Alexey Navalny’s death at the hands of Vladimir Putin and the two-year anniversary of Russia’s war of aggression against Ukraine generated severe additional sanctions against the Kremlin on February 23.
The White House imposed a package of measures against more than 500 people and companies. It was described as the biggest raft of sanctions since the full-scale war broke out in February 2022 and included the targeting of individuals, sanctions evaders around the world, and Russia’s defense industry.
While the new package is welcome, there are numerous and well-grounded complaints that sanctions are not working as hoped, and that more must be done.
Robin Brooks, the former chief economist of the Institute of International Finance (IIF), argued in the Financial Times on February 22 that sanctions impact has been muted by trade-offs and opts-outs given for various interest groups — Brooks singles out Greek shipping oligarchs as helping to undermine the Western oil price cap imposed on Russia from December 2022.
Let me set out where we stand and propose robust improvements.
Western sanctions have hurt the Russian economy, but not crippled it. As a result, its military machine may have been weakened at the margin, but not enough to change Putin’s willingness to wage war on Ukraine.
And yet, compared to prior expectations, the West has actually gone further in its sanctions response than anyone expected prior to the invasion — perhaps including Putin himself. Few people had expected energy to be sanctioned, numerous Russian banks to be excluded from SWIFT, and over $300bn in Central Bank assets to be immobilized.
The fact that these actions have not had a greater effect reflects a range of factors.
First, Putin likely long planned his invasion of Ukraine, perhaps as far back as the annexation of Crimea in 2014. In the intervening years, Russia built up buffers, including accumulating over $600bn in foreign exchange reserves, while paying down debt. This provided durability to the Russian economy in the face of Western sanctions.
Second, the West approached sanctions on Russia with an (over) abundance of caution, always overly aware of the possible effects on Western economies. Some would argue that, ultimately, this reflected an underlying and continuing failure to take the Russian threat seriously and, hence, an unwillingness to pay the price of imposing sanctions on Russia.
Third, the West sought a united political front against Russia. The result was sanctions packages agreed by the lowest common denominator. This meant compromises in the timing, scope, and strength of sanctions.
Compromises were constantly made to keep as many countries as possible inside the sanctions club. This meant numerous opt-outs, as Brooks highlights, allowing Greek shipping magnates to facilitate Russian oil seaborne trade. The Kremlin was given time to adjust to sanctions and presented with numerous loopholes.
Fourth, and related to the above, the West, while eager to maximize the international isolation of Russia and trying to keep the developing world on board, was slow and soft on enforcement.
Russia exploited enormous loopholes (e.g. by importing dual-use technology through third countries) and used third countries to sanctions bust. This is amply seen by a huge pick up in trade between Russia and countries on the periphery in Central Asia, Transcaucasia, Turkey, and the Middle East. (See Brooks again on the extraordinary increases in EU trade with Central Asia.)
Way too late — to my mind — the West is now tightening up with secondary sanctions imposed on an increasing number of companies and individuals among Russia’s trading partners, from China to India, the Middle East, and Turkey.
The above should help, but what more could the West do on the sanctions front?
First, and the most obvious hit to Russia, and win for Ukraine, would be to finally move to freeze, seize, and allocate as yet immobilized Russian assets on behalf of Ukraine.
The more than $300bn held in Western jurisdictions is sufficient to be a game changer for Ukrainian financing of the war and reconstruction. It’s also a material hit to Russia’s balance sheet — it will hurt the Kremlin.
Arguments about risks to reserve currency status, retaliation, and impact on the rule of law in the West are overdone, especially when considered against a needs must argument. Simply put, if frozen Russian assets are not used to fund Ukraine, where else will the funds be found?
Second, when trying to close sanctions loopholes, maybe we need to think totally out of the box. One approach, suggested by Nigel Gould Davis at the International Institute for Strategic Studies (IISS), would completely ban Western trade with Russia by some date in the future — barring special licenses for truly critical items.
This would force companies to apply for special licenses to trade with Russia and have them prove why a particular widget produced is so critical to global markets. One can set a long lead time for implementation of such a policy — say two-to-three years — to give sufficient time for key licenses to be obtained and to limit disruption to global markets.
This would close off Russia from most non-critical imports and trade and, I think, accelerate the international isolation of Russia from business.
It would increase the costs of Russia doing business internationally, further raising import costs and further undermining the balance of payments. It would also give a stark warning to Russian policymakers that continuing its war of aggression will make everything, every aspect of life, more difficult unless it changes policy and returns to the fold of civilized nations.
Timothy Ash is a Senior Emerging Markets Sovereign Strategist at RBC BlueBay Asset Management. He is an Associate Fellow at Chatham House on their Russia and Eurasian program.
The opinions in this article are those of the author.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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