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Part II - Sanctions

Image: Heng (Singapour / Singapore), Lianhe Zaobao


Oh, no, talking about sanctions again? Oh, yes! This is cool stuff. Kind of like a class on international relations in a tea cup. In real time.

If our Western nations and Japan were on the ground fighting this war in Ukraine, I would be talking more about battles and munitions. But, what do I really know about that stuff, anyway? And, we over here in the West, are not fighting this war on the ground. We are fighting this war with our pocketbooks.

The news on sanctions changes daily. I am writing this article on sanctions on August 29, 2022.

Sanctions-Part I was about: 1) Why use sanctions? 2) What sanctions have been imposed - a list. For a daily up to date list of sanctions go to Peterson Institute for International Economics.

But, for all that … do Economic Sanctions work? The short answer is … there is no short answer. How successful these 2022 sanctions appear to be seems to depend on who you talk to.

According to:

Russian President Vladimir Putin referred to the sanctions as the “West’s Economic Blitzkrieg” and said that they never had a chance of succeeding. 

United States. - According to the United States government in April, “Experts predict Russia’s GDP will contract up to 15 percent this year, wiping out the last fifteen years of economic gains…”

World Bank - According to the World Bank in June, “2022 will be a bad year for the Russian economy. Gross Domestic Product (GDP) is expected to drop by over 11 %. This would be the largest drop in GDP since the collapse of the Soviet Union.”

Mark Galeotti, British scholar on Russia - My favorite Russia scholar, calls these sanctions an ‘unparalleled economic war’ against Russia.  Galeotti predicts that Russia will begin to feel the bite of the sanctions by September.  And though the economic impact from the sanctions have been slow to take hold, the damages will be severe and it will take a long time to recover from them.  (See Mark Galeotti’s podcast, In Moscow’s Shadows, Episode # 70, June 19, 2022.  You can get In Moscow’s Shadows where you get your podcasts or go to https://www.buzzsprout.com/1026985. ) Well, let’s see if Galeotti is correct. 

How successful will sanctions be and when will they hurt depends on a number of things:

  1. How ‘bullet proof’ is Russia’s economy, i.e. financially how long can Russia hold out under these sanctions?

    1. The Russian economy has not collapsed. In June the Russian ruble which had plummeted in the first months of the sanctions, has now recovered to where it was before the war began. Really?

      The Russians, expecting sanctions, have prepared. From Russia’s experience in the 2014 war against the Ukrainians, the Russians were expecting sanctions from Europe and the United States. The Russians planned in advance to restore the ruble by manipulating the currency. This means that Europeans are required to pay for Russian oil in rubles. On top of that, Russia has a giant trade surplus.

      But if we look a bit closer, in Moscow the ruble is worth considerably less and on the black market the ruble sells for as little as 1/2 of its earlier value.

    2. Also, Russia defaulted on a debt for the first time since 1998. Russia has money to make a $100 million payment, but sanctions have made it impossible to pay it. The US has barred Russia from making debt payments with the $600 million it holds in US banks, making it harder for Russia to repay its international loans. So who cares if Russia doesn’t pay its debts? Well, the guy who lent Russia the money might be unhappy. More importantly, in the long run - if Russia doesn’t pay her debts then no one will lend Russia money in the future. This is a big deal.

      All successful countries borrow money. The United States, China, and Japan have the largest economies in the world - in that order. As of January 2018, the US had a national debt of $25 trillion, China is roughly $5.5 trillion in debt, and Japan has around $12 trillion in debt. A healthy growing economy borrows money. I know! Doesn’t make sense, but it is true.

      If Russia can not borrow money, its economy will stagnate. That is not good.

      BTW: I am clearly not an economist and foreign debt is a controversial and complicated topic. But, we do know that if you or a country can’t borrow money you are in trouble in the long term.

    3. Russia's central bank assets have been frozen so it can’t use the $630 billion reserves it has in foreign currencies. I know, $630,000,000,000! That is a lot of zeroes. As a further slap in the face, major Russian banks have been removed from the international financial messaging system SWIFT, which will delay payments for its oil and gas exports.

