The effectiveness of Russian sanctions

Over six month ago, the US and several allied nations launched a broad package of sanctions against Russia’s $1.8 trillion economy, in response to its invasion of Ukraine.  In the weeks that followed, the Russian ruble’s value tanked, foreign multinational companies pulled out of the country, and economic prospects began looking grim.  Since then, however, Russia responded aggressively by shoring up the ruble’s value and increasing oil exports to China and India.

Russia is today the subject of over 11,000 individual sanctions. Half of Russia’s $580 billion of currency reserves lie frozen and most of its major banks are cut off from the global payments system.  The US no longer buys Russian oil, and a European embargo will come fully into effect in February.  Russian firms are barred from buying inputs from engines to microchips, and oligarchs and officials face travel bans and asset freezes.  

As well as satisfying Western public opinion, these measures have strategic objectives.  The short-term goal, at least initially, was to trigger a liquidity and balance-of-payments crisis in Russia that would change its bargaining power and create pressure to stop the war in its first few weeks.  In the long run, the intent is to impair Russia’s productive capacity and technological sophistication so that it would make it harder for it to consider a similar offensive in the future.

While most economists agree that Russia is suffering real damage that will mount over time, the economy – at least on the surface – does not yet appear to be collapsing.  The International Monetary Fund (IMF) expects Russia’s GDP to shrink by 6% in 2022, much less than the 15% drop many expected in March.  The ruble’s initial nosedive in value quickly reversed after the state limited currency transactions and after Russia’s imports plummeted.  Unemployment hasn’t noticeably surged, and Russia continues to earn the equivalent of billions of dollars every month from oil and gas exports.

To be sure, however, warning signs are flashing all around, contradicting Russian President Vladimir Putin’s claim that sanctions have failed.  Manufacturing of autos and other goods has plummeted because companies cannot import components.  Airlines have slashed international flights to near zero and are laying off pilots and cannibalising some planes for parts that they can no longer buy overseas.  Thousands of highly educated people have fled the country, hundreds of foreign companies are shutting down, and Russia’s federal budget in July showed signs of distress.

While sanctions many not be acting swiftly enough to provoke a public uprising or to constrain Russia’s ability to wage war in coming months, the long-term impact is expected to be immensely damaging to the country.  The technological gap between Russia and the advanced economies will widen over time.

The full effect of the sanctions’ work will be seen when they force political leadership in Russia into making difficult choices between financing the war and financing the economy.  There are no signs that the war will end in the coming months, but the sanctions are working exactly in the sense that they are making it increasingly more difficult to continue economically. 

Disclaimer: This article is brought to you by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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