Are the sanctions on Russia working?

When Vladimir Putin’s Russia invaded Ukraine in February 2022, many states imposed a series of sanctions against the Russian economy, more stringent than those after the occupation of Crimea. This is an important tool in an increasingly interconnected economy: the economic disadvantages resulting from the sanctions would serve as a deterrent to stop the invasion.

Various packages of sanctions were launched by the European Union. At present, the sanctions affecting Russia concern the export of products for civilian and military use as well as the import of oil, steel, cement, wood and spirits.

In addition to these there are specific restrictions on members of the Moscow government as well as individuals close to the regime. Among these, in fact, President Putin and Foreign Minister Lavrov: their accounts have been frozen, and they have seen the possibility of movement limited. The banking system has also been hit by sanctions: Europe has in fact banned transactions with the Russian Central Bank and frozen reserves, so as to make it more difficult for the Central Bank to operate an open market to stabilize the ruble, also excluding various Russian banks from the system swiftwhich allows information about financial transactions to be exchanged.

Other countries, such as the United States, Canada, the United Kingdom and Australia, have launched sanctions against Putin’s Russia, while Chinese companies are withdrawing from the country precisely because of Western sanctions. The United Kingdom announced on January 1 that it had stopped importing liquefied natural gas.

During the past year, the debate on the effectiveness of the sanctions has repeatedly heated up. Not so much on the impact that these have on economies around the world (there is no doubt about this, at least in the short term) as on the impact that they have and will have on the Russian economy.

To understand whether or not the sanctions are effective, we need to address two aspects: the first is whether and how much the sanctions are impacting, or will impact, the Russian economic situation and Vladimir Putin’s ability to finance the war; the second is whether and how much they will affect Putin’s political power.

The Russian macroeconomic situation and the war

First, it is useful to observe i macroeconomic data on the Russian economy in 2022, when the sanctions following the large-scale invasion of Ukraine took effect.

Let’s go obviously from the main indicator, i.e. the GDP. After the decline in 2020, due to the pandemic, and the rebound in 2021, Russian GDP will also have a negative sign in 2022. According to the most recent estimates, the decline in Russian GDP in 2022 will reach 3.4% according to the International Monetary Fund (IMF ), 3.9% for the OECD, 4.5% for the World Bank. 2023 does not bode well either: here the estimates are extremely variable, going from 2.3 for the IMF to 5.6 for the OECD.

Things are no better on the inflation front. This is a problem, as we have said several times, which does not concern only Russia but the whole world due to a number of factors. Yet even in this case it is Vladimir Putin’s country that does worse than the others: inflation in 2022 should reach 13%, again according to estimates, to then fall in 2023, with estimates ranging again from 6.8% at 5%.

Even the financial markets have shown a negative trend. After the Moscow Stock Exchange was closed for almost a month after the invasion of Ukraine, the MOEX, the index used to evaluate the performance of the Russian stock market, has never recovered, marking a decline of a third compared to the previous period to war.

The data therefore show a clear decline in the Russian economy from the point of view of macroeconomic variables. However, compared to expectations, we are witnessing a less pronounced decline than expected: in fact, in April, the IMF estimated a fall in GDP of around 10%. According to the weekly The Economistthe reasons would be, in fact, three.

The first factor concerns the policies adopted. Putin has no economic expertise, even the motivations behind the Russian invasion of Ukraine expressed in a pamphlet in 2021 they have nothing to do with the economic aspects. For this the economic competences are completely delegated to experts such as Elvira Nabiullina, president of the Central Bank of Russia. It is to her that we owe the maneuvers capable of stabilizing the Russian economy: in February 2022, in fact, she doubled the interest rate and acted on capital controls, thus saving the Russian economy from stellar inflation. However, these maneuvers have cost dearly, around 100 billion dollars in reserves according to data.

Figure 1: Reserves of the Central Bank of Russia, source: Central Bank of Russia

The second factor is historical: compared to Western countries, the Russian population has experienced more periods of recession. In fact, in the last quarter of a century, Russian citizens have witnessed 4 severe recessions, starting with what historians call “shock therapy”, that period in the 1990s when the privatization program implemented by President Boris Nikolaevich Yeltsin led to hyperinflation, the inability of the central state to pay wages and pensions, increases in crime.