    4. Russia is also suffering from inflation. That should be no surprise. If goods are scarce, the ones you can find will be more expensive. On June 23rd, Russian political scientist Ilya Matveev reported that “Yearly inflations is looking to be 20-25%. (NPR Ilya Matveev)

  2. How universally are countries imposing sanctions? Who is participating and who is not? Can Russia wiggle out of the impact of sanctions because other countries provide enough funds and products to ameliorate the financial pain?

SANCTION SUPPORTERS

  1. The economic sanctions placed on Russia, though far from perfect, are the most comprehensive actions taken against a major power since World War II.  

    1. NATO - 29 of 30 members (Turkey is a hold out - see below)

      Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the United Kingdom and the United States. Greece, Germany, Spain, the Czech Republic, Hungary, Poland, Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia, Albania, Croatia, Montenegro, and North Macedonia. Sweden and Finland, new applicants to NATO, also support NATO’s sanctions.

    2. The European Union members

      Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and Finland.

      It is understandable that the European states feel threatened by Russia’s invasion of Ukraine. Previous neutral European states are working with NATO and the EU - Switzerland, Norway, and the UK.

      Germany - Since 1969, Germany has maintained a policy called Ostpolitik, choosing dependence on Russian energy to maintain peaceful relations with Russia and to integrate it into Europe, while allowing defense spending to fall. In response to the February 2022 invasion, Germany suspended the Nord Stream 2 pipeline and announced a new policy of energy independence from Russia, admitting that Ostpolitik was a failure.

    3. The United States - President Biden has led the coalition imposing sanctions on Russia. See Ukraine Perspectives article on Biden’s leadership at “Biden: Cold War Warrior Armed for 2022 War.”

    4. Canada, Australia, and New Zealand have joined in the sanction regime with the United States.

    5. The East Asian states (excluding China) support the United States not only because the United States is an important military ally and support, but also because the Russia/Ukraine situation mimics a similar situation with China/Taiwan. If Russia can invade an innocent neighbor with impunity, then does China now have permission to invade Taiwan? Or, in a worse case scenario, would the People’s Republic of China invade part or all of another East Asian country?  Japan, Taiwan, and South Korea have banned exports of computer chips electronics, semiconductors, computers, sensors and lasers, navigation and avionics, and marine and aerospace equipment.

RUSSIAN SUPPORTERS

To offset the losses from the sanctions from Western and Asian allies, Russia increased energy exports to China, Turkey and India to make up for decreased revenues in Europe. Russia has given deep discounts on oil and gas and has pocketed an extra $24 billion from selling energy to those nations. The sanctions on Russia’s imports (the goods Russia brings into its own country) have proved much more effective than the sanctions on its exports (the goods Russia sends to other countries). Russia’s imports, since sanctions, have decreased 2 1/2 times - including pharmaceutical, auto manufacturing, textile, electrical and electronic equipment, and computer industries depend on imports.

  1. Direct

    1. Belarus is the the only full supporter of Russia, allowing Russian troops to enter Ukraine from its Belarus.

    2. Other countries supporting Russia in the war with Ukraine are Cuba, Nicaragua, Venezuela, and Kyrgyzstan.

  2. Indirect

    1. Syria supports Moscow’s recognization of the republics in eastern Ukraine.

    2. Iran justifies the Russian invasion of Ukraine by saying Russia has been provoked by NATO.

    3. UAE and Saudi Arabia don’t want to get involved and haven’t condemned Russia’s aggression.

  3. Neutral or wishy washy - all of these regions or countries made the requisite slap on the hand to Russia for invading Ukraine in a vote of the UN General Assembly, but now they refuse to join in imposing sanctions against Russia. Generally, these countries think the war is a European or regional problem that they do not want to get involved in.

    1. South and Central America

    2. Africa

    3. Middle East

    4. Southeast Asia

    5. India

    6. China

      China, the second largest economy in the world, deserves an article all of her own. The oldest civilization in the world and now the largest communist nation is complicated. Don’t let anyone kid you, China and her place in the world is not easily explained or dismissed.

