Are sanctions against Russia working? Two months on from the first targeting of Russian banks and oligarchs, Putin's grip on power remains as firm as ever. This shouldn't come as a surprise: restrictions on Iran, Venezuela and North Korea have impoverished their populations, but haven’t led to political revolutions. So how successful can sanctions be against Russia today? And even if they do work, will the cost to the West be too much to bear?
The full impact of sanctions on the Russian economy isn’t yet clear. In the short-term, they have created severe food shortages in shops. This, combined with a high rate of existing inflation at 16.7 per cent (expected to reach 30-40 per cent by the end of the year) threatens to impoverish Russia’s middle class, and widen the already vast disparity between the very wealthy and the rest of society.
Russia’s gross national product for the year is expected to drop by 11 per cent. The country has been cut out of the international bank payments system, £230 billion of its foreign currency reserves abroad have been frozen, and Russia could soon default on its debts. Trade is expected to drop by more than 30 per cent, a gap that non-western aligned countries simply cannot fill. Components for the construction of all kinds of machinery, including aircraft and tanks, are being cut off. As a result, Russia will have to substitute this by importing goods on a large scale. This will take time, particularly with so many foreign companies refusing to deal with them. The Russians also anticipate catastrophic levels of unemployment. So far, in short, sanctions appear to be working.
A downside of sanctions, however, is that they harm those imposing them. They also present a dire prospect for third parties, namely those in the Third World. The loss of exports from Russia and Ukraine, both major players in the international grain market, is an urgent issue for the World Bank: starvation is lurking around the corner. Sanctions are also undercutting western economies, which face fast rising inflation as bad as the 1970s: at more than eight per cent in the US and not much less in Germany and Britain. Shortages in basic commodities from Russia will exacerbate prices even further. The International Monetary Fund now anticipates that global growth this year will almost halve from last year, down from 6.1 per cent to 3.6 per cent.
The Russian economy, on the other hand, is self-sufficient in almost every known commodity, including gold. Only in lithium — for vehicle batteries and space technology — is it heavily dependent on foreign supplies. Russia is the third largest producer of oil and the second largest producer of natural gas. It’s the leading miner of class one nickel needed for batteries. And it’s a crucial global supplier of refined uranium, palladium and refined copper, as well as being an important source of low sulphur coal and aluminium.
The disappearance of these Russian exports deprives the global car industry of vital components, especially for electric vehicles, which the West has been basing its carbon reduction targets on. It also raises the cost of the energy to power its plants. With demand for electric vehicles expected to rise considerably in the next decade (Biden, for instance, wants half of all vehicles sold in the US to be electric by 2030), sanctions against Russia will seriously reduce any hope of meeting such optimistic expectations.
Then there is the issue of gas. Germany receives over half of its gas from Russia. So what will happen this winter? No substitute exists, and its nuclear power supply will close within a year. It’s critical for industry and crucial to domestic heating. Looking at the looming crisis facing Germany, it’s clear that this is what Putin had in mind when he said earlier this month that ‘unfriendly countries concede that they won’t be able to make do without Russian energy resources.’ Trade unions and employers in Germany have come out against an embargo against Russian oil and gas: German chancellor Olaf Scholz evidently has a big issue on his hands.
For Austria, the problem is even worse: they are 80 per cent dependent on Russian gas. Yet short of fully banning Russian oil and gas — which provide two thirds of Russian foreign exchange income — sanctions can only hinder Russian economic growth, but not grind it to a halt. And even if oil is sanctioned, this doesn’t necessarily stop its sale. The West may soon find that the sanctions regime begins to leak like a sieve, as they tend to, and the longer it continues the more likely it is that others will circumvent it. This is compounded by the fact that major economies such as China and India aren’t on board.
And how wedded will the US remain to sanctions, with elections to the House on 8 November at which the ruling Democrats look to lose substantially? The country will be going to polls facing the prospect of further inflation, and a possible recession. No one in their right mind would argue that the highly indebted world economy is in a healthy condition to cope with the endless prospect of excluding Russia entirely from international trade.
One early indication that Russia can survive economically is the awkward fact that the rouble has reversed its dramatic slide against the dollar. Russia’s central bank chief Elvira Nabiullina is tough, clever and inventive: she took proactive measures to get a grip on inflation way before the tentative baby steps taken by the Federal Reserve and the Bank of England. Now she intends to go to court to challenge the withholding of its foreign currency reserves abroad. Sanctions alone, without an embargo on Russian energy, clearly won’t work.
Only the Russians themselves can end this war. All may not be lost on that front, however. The Russia of today is not that of 1953. Unlike those in Solzhenitsyn's 'Cancer Ward' who had lost any idea of rational freedom under Stalin and therefore had no escape, the Russian people have long since tasted liberty. They are unlikely to endure its passing for long without some form of resistance.
When opposition leader Alexei Navalny was locked up, the independent Russian press argued that what lay behind the discontent were the standards of living that had fallen for the past decade. Sanctions today are further compounding this brewing sense of disillusionment as the population suffers sudden acute food shortages. The issue is whether their impact is sufficient to ignite unrest to the extent required. The very reason Putin sought to extinguish Ukraine — the dangerous infection of popular democracy — is the same reason he has to fear the street today.
Will the people of Russia rise up and paralyse Putin's dictatorship? Or will the West find itself in economic turmoil, battling social unrest, at a time when certainty of purpose is most required? Only time will tell.