Who’s Winning the Sanctions War?

Bruce W. Jentleson

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Your economy will face “devasting” consequences, U.S. President Joe Biden warned Russian President Vladimir Putin about the sanctions the United States and its allies would impose if Russia invaded Ukraine. When Putin invaded Ukraine anyway, the sanctions did hit hard. Yet Putin hasn’t withdrawn. And he’s jiujitsu-ed with Russia’s own countersanctions. Close to six months in and now into its third phase—first deterrence, then compellence, now attrition—who’s winning the sanctions war?

The first phase, sanctions as a major element of deterrence, did not succeed. Putin’s Greater Rossiya vision and belief that victory was at close hand—recall that Russian soldiers carried dress parade uniforms in their packs—may have made him undeterrable. But even if he were not fully set to invade, we know from other cases that while threats of sanctions have had some success for limited policy change objectives, they have not been able to deter a determined aggressor from going to war. Not former Italian dictator Benito Mussolini from invading Ethiopia-Abyssinia in 1935, not former Iraqi leader Saddam Hussein from invading Kuwait in 1990, and not the Soviet Union from invading Afghanistan in 1979.

Phase two, the sweeping sanctions imposed once Russia invaded, sought to inflict sufficient costs that—along with NATO support for the Ukrainian resistance—would compel Putin to withdraw. Financial sanctions cut Russia off from much of the international financial system, including freezing close to half of the $640 billion held externally in hard currency reserves. Technologies like semiconductors, vital both for military equipment and commercial products like cellphones and cars, were embargoed. In contrast to the end-arounds pursued in many other sanctions cases, more than 1,000 multinational companies ended—or at least reduced—business in or with Russia. Over 600 Russian oligarchs and siloviki elites, including Putin and his family, have been individually sanctioned. Sports and cultural bans—the FIFA World Cup (both men’s and women’s), International Ice Hockey Federation, Formula 1, and Eurovision Song Contest—tried to foster a sense of isolation for the average Russian. Although oil and natural gas are particularly strategic to the Russian economy, with prewar production providing about half of the federal budget and one-third of the country’s GDP, sanctions have been slower at coming into effect and more limited given the energy dependence of those issuing the sanctions.

The overall sanctions package did have a substantial economic impact. Russian GDP projections saw the worst contractions since the chaotic 1990s. In March, the ruble lost close to half of its value, from 84 rubles to 154 rubles to the dollar. In mid-April, Moscow’s mayor warned that 200,000 jobs were at risk. Economy-wide inflation approached 18 percent, even higher in sectors most dependent on international supply chains. With the Ukrainian resistance destroying so much combat equipment and sanctions impeding resupply efforts, Russian front-line forces were facing shortages.

Although many countries joined the sanctions, some key ones did not. China has increased its Russian oil imports, provided some military goods, and chimed in with supportive statements, though it has not been as fully supportive as the Russia-China pre-invasion “no limits” partnership implied. Prompted by price discounts as well as bilateral military ties, India increased Russian oil imports from 1 percent to 20 percent. With Saudi Arabia and the United Arab Emirates refusing to significantly increase production, world price rises more than offset even the discounts Russia resorted to, keeping earnings by some estimates higher than the year before.

And those oil revenue numbers don’t even include the tripling of oil tankers “going dark” to avoid being detected and shippers and refiners hiding Russian oil blended in with others. Hundreds of thousands of metric tons of Ukrainian grain were stolen and shipped out to Russian allies. There’s been plenty of other sanctions-busting, including oligarchs and Putin cronies finding offshore tax and banking havens and safe harbors for their superyachts.

For the costs still coming through, the Kremlin has resorted to a mix of economic compensatory measures and political repression. Hikes in central bank interest rates and capital controls helped bring the ruble back from its early sharp decline to a seven-year high in late June. Retiree pension increases and company bailouts have helped cushion the average Russian. Arrests and other political repression subdued the initial wave of internal protests. The few oligarchs who have dared to speak out have paid a price.

Russian countersanctions, most significantly cutting natural gas supplies to the European Union, are having a bite of their own. As of July 31, pipeline volumes—more than 400 million cubic meters a day (mcm/day) a year earlier—were down to close to 100 mcm/day. German electrical power costs almost doubled from January to June, from 140 to 260 euros per megawatt-hour. Gas shortages are already causing major industries to cut back production. Conservation as well as fuel- and supplier-switching measures have helped but only somewhat. The EU’s recent gas-sharing agreement has enough loopholes to still leave the specter of winter rationing looming. Indeed, some rationing has already started. Amid one of the hottest summers on record, Spain is requiring commercial air conditioning to be set no lower than 27 degrees Celsius (or 80 degrees Fahrenheit), the Netherlands is encouraging 5-minute limits on showers, and in France, “urban guerrillas” are shutting off storefront lights.

