The West has learned a lot about the effectiveness, or ineffectiveness, of sanctions since the Russian invasion of Crimea in 2014. So too, however, have the Russians.
As the US, UK, the European Union and their allies canvas their response to the threatening build-up of Russian forces on Ukraine’s borders and how they would react to an actual invasion a raft of potential sanctions are being contemplated.
The proposed measures could isolate Russia’s banking system and much of its economy, precipitating a financial crisis and significant hardship within Russia.Credit:Kremlin via AP
There is legislation passing through the US Congress and UK parliament to provide the legislative backing for a range of financial sanctions against Russia, key individuals and private and state-owned companies. The 27 members of the European Union, dependent on Russia for much of its energy, aren’t as advanced in developing their response.
It is clear that, if Russia does invade, the range and nature of the sanctions imposed by the West will go far beyond the very targeted sanctions levied in 2014 or those that have been made in response to other issues, like Russian meddling in US elections.
Past sanctions have generally targeted specific oligarchs and companies close to the Kremlin and have been disruptive rather than damaging.
The measures now being contemplated would broaden the range of individuals and entities cut off from financial dealings with the West and could isolate Russia’s banking system and much of its economy, precipitating a financial crisis and significant hardship within Russia.
The sanctions would be particularly damaging if they were able to halt, or greatly reduce, the revenues Russia gleans from sales of oil and gas, although that would hit Europe (which gets about 40 per cent of its gas from Russia) and global oil and gas markets hard.
Indeed, the most effective sanctions – those that could shut Russia out of the global financial system and cripple its oil and gas exports – carry with them the prospect of substantial collateral damage for the rest of the world.
Europe, already experiencing gas shortages and high energy prices, would be particularly hard-hit but even the US could be harmed, via higher oil prices and even higher inflation, at a moment when inflation is already at 40-year highs.
Among the potential sanctions being canvassed are the use of the American dollar’s dominance of global financial activity and the dominance of its economy, banks and investors in global financial transactions and trade to cut off Russia’s financial system from much of the rest of the world, shut down its exports and imports and deny it access to key industrial inputs like semi-conductors and oil industry equipment.
Europe’s reliance on Russia’s oil would leave it vulnerable if sanctions are unleashed.Credit:Bloomberg
The Russian ruble has already been depreciating against the US dollar – it is down about 10 per cent since late last year – while the increased tensions have been a factor in the rise of the oil price this year from below $US80 a barrel to more than $US90 a barrel. Russian bond yields have been surging.
The imposition of the threatened sanctions would see the ruble crash further, Russian bond yields rise further and oil and gas prices jump higher along with the prices of other key commodities like aluminium and titanium. Offshore funds and properties of the oligarchs, including Putin’s, would be frozen or seized and Russia isolated by travel restrictions.
What has been seriously discussed is more like the sanctions on North Korea and Iran than anything Russia has experienced previously.
It would, of course, come at some cost and pain to those imposing the sanctions.
This would be the most aggressive and holistic attempt to damage an economy and country as large and powerful a country as Russia; one of the world’s major oil producers and whose financial institutions and economic and financial links with the rest of the world are very material.
Europe is particularly vulnerable, give its reliance on Russian gas and oil.
While the Americans are trying to help Europe diversify its gas supply away from Russia – the Biden administration has been urging Qatar and other big LNG producers (like Australia) to redirect supply to Europe — the global gas market is tight, the availability of non-contracted supply even tighter and the gas would come at a steep cost if Russian gas was taken out of the market.
A financial crisis in Russia and the unforeseen consequences of efforts to freeze it out of the global financial system could create systemic issues and potentially a financial crisis, which is why the Europeans have pushed back strongly against suggested that Russia should be removed from the SWIFT network – the world’s most critical piece of financial plumbing — that financial institutions use to send messages and payment orders.
Cutting Russia off from the network would cause immense financial pain to Russia but the flow-on effects for the global financial system and international institutions could also be destructive. That why the option of forcing Russia off the platform is being described as the “nuclear option.“
Having experienced the sanctions imposed since 2014 the Russians have been trying to reduce their vulnerability to exactly the types of actions now being threatened.
They’ve greatly increased their foreign currency reserves while reducing their exposures to the US dollar. They’ve used their oil and gas revenues to build a contingency fund. They’ve reduced their government debt-to-GDP ratio to about 20 per cent and consequently reduced their reliance on foreign capital.
Sanctions might be the option of first resort for the Americans, British and Europeans but they’re also the option of last resort because of the self-inflicted damage they would generate. They are far better as purely a deterrent than acted on.
Russia has also found common purpose with China, which is also subject to a range of sanctions from the US and other western economies.
They’ve been increasingly using the yuan and ruble to settle their own cross-border transactions and encouraging the wider use of their currencies in settlements elsewhere to reduce their reliance on SWIFT and their exposures to the US dollar in international trade.
Sanctions are clearly the only deterrent/punishment the West has, short of a military intervention that is beyond contemplation, to prevent an invasion of Ukraine or respond to one.
While they would cause real pain to Russia and its people – far more than the limited and narrowly-target sanctions of the past – there would be flow-back to those imposing them.
Sanctions might be the option of first resort for the Americans, British and Europeans but they’re also the option of last resort because of the self-inflicted damage they would generate. They are far better as purely a deterrent than acted on.
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