    7. Turkey

      Turkey is complicated. Aren’t they all?

      Turkey is important to NATO because of her geographical intersection between Europe and Asia. The U.S. has a major air base in Turkey where America stores nuclear weapons and Turkey’s President Erdogan has blocked Russian warships headed toward Ukraine during the 2022 War. But, Turkey’s President has a difficult relationship with the other NATO members by being the only member to oppose admitting Finland and Sweden into NATO.

3. So…when will the sanctions defeat the big bear attacking the little state of Ukraine? When will Putin pull out his troops?

What I see -

  1. Putin is in charge and doesn’t appear to have any intention of withdrawing his troops from Ukraine in the near future.

  2. Polls show that the Russian people support the war, so we shouldn’t expect an uprising against Putin in the near future.

    The Kremlin has complete control of the Russian press and Internet. Most Russians don’t know about the massacre in Bucha or the destruction of maternity hospitals or bombing of train stations. They believe that Russian troops have been sent to Ukraine to save their neighbor from the Nazis in power - Nazis who took control of the country with the illegal overthrow of Viktor Yanukovych in 2014. The vast majority of Russians think this war is the fault of Ukraine and the United States. The Russians passed legislation suppressing dissent, so the Kremlin suffers little to no resistance.

  3. So - How long can Putin run the war with the troops he already has?

    How many Russian troops have been killed in the war? Any number I can give you is probably not defensible. The Russians and the Ukrainians say two different things. But, a number I hear most consistently is that after 6 months of war, the Russians have lost 45,000 personnel.

    Putin has yet to authorize a full draft to bring more recruits into the military. However, in July Russia began recruiting thousands of volunteers to restock its ranks in Ukraine. No experience needed. The recruiting is focused on poorer and more isolated regions where lots of money of money is rewarded to new recruits.

    On August 25th, Putin signed a decree to increase the Russian armed forces by 132,000 to take effect on January 1. I know, I don’t know why that odd number is needed. This increases the number of Russian troops to 2 million. “The decree comes just a day after Putin’s defense chief acknowledged that the Russian military campaign in Ukraine has stalled, with experts saying the Kremlin's troops appeared demoralized and understaffed.”

    The Kremlin hasn’t said where it is going to get the additional troops. Will he get private contractors or use conscripts? Putin has tried to avoid a complete mobilization - "Putin has been reluctant to do this because he has tried to isolate the Russian population from the costs of the war through using mercenaries from the Wagner private security organization, recruiting in the non-Russian ethnic republics of the country, from the prison population and using press gangs in occupied parts of Ukraine," said Neil Melvin, the director of international security studies at the Royal United Services Institute, or RUSI, a London-based think tank. (NBC News)

  4. The economy continues to support the war machine. How long the military can operate without new computer chips and replacement parts for its weapons is unknown.

  5. Winter is coming. How long will the Russian military be able to fight during the winter? Remember Napoleon?

In Summary - Economic Sanctions are a form of warfare and it is the form now being used by allies of Ukraine against Russia. The sanction regime being used is the strongest and most coherent in the history of the modern world. Sanctions take a long time to stop military warfare. Russia is suffering from the effects of economic sanctions, but its aggressive war machine continues to wreak death and destruction on Ukraine. The war is spearheaded by one man, Vladimir Putin who has no intention of ending the war soon. Unfortunately, this war may last a long time. How long no one can predict. What we do know is that as long as Ukraine has the military and economic support of its allies, it may be able to hold off Russia long enough for….

So, this whole study of sanctions is a study in progress. And many questions remain. How long can Ukrainian allies hold sanctions against Russia? Will the allies be able to become independent of Russian oil and gas? Will the January 2023 boycott of oil and gas substantially hurt Russia? Will sanctions be enough to force the Russians to withdraw from Ukraine? What is in the future for Ukraine? What about the civilian population of Russia? Oh, my…so many questions.