How much pain will the West’s sanctions cause Vladimir Putin? So far, not much. And tougher measures would have drawbacks for the West
So far, not much. And tougher measures would have drawbacks for the West
When Russia’s president, Vladimir Putin, recognized the independence of two breakaway enclaves in eastern Ukraine on February 21st, he knew that the West would impose sanctions. America, the European Union, and Britain had all promised punitive measures exceeding those imposed in 2014 when Russia annexed Crimea. Within a day of his decision the Western response was made public (Australia, Canada, and Japan have since joined in). It included restrictions on the sale of Russian debt in Western capital markets, a freezing of the foreign assets of some Russian oligarchs and their children, and restrictions on Russian banks and parliamentarians. Most striking was Germany’s decision to suspend the licensing of Nord Stream 2 (ns2), a completed gas pipeline between Russia and Germany. The announcements were accompanied by tough rhetoric from Western leaders.
But how much pain will the West’s sanctions really cause Mr. Putin, and what more might the West do to discourage a full invasion? So far Russia’s leader seems undeterred. Pictures released by Maxar Technologies, a satellite-imaging company, on February 22nd showed new deployments of troops and equipment near Ukraine’s borders. And the measures rolled out so far by the West will not cause Russia’s economy serious problems.
Start with the sanctions on a handful of oligarchs and people close to Mr Putin. In a (since deleted) tweet Josep Borrell, the eu’s foreign-affairs chief, promised “No more shopping in Milano, partying in Saint Tropez, diamonds in Antwerp.” But there are plenty of other sunny places that will welcome holidaying oligarchs and their offspring, most of whom will have diversified where their assets are held. What about the energy-sector measures? Suspending ns2 is an important symbolic gesture, particularly in Germany, where politicians have bickered about the pipeline for years. The decision will hurt Russia’s influence in Europe and Mr Putin’s pride, even if the pipeline does not generate any income for Russia today.
The financial sanctions, meanwhile, look more performative than punitive. American financial firms have been banned from buying new dollar-denominated Russian debt since 2014. Although the new sanctions extend this to the secondary bond market, Russia has not issued dollar-denominated bonds since 2019 and has insulated itself from relying on Western capital markets by reducing the share of its government debt that is denominated in foreign currencies and building up large foreign reserves. The banks targeted include those linked to the army and the regime but are small fry. The two banks named by America, for example, accounted for just 6% of Russia’s banking sector by assets at the end of 2020.
A final consideration is the degree of global coordination. Even within the Western alliance, the sanctions were not entirely cohesive. Britain’s prime minister, Boris Johnson, has been criticized for sparing most of the Russian oligarchs who have billions of pounds stashed in the country. The three men Britain hit were already the subjects of American sanctions. And of the five banks Britain placed sanctions on, only one, Promsvyazbank, was also targeted by America.
What more could the West do? One challenge is reaching a collective agreement about which further acts of aggression by Russia would trigger tougher sanctions. Assuming the West can do that, several more potent economic weapons are available. Russia’s financial system could be hit by sanctions on the two biggest banks, Sberbank and vtb, or in an even more punitive step, by cutting off the entire Russian banking industry from swift, the messaging network used by banks around the world to make cross-border payments. In tech, America could block the sale of technology such as microchips to Russia, using the same instrument it used to punish Huawei, a Chinese technology company. And the West could seek to impede Russia’s non-gas energy exports. Gas made up less than a tenth of the value of Russia’s exports in 2019. Much more lucrative is oil, which accounted for almost half.
Such tougher sanctions would have several drawbacks for the West. They might prompt economic retaliation from Russia, in the form of cyber-warfare or restrictions on the sale of gas to Europe. They would impose direct costs on Western economies. Russia remains the eu’s fifth-largest trading partner, for instance. European banks have $56bn-worth of claims on Russian residents. Cutting Russia off from swift could cause instability in the financial system. And energy bills in Europe would probably rise further. Furthermore, to be truly effective the West would also need to ensure that the sanctions are globally enforced: that means either persuading or coercing Asian countries, including China and India, to abide by them, perhaps by threatening secondary sanctions on them if they refuse. Without this, any stronger sanctions regime would be a leaky bucket.
Western countries insist that the new sanctions are just a taste of what Russia may face if Mr. Putin refuses to back down. Britain has promised to “ratchet up” its measures. Yet there is a limit to how severe Western leaders can make their sanctions before their own citizens start to feel the effects. The big question is whether their pain threshold is lower than Mr. Putin’s.