From the get-go we were told that sanctions would flatten Russia’s financial system; crash the ruble; spur a sovereign default; and potentially push the country into a decades-long depression.
French finance minister Bruno Le Maire talked about an "all-out economic and financial war" to down the Russian economy. On March 9th, CNN ran with a headline: "Ruble destroyed as Russia slides towards default".
It was edifying to think that globalisation could be harnessed to check Russian president Vladimir Putin's brutal assault on Ukraine. But none of these things has happened or is even close to happening.
Not only that, there are signs that Russia’s economy, perennially blighted by sanctions and currency volatility anyway, has partially acclimatised to its pariah status.
On Friday, the rouble traded above its pre-war level while government bond prices climbed to a two-month high on expectations of an imminent rate cut.
Russia’s central bank more than doubled its key interest rate to 20 per cent on February 28th as the first wave of sanctions hit to temper a spike in inflation, before trimming it to 17 per cent on April 8th.
It is expected to lower it further at the next board meeting on April 29th. The ruble isn’t a stock price for the Russian economy as it isn’t allowed to trade freely but its recent appreciation reflects one essential fact: there is still sizeable western trade with Russia.
While the sanctions are the most punitive ever imposed on a major economic power, they’ve been carefully calibrated to avoid Russia’s biggest export and the West’s biggest Russian import, energy. As a result, they’ve entirely failed to change the current dynamic.
Maybe that was an impossible ask in the first place. Sanctions are a slow burn. However, by studiously avoiding oil, gas and other commodities and the banks that facilitate these transactions, the West has prioritised its own economic interests, something that Putin has successfully banked on.
‘Blood money’
Proceeds from the sale of Russian oil and gas amount to about $1 billion (€920 million) a day. This money goes directly to fuel tanks, pay for armaments and is therefore financing the destruction of Ukraine. Ukraine’s president, Volodymyr Zelenskiy, describes it as “blood money” and he’s right.
This is not to say sanctions or the corporate boycott haven't had an impact. Inflation in Russia is running at a 20-year high of 17 per cent while the International Monetary Fund (IMF) is predicting the economy will shrink by 8.5 per cent this year. The head of Russia's central bank, Elvira Nabiullina, is also warning that the full hit from sanctions won't come until later in the year.
On the policy areas they apply to, sanctions are working but more than 50 per cent of the Russian economy is based around selling energy and commodities, which fall outside the scope of the measures.
Putin claims western countries have scored an own goal by imposing sanctions which he says have led to a “deterioration of the economy in the West”.
He also claims that the rouble has now stabilised and that retail demand within Russian has normalised. Of course he would say that.
The Kremlin takes a more brutalist approach to information, denying self-evident truths and sketching out farcical narratives about liberating Ukraine from neo-Nazis. Communications between governments and populations in dictatorships take place in a sort of parallel universe.
Self-interest
Western governments maintain a more subtle approach to messaging, in the case of sanctions, bigging up the impact while camouflaging the riptide of self-interest that runs beneath.
Germany, the chief opponent to an EU-wide energy embargo – a reflection of its reliance on Russian energy – has subtely switched its messaging from warning about the potential economic fallout to suggesting an embargo might worsen the war on the ground, cold comfort for those in the firing line.
The Bundesbank did, however, warn on Friday that an embargo on Russian gas would cost Germany €180 billion in lost output this year with one of the deepest recessions of recent decades.
It comes down to whether recession in Germany and the wider euro zone is a price we should pay to disentangle ourselves from Russia’s war machine and to insist we will have no truck with such barbarism.
The alternative is to continuing financing one country’s brutal subjugation of another, a morally repugnant position for the EU to maintain. The money Germany alone pays Russia for oil and gas equates to half Moscow’s military budget.
The economic consequences of an embargo are also likely to be much larger – notwithstanding the Bundesbank's warning – for Russia than for the West. And Europe, as it has shown during the pandemic when it successfully nationalised much of the private-sector wage bill, has the financial firepower to take the hit. Surely there comes a time when values supersede economics?
Sanctions, as instruments of foreign policy, may act as a deterrent against future action but their effectiveness in reversing ongoing military action is questionable. The hollowed-out, energy-avoiding measures we are currently deploying are little more than virtue signalling.
