Six months ago, the Russians invaded Ukraine. A war of attrition rages on a thousand kilometer font line of death and destruction. In its shadow, another struggle is taking place – an economic conflict, in terms of intensity and scope, incomparable to anything since the 1940s, during which Western countries crippled the nearly two trillion Russian economy with extensive sanctions.
The outcome of the Ukrainian war depends on the effectiveness of this embargo. But at the same time, it will reveal a lot about the ability of liberal democracies to project their power globally in the 2020s, including vis-à-vis China. Worryingly, the sanctions war is not yet progressing as well as many had hoped.
Since February of this year, America, Europe and their allies have imposed a constellation of unprecedented restrictions on thousands of Russian companies and individuals. Half of Russia’s 580 billion foreign currency reserves lie frozen, and most of Russia’s major banks are cut off from the global payment system.
America no longer buys Russian oil, and in February of next year the European embargo on its imports will come into full effect. Russian firms cannot buy key parts from engines to microchips. Russian oligarchs and representatives of state power are not allowed to travel abroad and have their assets frozen. An American team called “KleptoCapture” intercepted a superyacht on which a Fabergé egg was found.
These measures cause some satisfaction among the public in the West, but mainly they are of strategic importance. Their short-term goal, at least initially, was to create a liquidity and balance of payments crisis in Russia that would make it more difficult for the Kremlin to finance the war in Ukraine. In the long term, the goal of the sanctions is to weaken Russia’s production capacity and technological sophistication so that Vladimir Putin has fewer resources and capacities available if he gets the urge to attack another country. And the main goal of sanctions is to deter everyone else from warlike appetites.
Behind these ambitious goals is a new doctrine of Western power. The unipolar era of the 1990s, when America had no competition, is long gone, and after the wars in Iraq and Afghanistan, the West’s desire to use military force to a greater extent has passed. Sanctions seemed an appropriate response, as they allow the West to exercise its power as it controls the financial and technological networks that form the heart of the 21st century economy.
In the past twenty years, these tools have been used to punish human rights abuses, to isolate Iran and Venezuela, and to cripple companies like Huawei. However, the Russian embargo took the sanctions to a whole new level, as it aimed to cripple the eleventh largest economy in the world, one of the largest exporters of energy, grains and other commodities.
The knock-out did not come
What are the results? In a three- to five-year perspective, being cut off from Western markets will do a lot of damage in Russia. By 2025, a fifth of its civilian aircraft fleet will have to remain on the ground due to a lack of spare parts to repair it. Improvements to telephone networks are being delayed and customers are missing Western brands. The state and various Russian tycoons are seizing Western assets in Russia, from car companies to the McDonald’s restaurant chain, and crony capitalism is flourishing. Some of the most talented people are leaving Russia, who are opposed to the reality of a dictatorial regime and the vision that their country will become a Chinese gas station.
The problem is that the West has failed to impose knock-out sanctions on Russia. Russia’s GDP is projected to shrink by six percent in 2022, according to the IMF, which is significantly less than the fifteen percent that many were talking about in March, and less than what Venezuela once suffered. Energy prices will provide Russia with a $265 billion current account surplus this year alone, the second largest after China.
After the initial paralysis, the Russian financial system has stabilized and the country is finding new suppliers of some goods, especially in China. In Europe, for now, the energy crisis may trigger a recession. The price of natural gas jumped another twenty percent this week as Russia throttled supplies.
It turns out that sanctions are simply not an infallible weapon. The first disadvantage is the time delay. Being cut off from access to technologies monopolized by the West takes years to show, and autocracies, with access to significant resources, can usually weather the initial shock of an embargo fairly well. Then there’s the revenge. Although the West has an incomparably higher GDP than Russia, controlling gas supplies gives Putin considerable power.
And the biggest mistake of the sanctions is that the full or partial embargo is not applied by over a hundred countries in the world, which generate forty percent of the global GDP. Oil from the Urals flows to Asia. Dubai is drowning in Russian money and Emirates and other airlines fly to Moscow seven times a day. A globalized economy can adapt very well to shocks and opportunities, especially when most states are not interested in supporting Western policies.
It wouldn’t be enough for China
So don’t be under the illusion that sanctions offer the West a cheap and asymmetrical weapon against China, which is an even bigger autocracy. To deter or punish Beijing from invading Taiwan, the West can seize three trillion dollars in China’s foreign exchange reserves and cut off its banks. But as with Russia, it is unlikely to cause the Chinese economy to collapse.
In addition, the Chinese government can retaliate by cutting off the West from the supply of electronics, batteries and medicine, the shelves in supermarkets such as Walmart will be empty and panic will break out among customers. And since China is a bigger trading partner than America for many countries, enforcing a global embargo would be even more difficult than against Russia.
The West can therefore take a lesson from Russia’s war in Ukraine that when confronting aggressive autocracies, it is necessary to proceed simultaneously on several fronts. Hard power is essential. Democracies must work on ensuring that their adversaries cannot cut them off from key raw materials in the event of a conflict. Sanctions play an important role, but the West should not overuse them. The more countries fear that the West will impose sanctions on them tomorrow, the less they will be willing to apply the embargo today.
The good news is that half a year after the invasion, democracies are adjusting to the new reality. Heavy weapons are pouring into Ukraine, NATO is fortifying Europe’s border with Russia, and Europe is looking for new sources of natural gas and accelerating the transition to clean energy sources. America is reducing its reliance on Chinese technology and pushing Taiwan to strengthen its defenses.
The catch is that every autocracy studies the sanctions war against Russia, and even more so the Chinese one under the leadership of Xi Jinping, and learns its own lessons from it. A new era conflict is raging in Ukraine, in which military, technological and financial elements are intertwined. However, this is not an era in which the West can rely on its dominance. Dollars and semiconductors alone will not stop any aggression.
© 2022 The Economist Newspaper Limited
All rights reserved. Published under license with The Economist, translated by Hrot weekly.
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