April 25, 2024

Why Haven’t the Sanctions on Russia Worked?

When, earlier this month, Tucker Carlson posted a short video clip of himself visiting a Russian supermarket and raving about how great the bread was and how low the prices were, and another clip from his trip to a knockoff McDonald’s restaurant in Moscow, he received plenty of well-deserved mockery. Carlson seemed both willfully ignorant, pretending that he doesn’t know that prices are lower in Russia than in the U.S. because Russia is much poorer than the U.S., and oddly credulous (is a garden-variety fast-food joint really worth gushing over?).

Still, amid the weirdly pro-Russian and anti-American rhetoric, Carlson’s travelogue did point out something worth paying attention to: The sanctions that the United States, Europe, and other industrialized democracies have imposed on Russia in the two years since its invasion of Ukraine have not devastated the Russian economy. Although the initial announcement of sanctions led to a crash in the value of the ruble and bank runs, the economy soon stabilized. After falling a less-than-expected 2.1 percent in 2022, Russia’s GDP actually grew last year, and appears to be on pace to do so again in 2024.

The sanctions have reshaped the Russian economy, making it worse for consumers and more dependent on government spending, while seriously denting its long-term prospects. But they have not crippled the economy, nor put any real pressure on Russia to end its war in Ukraine. So although the Biden administration just announced a whole new round of sanctions designed to punish Russian President Vladimir Putin for the death in prison of the opposition politician Alexei Navalny, they are unlikely to be any more effective in bringing Putin to heel than earlier ones.

If the sanctions on Russia have had limited impact, that’s in part because they were limited in scope. They did involve serious measures: They included the freezing of $300 billion in Russian central-bank assets, a ban on transporting Russian crude oil using any Western services (including shipping and insurance) unless the oil is sold for $60 a barrel or less, restrictions on technological exports to Russia, and targeted sanctions against thousands of Russian individuals, companies, and ships.

Even though the price of Russian oil was capped, however, Europe did not stop buying it, or natural gas (though imports of Russian gas have fallen sharply)—because it couldn’t afford to. Some Russian banks were cut off from access to the SWIFT banking network, but unlike the conditions imposed on Iran in 2012, the ban was not total: Some of Russia’s biggest banks were exempted. And the West is still doing business with Russia: A little less than half of European exports to Russia, for instance, are under sanction.

Beyond that, the nature of the sanctions regime meant that its effectiveness was bound to be limited. To be truly effective, sanctions need to be global (or as close to it as possible). In the case of Russia, though, the second-biggest player in the global economy, which is China, is not only not participating in the sanctions but is actually helping weaken their impact. China was already Russia’s biggest trading partner before the war in Ukraine, and in the past two years, trade between the two countries has soared, with China importing more and more Russian oil and gas.

Countries such as Turkey, India, and the United Arab Emirates have also helped Russia circumvent sanctions by serving as trade intermediaries that permit the transshipment of Russian oil and the importation of important technological products such as microchips. These conduits have enabled Russia to avoid the full effect of the $60-a-barrel cap on its oil price, which was an important part of the sanctions package, and to keep imports flowing in.

On top of this, Russia’s economy was reasonably well prepared to weather the cost of sanctions, perhaps in part because it had dealt with them before. (The U.S. and Europe sanctioned Russia in 2014, after its invasion and annexation of Crimea.) Russia had low levels of sovereign debt, which meant that it didn’t depend much on foreign lenders to pay its bills. It had a large current-account surplus (indicating that it was exporting much more in goods than it was importing), and it had built up a big national wealth fund. Russia also responded to the sanctions by imposing strict capital controls, restricting the ability of Russians to move money out of the country. That helped prop up the value of the ruble and stabilize the financial system.

Russia has also been helped, oddly enough, by the fact that its economy lacks a major manufacturing sector, and doesn’t make much that people in the West want to buy. Because Russian exports of manufactured goods are not that important to the economy, cutting off access to Western markets for those goods isn’t a big deal. For a country with an economy heavily reliant on the export of such goods—like Vietnam, which is highly dependent on selling abroad stuff such as phones, textiles, and shoes—Western sanctions could be much more damaging.

Finally, Russia’s economy has gotten a big stimulus from a sharp increase in government spending. A few months after the war in Ukraine began, Russia pushed through increases in state pensions and subsidies, as well as boosting payments to soldiers and their families. Last year, public-sector employees also got significant raises. And, most important, Russia has ramped up military spending. The result is that state spending now accounts for more than a third of Russia’s GDP. Military Keynesianism has helped the economy to stay afloat and wages to grow briskly.

Putin has thus managed to soften the cost of sanctions and minimize public discontent with the economy. But this comes with a price. His doing so has made the modern Russian economy look strangely like the old Soviet economy—highly dependent on exporting raw materials and on military spending, technologically limited, and generally unfriendly to consumers. A lesson of the 1980s Gorbachev era was that an economy that looks like this ends up as a lumbering giant of inefficiency and stagnation.

This is where the sanctions have hit hardest, restricting Russian access to advanced technologies in transportation and communication, to say nothing of digital innovation such as artificial intelligence. Sanctions have also made it more difficult for Russia to build out energy infrastructure. Western companies and investors have exited the country. And capital controls and the economy’s dependence on government spending mean that the state is playing a bigger, more heavy-handed role in the economy.

If Putin were a different kind of leader, this might matter to him. But his ambitions are territorial and imperial, not economic. The fact that sanctions are making the Russian economy less consumer-friendly seems very unlikely to persuade him to reconsider what he’s doing in Ukraine. If anything, the impact of sanctions has strengthened, not weakened, his own hold over the economy. In his statement yesterday about the new round of sanctions on Russia, President Joe Biden said that they would “ensure Putin pays an even steeper price for his aggression abroad and repression at home.” If so, it’s a price Putin seems more than happy to pay.

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