And then there is the broader global fallout. Once again, climate change is being traded off, the United States is rolling back limits on domestic oil and gas drilling, and Europe is shifting back to coal. Global GDP growth, 5.7 percent in 2021 and in January projected at less than 4.1 percent, is now forecast at 2.9 percent. While global oil prices have come down as of late, concerns remain that with Russian oil sanctions getting tighter, world prices could approach $200 per barrel. Poor and developing countries have been especially hard hit by all this, with at least 40 million people being pushed into poverty. Even though Russian war tactics are principally responsible for nearly half of the world’s population facing food shortages, much of the global south also blames Western sanctions.

Some analyses, including in this magazine, point to sanctions doing increasingly deep structural damage to the Russian economy. The ruble may be propped up, but black market exchange rates show its weakness. Gazprom’s stock tumbled for the first time since 1998 as it did not pay out a dividend. Import substitution has lagged in one sector after another. Tellingly, Elvira Nabiullina, Russia’s Central Bank chairperson, warned that “the period during which the economy can live on reserves is finite.” An estimated 500,000 workers, many highly educated and having tech sector experience as well as being a crucial part of any economy’s talent base, have fled the country. With Russian forces having lost an estimated 2,600 armored vehicles and fired close to 70 percent of their precision-guided missiles, sanctions are forcing jerry-rigged resupply efforts, such as taking semiconductors from refrigerators and dishwashers.

If Western sanctions fatigue doesn’t set in and the NATO-supported Ukrainian resistance continues to inflict substantial costs on the ground, the economic-military pincer may squeeze even tighter. Still, there should be no expectation of Putin saying uncle. Claims about sanctions driving Russia to “economic oblivion” and “wreck[ing] Putin’s war machine” don’t reflect the full picture.

Nor is this just Putinology. The sanctions track record is full of cases of extensive economic impact not leading to policy change: For example, there have been 60-plus years of sanctions against Cuba, but the regime is still in place; decades of sanctions against North Korea but leader Kim Jong Un keeps expanding his nuclear arsenal; and former U.S. President Donald Trump’s “maximum pressure” campaign against Iran pushed GDP down by 10 percent, inflation up to 40 percent, and youth unemployment close to 30 percent, but there was no saying of uncle from Tehran either.

One is whether internal elites and other key political actors play a “circuit breaker” or “transmission belt” role, blocking or carrying forward sanctions pressure against the regime based on whether their interests are served by resistance or compliance. One of the reasons former U.S. President Barack Obama’s Iran sanctions achieved their policy objective and Trump’s did not was that by bringing economic pressure without political antagonism, they tapped those internal shifts in Iranian politics. The same was true with Libya back in 2003 when its oil industry had deteriorated due to a lack of international technology and investments subject to U.S., European, and United Nations sanctions, so that pragmatic technocrats around former Libyan leader Muammar al-Qaddafi were more able to make the case that their and his interests would be served by concessions on terrorism and weapons of mass destruction programs

With estimates of Russian troops killed or wounded running as high as 70,000 to 80,000 people, far higher than in their eight-year war in Afghanistan, reports of increasing internal opposition from Russian families and dissidents are not to be made too much of but also can’t be dismissed. Nor can scenarios in which for their own nationalist reasons—pride hurt by having to turn to North Korean “volunteers” or protecting the military from further damage—some key power broker elites bring pressure for finding an acceptable way out.

The other key factor is a diplomatic strategy that plays the sanctions-strengthened hand for favorable but still somewhat reciprocal terms. Here too, notwithstanding various differences, the Iran and Libya cases are instructive. Obama’s Iran sanctions inflicted enough economic pain to get Iran to negotiate seriously on nuclear nonproliferation, and when an agreement was reached with the Joint Comprehensive Plan of Action, it lifted many of the sanctions. Trump’s eschewing of anything close to a serious diplomatic process took away any credible bases for reciprocity. Similarly with Libya, the deal U.S. and British negotiators struck (led by then-U.S. Assistant Secretary of State William Burns, who is now the director of the CIA) provided sanctions relief in exchange for terrorism concessions and weapons of mass destruction dismantling, the significance of which became especially evident amid the 2011 Arab Spring’s chaos and instability since.

As hard as it was to establish substantively appropriate and politically viable terms with Iran and Libya, it will be that much harder with Russia. Which sanctions get lifted, and for what in return? Do some stay in place on an ongoing basis? On these and other questions, the key will be being sufficiently punitive to have U.S., European, and Ukrainian support while still providing a basis for Putin or any other Russian leader to agree. This is a tough balance to strike but a necessary one.