In December 2021, US President Biden warned President Vladimir Putin of Russia that any incursion into Ukrainian territory would entail “economic consequences like none he has ever seen”. America and its European allies followed through on this threat with the largest scale economic sanctions effort in recent history.
One year later, the Russian economy has weathered the shock much better than expected.
In March 2022, the Institute of International Finance forecast that the Russian economy would contract by 15 percent by year’s end. Yet, over the last year, the Russian economy appears to have shrunk by a considerably lower amount, slightly more than 3 per cent. In its most recent outlook, the International Monetary Fund expects the Russian economy to see a very small recovery of 0.3 per cent in 2023. Meanwhile, it expects the European Union to expand by a mere 0.7 per cent and British GDP to fall by 0.6 per cent.
Why has the Russian economy proven relatively resilient under sanctions? The limited efficacy of the sanctions is due to Russia’s policy response, its size, its commercial position and the importance of nonaligned countries in the world economy.
A quick crisis-fighting response can blunt the short-term impact of sanctions. Through capital controls and aggressive interest rate hikes, the Russian central bank avoided a catastrophic financial crisis in the spring of 2022. The government’s remaining financial reserves will provide a cushion for some time to come.
The slightly underwhelming results are not for lack of trying. By any metric, the Western sanctions of the last year have been impressive in their speed and sweep. Within days of the invasion, the Russian central bank saw $300 billion in foreign assets frozen. In the following weeks and months, Western governments moved to block all foreign investment; disconnected three quarters of the Russian financial sector from the SWIFT payments network; blocked exports of high-tech components; blocked flights, shipping, maintenance and insurance services to Russia; and weaned themselves off Russian energy.
A year ago, expectations of economic Armageddon were widespread. The International Energy Agency warned that sanctions on the Kremlin’s oil exports would unleash “the biggest supply crisis in decades”. But last month, the four-week average of Russia’s crude export volumes were at their highest level since June.
By the end of 2022, most Western states had substantially reduced or entirely stopped imports of Russian oil, gas and coal. An additional shock to Moscow has come from the corporate exodus of Western firms from Russia. Hundreds of multinationals have left the Russian market, wound up local subsidiaries, or abandoned investment projects altogether. A Group of 7 price cap on Russian oil exports appears to be working without disruption to global markets, while dozens of billions in assets owned by Russian oligarchs have been frozen.
To be sure, the sanctions have had serious effects. Even a smaller-than-expected contraction means that the Russian economy is significantly below its long-run growth trajectory. Under current circumstances, it will be lucky if it ever regains its 2021 income level.
Certainly, 2022 was a bad year for ordinary Russians. But both the financial crises of 1998 and 2008 and the 2020 pandemic recession caused worse contractions in real GDP growth than the sanctions imposed over the past year — measures once touted as an economic “nuclear option”.
The economic damage is not yet over. The lack of foreign capital, technology and knowhow will substantially hamper the country’s future development. Russia’s oil and gas sector depends on Western expertise. It will be difficult to maintain, let alone expand, current production levels in the long run. The airline sector has managed to remain in the air only by cannibalising its fleet for parts. Perhaps most crippling in the long run has been the departure of a vast pool of talented and educated professionals. Hundreds of thousands of Russian IT specialists, teachers, academics, engineers and scientists now live in exile in Istanbul; Yerevan, Armenia; and Tashkent, Uzbekistan.
The West has shown that it possesses the tools to destroy the growth prospects of import-dependent middle-income economies. But sanctions have failed to cause crippling and insurmountable problems of the kind that will cause the collapse of either the Russian economy or Putin’s war effort.
The last year has demonstrated that against a Group of 20 economy, the United States and Europe alone are no longer capable of mounting sanctions regimes with overwhelming consequences. Historical experience suggests that larger targets are better able to withstand sanctions pressure, both because they have more internal resources to draw on and because they are more difficult to sever fully from the world economy.
While Russian trade with the West has collapsed, its commercial exchanges with Asian, Middle Eastern, Latin American and African states have expanded. As the world recovers from the pandemic and adjusts to the shock of the war, Russia’s commodity exports are too appealing to shun entirely. The lure of cheap raw materials from Russia is spurring sanctions avoidance on a previously unseen scale.
A global “dark fleet” of uninsured and hard-to-trace tankers roams the oceans to deliver Russian oil to buyers everywhere. Turkey has become a major conduit for global businesses looking to sell to Russia, as long snake through the mountain passes of the Caucasus. Indian refineries and Singaporean oil storage firms are making hefty profits buying discounted Russian oil and selling it worldwide.
Through a host of intermediaries, Western-made microchips continue to end up in Russian helicopters and cruise missiles. Small countries like Armenia and Kyrgyzstan are busy entrepôts for smartphones, washing machines and other consumer goods being shipped to Russia. Compared with pre-war patterns, this new trade alignment is less efficient, costlier and more prone to interruption. It has, nevertheless, enabled Russian imports to recover to their pre-war levels.
Perhaps the most urgent lesson of the sanctions’ limited effects is what they make us miss: the dire economic position of Ukraine and what the West can do to shore it up. For all the attention lavished on sanctions, they are a sideshow and not the main arena in which Ukraine’s future will be determined. In fact, by focusing public opinion on the economic performance of Russia, the world’s 11th-largest economy in 2021, the sanctions campaign has drawn attention away from the vastly more crippling effects of Russia’s horrific war on Ukraine’s smaller and weaker economy.
Which is in more acute trouble, a $1.8 trillion economy that has contracted by 3 per cent, or a $200-billion economy that has lost one third of its GDP? What the West needs to focus on above all is lasting assistance to Ukraine. While military aid has understandably been paramount in recent debates, the long-term challenge is to move the Ukrainian economy onto a path of full integration with the West. In the meantime, it must be shored up to prevent collapse. This task cannot wait until the war is over.
Sanctions are important as an expression of support for Ukraine’s war of defense. But they are a diversion from the economic struggle that truly matters in this conflict.
(Nicholas Mulder, a historian of 20th-century European and international history at Cornell University, is the author of The Economic Weapon: The Rise of Sanctions as a Tool of Modern War)
This article originally appeared in The New York Times
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