The Brown Bear Secures Its Prey
In the few days after the Russian invasion of Ukraine, several countries across the globe have levied harsh economic sanctions on the aggressor nation. Perspectoverse’s Urvi Agarwal brings to you a comprehensive analysis of these sanctions and the degree to which these appear to be successful.
Russia’s invasion of Ukraine on 24 February 2022 did not come as a shock to the world. Yet, they triggered a response that was indeed shocking for economies and financial markets. Western liberal democracies across the globe met Putin’s war with severe sanctions and condemnations, while others remained silent on the issue.
Before delving into the specificities of the multitude of sanctions imposed on Russia, it is important to analyze its cross-border relations before 2022. In terms of trade, Russia does not depend heavily on the United States. Even after the neutralization of the Cold War in 1991, financial relations with the US did not normalize to the extent of economic allyship or bilateralism. With the European Union, Russia has a trade relationship powered primarily by natural gas and energy exports from Russia.
The United States’ President Joe Biden has been amongst the most vocal about the glaring geopolitical threat. In order to secure unipolarity, the States imposes heavy economic sanctions on Russia instead of deploying military troops to defend Ukraine.
The US Dollar is the world’s reserve currency, and all international transactions pass through New York City. Biden’s sanctions will freeze all Russian assets passing through New York immediately. The US Treasury estimates that $1 trillion in Russian assets will be unable to flow through the US and its partners’ financial systems.
Further, Biden’s sanctions block all dollar transactions with Russia’s largest banks: Sberbank and VTB Bank. The banks hold 33% and 16% of Russian bank assets and dollar (Forex) flows to them have been blocked through ‘full blocking sanctions’. Export from the US to Russia has been limited greatly as well, squeezing the Tech sector in Russia. The export limitations target specific industries like technology, energy, military and telecommunications applications.
The sanctions are undoubtedly taxing on the Russian economy. However, there are several threats and limitations to these sanctions.
Firstly, the sanctions were issued with a long-term perspective - it may take months or years for them to take full effect.
"This is going to impose severe cost on the Russian economy, both immediately and over time. We have purposely designed these sanctions to maximize a long-term impact on Russia, and to minimize impact on the United States and our allies,” stated Biden.
The extended period of action may be unsuccessful in deterring Putin from pushing the limits. Historically, resilience to external repression has been an idealistic pillar for Russia; scholars believe that economic sanctions will fail to deter Putin’s acts of aggression in the future.
Secondly, the sanctions have perceptibly impacted the United States economy. On Thursday 23 February 2020, the stock market plunged and oil prices rocketed. Clearly, the implications are greater for the US in the short-run.
Moreover, the sanctions are limited to transactions made in American dollars. They can be evaded through the use of alternative currencies and transaction media. For instance, Venezuela tried to evade sanctions by floating cryptocurrency; although the venture was unsuccessful, Russia has ample room to evade international pressure through monetary shifts.
Taiwan has also joined the United States in plugging tech exports to Russia. The TSMC has stopped all semiconductor exports to Russia, inducing heavy repercussions on technology required for military expansion.
The European Union’s relationship with Russia, however, is far more complex. While the Union tries to keep Russia at arms length, the two entities are inescapably tied territorially and economically.
Aviation and finance have faced heavy sanctions. Transactions with the Russian Central Bank have been prohibited. The EU Council has imposed sanctions on 26 persons - consisting of oligarchs and businessmen working in key industries of Russia - and 1 entity. These individuals and entities are subject to asset freezes and travel bans to EU territory.
However, a game-changing decision by Germany complicates Russian plans. Germany decided to suspend the $11 billion Nord Stream 2 pipeline that would have brought natural gas from Russia. This will have severe repercussions on Russia's geopolitical chokehold over Europe in terms of energy supply. This major strategic meander may force Putin to reconsider his plans and relations. On the other hand, this suspension may have a larger impact on Germany than Russia.
Ultimately, China - Russia’s biggest trade partner - is still in support of the Kremlin. As long as Putin has the tacit support from Xi Jinping, a serious threat to Russian plans seems unlikely. Rather, the attempts to pose this threat may have broader repercussions on the rest of the world. As Americans battle high inflation, the narrative that sanctions will punish Russia without having real costs is perceptibly flawed.
Nothing justifies war; it must end somewhere. Unfortunately, this end seems blurred and far away. The world takes a shaky breath as tensions rise and solutions pass in vain.
Written by Urvi Agarwal