Home ›› 29 Jan 2023 ›› Editorial
As the Russo-Ukrainian war enters 2023, its sustained intensity raises consternation amongst various policymakers in the US and Western Europe as to whether sanctions against Moscow are achieving desirable results. Despite the imposition of Western sanctions, there is no apparent end to the invasion in sight, nor are there any serious attempts at negotiations from Russia’s President Vladmir Putin. Thus, months into an aggressive sanctions regime on Russia, an assessment of the effectiveness of those measures on the Russian economy is necessary to determine whether policy goals are making satisfactory progress.
When the war began last spring, the United States sought to implement a maximum pressure campaign strategy against the Kremlin. Such a strategy materialized into a multilateral collaborative effort aiming to weaken key sectors of the Russian economy and isolate Moscow financially.
More recently, and in solidarity with Ukraine, a US led multilateral task force was launched to take more concrete action against Russia. This taskforce is comprised of the Group of Seven (G7), namely the richest economies of the world- Germany, Canada, the United States, Japan, France, Italy, and Britain. The G7 nations met and joined in the banning of the import of Russian commodities, which represent a major source of revenue for the Kremlin, in a collective measure to starve Russia out of tens of billions of dollars.
While there seems to be consensus on maintaining the sanctions regime against Russia, there are several outspoken critics in G7 nations that think they are a fruitless endeavor. Proponents of this belief that the G7 has failed in achieving desirable/tangible results from its sanctions initiatives theoretically look toward macroeconomic indicators that suggest the Russian economy has proved to be more resilient than anticipated.
Indeed, it is true that the Russian government has implemented several policies to mitigate the impact of sanctions. For years, Putin has built up Russia’s economic defenses so that it would be able to resist whatever measures the West imposed – dubbed the Fortress Russia Strategy. Since 2014, Putin has aspired for Russian economic self-sufficiency and has attempted to ensure that the West can never exert economic control over his country. The Fortress Russia Strategy necessitates that Russia diversify its economy away from oil and gas, two volatile commodities, and lessen dependence on Western technology and trade. The strategy has yielded some success as Russia is somewhat less dependent on hydrocarbon revenue compared to 2019. Oil profits accounted for nine percent of its GDP, down from fifteen percent from when Putin took office. Between 2010 and 2019 Russia’s services industry grew by seven percentage points relative to GDP.
Moscow has also developed technologies which operate independently of Western ones. For example, Mir, a Russian payment system accounted for a quarter of domestic card transactions in 2020, up from nothing five years ago, and the share of Russian imports classified as high-tech appears to be falling as well. Moscow has additionally pursued alternative trade supply routes from places like China, India, Turkey, and Kazakhstan to lessen dependence on Western Europe.
But the Fortress certainly has its holes, as Russia still remained enmeshed in a supply chain of Western ideas and technologies at the start of the war. In fact, the Russian economy is still significantly dependent on the West and in some industries such as chipmaking and computers, Russia remains wholly dependent on American parts. Almost all advanced semiconductors that Moscow utilizes from civilian to military application requires Western “know-how.” This particularly inhibits Russia’s ability to effectively wage war in Ukraine; Russian military is dependent on microchips for electronic gear, military equipment, and missile technology. Faced with a ninety percent drop in microchip imports, it is unlikely the Kremlin will be able to sufficiently employ equipment vital to the operability of its armed forces or replenish its missile stocks with precision munitions.
With regard to hydrocarbon sales, even with a lessened dependence on energy revenue, it still constitutes a major portion of Russia’s GDP. Russia’ Fortress Strategy has been unable to supplement the loss of Western financing and technology to sustain the maintenance of existing oil and gas firms. New Russian reserves in the Arctic Sea cannot be developed without Western technology, which will deprive Moscow of significant revenue in the years to come. Reorienting gas exports to China will additionally take years and investment in new infrastructure to develop as the majority of Russian energy pipelines are routed towards Europe. It is likely that China will place the burdensome costs of developing these transit routes on Russia, as Beijing is already developing pipeline routes to several Central Asian republics that are more insulated from Western diplomatic pressure than Russia. Policymakers in Beijing likely recognize they will be able to extract financial concessions from Moscow as it becomes increasingly desperate as sanctions continue to take their toll.
The weaknesses in Russia’s ability to resist the Western backlash from the war in Ukraine means that sanctions are invariably having a profound effect on the Russian economy. Arguments that sanctions haven’t had their desired effects are misguided. A reliance on macroeconomic indicators to ascertain the effectiveness of sanctions is misleading, as when contextualized with Russia, these factors point to a strengthened ruble, modest contraction of Russian GDP, and relatively low unemployment. However, these figures are not necessarily reflective of the situation on the ground. For example, Russian unemployment officially stands around 3.7 percent, equating to approximately 2.7 million Russians unemployed. Certainly a low figure, considering the economic attrition that Russia is ostensibly contending against.
Eurasia Review
