As the U.S. and Europe roll out an arsenal of economic sanctions to combat Russia’s invasion of Ukraine, there is scant understanding that the financial interdependence of the crisis’s significant players means quick and easy solutions are unlikely to work. Worse still, imposing sanctions on Russia’s elite will do little if anything to bring order to what has fast-become chaotic.
Putin and the Sanctions Crosshairs
Nevertheless, news earlier this week that Russia ordered its military to take a “peacekeeping” role in disputed regions of eastern Ukraine, prompted the western democracies to impose sanctions on Russia.
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The U.S. and U.K. imposed penalties against specific Russian individuals and companies. Some Russian banks as well as wealthy individuals and oligarchs were included on the U.S. sanctions list. Plus, there’s a ban on purchasing the country’s debt. In short, these actions are aimed at hurting the rich and powerful in Russian President Vladimir Putin’s inner circle. Problem is, experts aren’t sure these actions will have much impact.
“So far, we’ve seen timid sanctions,” says Peter Tchir, head of global macro strategy at New York-based financial firm Academy Securities. “Sanctions only work when they force behavior change, but in Putin’s case they won’t.”
As it was under the Czars, the issue in Russia now is that the population is mainly poor – with average annual per capita income around one fifth of that in the U.S. Just a few ultra-wealthy individuals sit at the top of the economic pyramid. The sanctions will ultimately affect the poor more than those in the upper classes. “Russia has always treated the poor as peasants,” Tchir says.
Failure Rate of Sanctions in the Past
Others see greater flaws when imposing sanctions. “The record of those actions is that they fail,” says Steve Hanke, professor of applied economics at Johns Hopkins University. “There are always workarounds,” meaning sanctions won’t stop the rich from getting money in or out of the country.
Indeed, Russia has been subject to sanctions for years dating back at least as far as the 2014 annexation of Crimea—and the behavior of the country has not changed in a positive way since then. Like the new penalties, past sanctions were applied surgically to punish the elites.
Others have suffered from severe sanctions, but their behaviour has not changed. Hanke notes that U.S. sanctions on Venezuela haven’t pushed out the country’s authoritarian President Nicolas Maduro. Similar actions against Cuba didn’t get rid of dictator Fidel Castro. Likewise, Iran’s theocratic mullahs remain in charge despite more than four decades of harsh U.S. measures against the regime. The issue is that sanctions often prompt a country’s population to rally around the flag. “Whoever is imposing the sanctions are viewed as the enemy,” Hanke says. To put it another way, the economy is a storm and people are forced to band together.
Russia & Europe: Economic Bedfellows
There are many facets that make Ukraine more complex than initially appears. This is a matter of economics. The U.S., Russia and Europe are independent of each other in most areas. However, this is not the case for Russia and Europe. They are practically joined in energy matters. That means sanctions can’t be placed on Russia in shock and awe. Europe would be as affected by a total economic blockade as Russia.
“In the short and medium-term, it is almost impossible for Europe to phase out Russia’s energy,” says Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance. Europe receives around one third of its natural gasoline from Russia. This gas can be used to heat homes and generate electricity across Europe.
Europe has been experiencing an energy crisis, which saw prices rise dramatically in the last year. Energy insecurity was suddenly a serious and immediate danger. This problem was exacerbated in two ways. The first was lower natural gas flows from Russia to Europe, which led to energy shortages that exacerbated the problem. European governments have been calling for the gradual elimination of fossil fuels and the transition to renewable energy like solar and wind power. However, the phase-out of the old energy hasn’t been met by enough phase-in of the new.
At the same time, Russia needs Europe’s money. Revenue from energy exports accounts for approximately 40% of the country’s federal budget. Without that money there would be a gaping hole in the Russian government’s wallet. “It is highly dependent on getting money from the ground.” Ribakova says. The idea that Russia could shut down the power lines is seen as absurd. “Russia wants to be seen as a reliable supplier,” she says.
All this means that while the White House might be apoplectic about Putin’s actions in Ukraine, the Russia-Europe economic entanglement may get in the way of a simple solution. “Russia wants the income and Europe can’t live without the oil and gas,” says Konstantinos Venetis, a senior economist at TS Lombard in London. This relationship is supposed to be mutually beneficial.