The third factor concerns the market for energy goods. Indeed, the Russian economy depends on exports of oil and natural gas. Thanks to the increase in energy goods, Russia was still able to stay on its feet and finance the war in Ukraine. In 2022 the country had a increase by 38% compared to 2021 in revenues from energy goods, with a high trade surplus which also derives from the drop in imports. This has partly cushioned the sharp decline in other sectors, such as the automotive sector, where Russia is heavily dependent on external sources and which has therefore seen a return to a situation twentieth century, also from the point of view of safety standards.

However, this scenario could soon change: in fact, Europe launched a package of sanctions on crude oil, with limited exceptions, and from February 2023 this will also apply to refined petroleum products, together with a cap on the price of oil at 60 dollars a barrel. The impact of these new sanctions cannot be assessed now, but i commentators they underlined (already before the agreement) how this could have, together with strategies for the diversification of energy sources by Europe, a substantial impact on the country’s economy. Both precisely because of the trade surplus and, perhaps more profoundly, because of the relations that Russia has had with Europe in recent years.

There has in fact been a sort of symbiosis between Putin’s Russia and the West in recent years. The West has supplied Russia with technologies, to make its economy competitive, and with luxuries, to brighten the life of the oligarchs. Russia, on the other hand, has poured gas and oil into the West at affordable prices. The failure of this relationship is leading various Western companies to leave Russia, as revealed by a research by the University of Yale, damaging Russia also from a military point of view. In fact, the country does not have the technologies to be competitive on that front and according to experts the sanctions are also hitting Putin on the ground.

Just to give an example: the blockade on exports is forcing Russia to militarily employ semiconductors originally intended for domestic use. Tanks and aviation, sectors in which Russia depends on the West, also appear antiquated and could influence the outcome of military operations.

Russia and extractive institutions

As we have seen, the sanctions are having an effect both from a macroeconomic point of view – despite the impact being lower than expected – and from a field operations point of view. However, one wonders whether or not the sanctions will favor a regime change and a weakening of Vladimir Putin’s leadership in Russia.

Indeed, it is necessary to remember that Russia, like other regimes, falls within the category of countries with extractive institutions, a term popularized by the volume Why nations fail by economist Daron Acemoglu and anthropologist James Robinson. While inclusive institutions safeguard personal freedoms and property rights, thus encouraging citizens to produce wealth, extractive institutions subject economic activity to the well-being of a small circle of people, as happens precisely in regimes such as North Korea, Erdogan’s Turkey and, indeed, Putin’s Russia.

In fact, after the fall of the Soviet regime, Russia has not become a western liberal democracy at all, quite the contrary. First with Boris Yeltsin and then with Putin, the country has always been in the hands of a small circle, the oligarchs, who got rich thanks to the sale of the USSR’s public assets and ties with the political power.

Without understanding the link between political power and economic power, it is not possible to correctly interpret the Russian situation. And this link also has an impact on the effectiveness of sanctions. Like highlighted by the two scholars William Kaempfer and Anton Lowenberg, the effectiveness of the sanctions depends on how targeted they are with respect to the power groups and interests within the sanctioned country.

How much the sanctions launched by Western governments are influencing the internal dynamics of Putin’s Russia is not known. We know for sure that the sanctions have damaged the lives and economic interests of important oligarchs. The most emblematic example is certainly that of Rormtono TObramovich, former patron of English club Chelsea. In the first months of the war, a leading role was expected for the oligarch: for Putin he was a useful source of information about Western countries, for Europe a diplomatic channel to open negotiations with the Russian president.

However, during these years Putin’s power has become increasingly centralized, also thanks to persecutions (or executions) to the detriment of dissidents of the regime. The management of power in Russia is as opaque as it is multifaceted; it is not possible, with publicly available information, to assess the impact this will have on the balance of power.

It will be necessary to keep an eye on the impact that the new sanctions on energy goods will have: that will be the test to understand whether Putin’s system of power will show cracks or will instead remain granite in his neo-imperialist project.

Read also >> What is happening inside Putin’s system of power after 9 months of war and the ‘partial mobilisation’

What’s going to happen?

As we have illustrated, the sanctions imposed on Putin’s Russia are having an effect, judging by both macroeconomic variables and the progress of military operations. The effects that we will see in 2023 on the Russian economy, given the maneuvers of European countries to make themselves less dependent on Russian gas and oil, could have even more devastating effects on the Russian economy. What we don’t know, however, is how the political situation will evolve on the Russian front: whether the recession will undermine Putin’s power system causing him to lose the support of the oligarchs or whether the Russian system will remain standing despite everything.

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Are the sanctions on Russia working?