KIEV, UKRAINE - 2021/08/24: Female servicemen are seen marching during the Independence Day military ... [+]
A year after Russian President Vladimir Putin ordered the invasion of neighboring Ukraine, the cost of his decision is clear in the impact on Russia’s faltering economy. But world leaders should not confuse the political effectiveness of the Allies’ response with the effects of the economic sanctions. That could lead to mistaken conclusions about the international response to the war. Putin may still be in Ukraine, but the economic sanctions have made it a costly endeavor for him.
The start of the war provoked a remarkably united reaction from the United States and European powers, which imposed unprecedented isolation on the Russian economy. After 12 months, Russia is still in Ukraine, but it would be short-sighted to conclude that these wide-ranging measures to punish Moscow are not working. Realistically, few expected that economic sanctions alone could somehow change Putin's mind about Ukraine.
Economic measures are just one tool of statecraft. Their purpose is to limit the ability of key individuals, state entities and regime-linked organizations to access resources and thereby to constrain their ability to continue the illicit behavior or actions. The death and destruction that Russia’s illegal invasion has caused in sovereign Ukraine continues, but thanks to the economic sanctions it has not been a costless endeavor for Putin and his cronies. Bloomberg News reported last week that Russia’s top 23 oligarchs — each ranked among the world’s 500 richest people — had lost $67 billion since the start of the war, about 20% of their combined wealth.
The Russian economy has contracted by 5.6%, Russia’s trade flows have declined, inflation has risen sharply and Russian companies face steep challenges to raise capital. These are crushing blows by any standard for a middle-income country that is dependent on resource exports and still recovering from the pandemic downturn. The economic damage will mount further over time. Russia continues to sell oil and even enjoyed a temporary price spike after the invasion as petroleum markets priced in new geopolitical risks. But getting oil to market is now more complicated and expensive, and the EU’s price cap is paring back a chunk of Moscow’s profits. Europe’s resolve to wean itself off all Russian energy seems to be intensifying as the invasion continues. This week Russian billionaire and industrialist Oleg Deripaska said Russia will need foreign investors next year or they risk running out of money.
The history of economic sanctions would suggest that so far the present-day situation is bucking the trend. Research by Elliott, Hufbauer and Oegg show that sanctions tend to be more effective when the target economy is small and the costs to the senders are minimal. But Russia is a relatively large player on the global energy market, and Europe is bearing a hefty cost for maintaining the sanctions. Yet, somewhat astonishingly, Europe seems ready to bear even more costs to further restrict Putin’s efforts. If the present-day data point that we are living through ends with Ukraine maintaining its sovereignty, then we are witnessing an anomaly that will forever alter how we view economic sanctions.
Could the U.S., European Union, UK and others do more? Yes. Many of Putin's oligarchs around the world continue to help fund the war as they either remain untouched by the sanctions or finding ways around them.
What about China's role? To the extent that China sells Russia weapons and other equipment used for the war, then it is undermining the Allied sanctions. If that continues, Washington, London and Brussels may make it harder for U.S., UK and EU firms to continue doing business as usual with their Chinese counterparts.
The effectiveness of the economic sanctions comes from the close coordination and steadfastness among Allied countries. This is in stark contrast to some past efforts like the 1980 U.S. grain embargo in response to the Soviet invasion of Afghanistan. Whatever happens, the sanctions are stronger when the Allies are coordinated, and all signals so far show a strong, united front.
While it’s fair to question how effective the sanctions are, we should acknowledge what appears to be working. Critics might consider the alternative: Do less or even nothing at all. In this counterfactual, Putin likely takes Ukraine. Then he moves onto perhaps to Moldova, Slovakia, Poland, the Baltics. A world in which a brutal, rapacious dictator invades a sovereign nation without severe international repercussions is, evidently, not one that the democratic West is prepared to tolerate.
