Ongoing sanctions against Russia are weighing on its economy. Yet greater enforcement would have to follow to truly cripple Russian President Vladimir Putin’s economic and financial Achilles’ heel.
Since Russia’s large-scale, unprovoked invasion of Ukraine on February 24, a series of targeted sanctions have rightly been piled on Putin’s economy. Harmful to the Russian economy, these measures – which are unprecedented in terms of comprehensiveness, coordination and speed – have affected Russia’s access to financial instruments and resources as well as its trade and investments in the world. .
Sanctions are a tactic rather than a strategy. In particular, financial sanctions do not deter or punish, but rather prevent money and other resources from being used by an adversary. They are practically effective only if they are massive, imposed quickly, rigorously coordinated and followed until the end.
In its recent assessment of the sanctions, the International Monetary Fund summarized their initial impact by stressing that “the sanctions announced against the Central Bank of the Russian Federation will severely restrict its access to international reserves to support its currency and financial system”.
The IMF further noted that “international sanctions against the Russian banking system and the exclusion of a number of banks from SWIFT have significantly disrupted Russia’s ability to receive payments for exports, to pay for imports and to engage in cross-border financial transactions”. SWIFT is an organization that helps execute financial transactions between banks around the world.
Indeed, the historic sanctions that have been imposed on Putin’s war on Ukraine have weighed on the Russian economy in measurable ways, leading to factory closures, job losses, a doubling of interest rates and a falling rouble, all of which were further exacerbated by rising inflation. It is still too early to assess the full effect of these sanctions, but there has already been strong downward pressure on the Russian financial markets and economy.
As a recent report by the Congressional Research Service points out, “the recent rounds of US sanctions and related actions could have a greater impact than the sanctions the United States has imposed on Russia thus far.” While US and allied sanctions initially focused on the financial sector, their scope quickly expanded to other non-financial dimensions at an increasing pace.
In a rare admission of an inescapable reality, Putin acknowledged that “[Russia’s] the economy will need deep structural changes in these new realities, and I won’t hide it, it won’t be easy; they will lead to a temporary rise in inflation and unemployment.
Putin’s economy will see far more turbulent times than his wishful thinking of “a temporary rise in inflation and unemployment”, especially given that the Russian economy has severely lacked economic resilience.
According to The Heritage Foundation’s Index of Economic Freedom, an annual global benchmark study that measures and compares economic governance in countries around the world, Russia’s economy has been largely in the “mostly unfree” status. or “repressed”. Widespread corruption and a lack of economic freedom have long diluted the foundations of the Russian economy, making it significantly vulnerable to external shocks.
We will hear more about the impact of the evolving sanctions on Russia and the global economy in the weeks and months ahead. Yet the overall impact of targeted sanctions against Putin’s Russia will be quite severe inside the country, while it will be relatively limited and measured outside.
The impact of Russian sanctions in the rest of the world is likely to be uneven. Countries with close economic ties to Russia are at greater risk of supply disruptions, and companies with significant exposure to the Russian economy will be more affected, which is further exacerbated by the legal and reputational risk associated with conduct of business in this country.
There will be a high level of inflationary pressure around the world triggered by Russian sanctions in general, but the extent of this depends on each country’s overall macroeconomic and fiscal conditions.
For example, the United States was already suffering measurably from rising prices long before Russia invaded Ukraine. Blaming sanctions for 40 years of high US inflation is essentially blaming Ukraine, a country America needs to help. The real underlying culprit for record US inflation and other economic woes is President Joe Biden’s misguided and reckless government economic agenda.
From a broader geostrategic point of view, now is the time for Washington and its allies to pay much more attention to Russian-Chinese economic relations and to intensify the measures necessary to dissuade Beijing from helping Russia hit by penalties.
Ever since Western sanctions began in response to Russia’s first invasion of Ukraine in 2014, Moscow has asked Beijing for help to soften the blow to Russia’s economy. Since then, the economic engagement between the two authoritarian countries has soared. In 2021, the trade volume between Russia and China amounted to more than $145 billion, up 36% from the previous year.
Unambiguously, the effectiveness of ongoing sanctions and the ripple effects on other countries is sure to require further and deeper analysis. However, there is no doubt that the sanctions have so far begun to bite Putin’s war economy.
Thus, the case for sanctions and greater pressure through them remains stronger than ever.
This piece originally appeared in The Daily Signal