The tightening of sanctions against Russia announced by the G7 summit in Hiroshima is evidence that the west remains solidly behind Ukraine in its battle against aggression. It is also a sign of failure.
Despite talk of quick victory there has been no knockout blow in the economic war, let alone signs that freezing assets, targeting oligarchs, seeking alternative energy sources and depriving Russia of vital components has brought about a change of heart in the Kremlin.
The lack of instant success should not come as too much of a surprise. The earliest example of the use of sanctions dates back to ancient Greece and their record has been mixed since then. For the most part, turning the economic screw has had only a modest impact. Furthermore, it takes time – decades often – for the measures to work.
No doubt, Russia is feeling the impact of sanctions, but so is the west. Indeed, one reason for the over-egging of claims that the Russian economy is close to collapse is that western policymakers know their own voters are suffering from the collateral damage: dearer energy, rising food prices and falling living standards.
Despite all that, public support for Ukraine in G7 countries remains solid. But the past 15 months have exposed the difficulties in laying economic siege to a country as well-endowed with natural resources and technical nous as Russia. The new measures are designed to disrupt the Kremlin’s ability to source materials for its military, close loopholes, further reduce international reliance on Russian energy, and limit Moscow’s access to the global financial system.
Early forecasts from the International Monetary Fund that the Russian economy would contract by 8.5% in 2022 have since been revised to a 2.5% fall. The IMF is expecting growth of 0.7% this year. Inflation is running at a three-year low of 2.3% – lower than in the US, the UK or the eurozone.
So what is happening? One possible explanation is that things are worse than they appear on the surface. There are reports of a brain drain of skilled workers and of shortages of spare parts. Neither would lead the economy to fold immediately, but longer term they would be factors – if left unaddressed – that would slow the economy.
Interestingly, some Russians admit the war has had an impact. Last September, the Institute of National Economic Forecasting of the Russian Academy of Sciences released an assessment in which it admitted the shock from sanctions had affected almost every part of the economy. It said difficulties in obtaining raw materials and components were among the most acute problems.
The RAS report said: “Despite the extreme severity of the problems, the authorities managed to stop the inflationary surge in the economy fairly quickly, prevent a bank panic, ensure the smooth operating of the payments system, and return the ruble to the previous exchange rate with a margin.”
Three questionable assumptions underpinned the west’s belief that the economic war would be swiftly over. The first is that Russia would run out of money and so be unable to finance its military action.
In reality, the energy embargoes and the freezing of Russian reserves held by western central banks have proved to be less effective than envisaged. While the volume of Russian oil and gas exports has fallen, higher prices have meant the value of exports has not been affected.
Russia has also offered to supply oil and gas at a discount and found plenty of ready buyers: China and India most notably. So far, Moscow has not needed to dip into its reserves, although that might change if global energy prices continue to soften.
The second assumption was that the entire global community would be united in opposition to Russian aggression. This has proved optimistic. Many countries in Africa and Asia refused to condemn Russia in a UN vote at the start of the war and abstained instead.
This lack of universal support for Ukraine has made it possible for Russia to circumvent sanctions. A report by the German newspaper Bild showed that exports of German cars to Kazakhstan rose by 507% between 2021 and 2022. Exports of chemical products to Armenia rose by 110%, and sales of electrical and computer products to the same country increased by 343%.
Now, it is possible that Kazakhstan and Armenia are in the throes of economic booms that necessitate massive increases in imports. It seems much more likely that the cars, chemicals and electrical goods are finding their way into Russia by a circuitous route.
The final assumption is that the Russia of 2023 is no different to the Soviet Union of the 1980s; a basket case that will wilt under pressure from the west’s superior economic model. Yet, as the US economist James Galbraith pointed out in a recent paper, Russia has an excellent education system, plenty of technical knowhow, and industrial plants that have been built by western multinationals since the end of the cold war. Sanctions provide an incentive for the Russians to substitute home-grown products for western imports.
“Though some techniques remain to be mastered, Russia is not short of any underlying ingredients – food, fuel, materials, scientific and engineering talent,” said Galbraith. “Whether its economic leadership is of a calibre to use these resources effectively is an open question, but so far, the contrary evidence is not compelling.”
None of which is to say that Russia will win. Putin has been guilty of his own questionable assumptions: that the war would be short and that the west would provide only token support for Kiev. But the new sanctions and the pledge to back Ukraine for “as long as it takes” is recognition that Russia is putting up stiffer economic resistance than the G7 anticipated.