the groundwork for this has already been done, such as the US efforts to restructure development support under the Development Financial Corporation (DFC). Other worthwhile proposals include the Department of Energy offering to sell oil options and potentially pledge secure supplies to allies, to help limit uncertainty. But these efforts do not go far enough. Just as Congress authorised Biden’s $40bn Ukraine bill, for example, it rejected a proposal to effectively expand DFC.
Europe can put forward solutions too, for example socialising the cost of major increases in gas drilling in the Netherlands. Such a policy can be implemented far more quickly than building new LNG terminals, though efforts to build new energy infrastructure should also receive significant state support. European export credit agencies should be part of the fight, significantly expanding their capita could make them a key factor in making sanctions support and compliance more attractive for the developing countries.
Another vector of this approach should be a Western acknowledgement that food system inequality, fragility and interdependency mean Russia’s blockades will potentially be far more crippling to the Global South. A Western merchant marine and aid plan should be developed immediately to mitigate this and build credibility with would-be-allies threatened by Putin’s perfidiousness.
Finally, the US must remember it has a geo-economic lever more powerful than any other – the use of federal reserve swap lines. The selective offering of such support could help bring even the most reticent partners into line with Western sanctions given its potential to provide economic and monetary stability.
Demand-side policies are the carrots to the supply-side policies’ sticks in the West’s geo-economic war against Russia. They must be the focus of the coming offensives, for without them this war will be far more costly and difficult to win.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.