The history of sanctions to date show target countries usually learn to live with or find ways around them, though they are far poorer for doing so, writes Rod Oram
France and the EU were ready to “wage a total economic and financial war on Russia,” Bruno le Maire, the French Finance Minister, said earlier this month as the EU finalised its first set of sanctions against Russia for invading Ukraine.
This prompted former Russian President and Prime Minister Dmitry Medvedev, currently the vice-president of the Russian Security Council, to warn the minister on Twitter to “watch [his] tongue” because “economic wars quite often turned into real ones”.
Le Maire took back his words, describing his comment as “inappropriate.” But he pushed ahead anyway with the sanctions. War was already real in Ukraine; and the EU, US and allies were already weaponising economic measures at a scale and intensity never seen before.
Yet, Russia had already deployed its own economic weapons. It cut the flow of its gas to Europe by about a quarter in the months before its invasion. Storage fell and prices soared. Don't retaliate. You need us, was the message Putin was sending the Germans in particular and Europe in general.
Putin has used Russia’s dominance of Europe’s gas market as an “economic and political weapon”, the chief of the International Energy Agency, Fatih Birol, said last week. In response, the OECD agency laid out a 10-point proposal showing how Europe could reduce its consumption of Russian gas by about a third.
This chart from Statista shows Russia was already under hefty sanctions following its invasion of Crimea in 2014. The latest ones more than doubled the load, pushing Russia well ahead of Iran, the previously most-penalised country.
The history of sanctions to date show target countries usually learn to live with or find ways around them, though they are far poorer for doing so. Only three times since the end of World War I have sanctions prevented conflict, says Nicholas Mulder, a Cornell University historian in his just-published book The Economic Weapon: The Rise of Sanctions as a Tool of Modern War.
Only one of the three was after World War II when the US used financial sanctions to pressure an ally, the UK, into ending the Suez Crisis.
Yet at their current scale applied to Russia “they are a tempest that will change the nature of globalisation itself in major ways. Given the criminality of Mr Putin’s invasion, punishing Russian aggression with economic, financial and diplomatic measures is necessary,” Mulder wrote recently in The Economist.
But he warned political and business leaders in the West: “In an already fragile world economy, the unintended political and economic effects of sanctions can quickly spiral out of control. Instead of rushing forward with further sanctions, Western policymakers must focus on directly helping the Ukrainians defend their independence. They must also promptly outline clear conditions for the removal of sanctions to encourage de-escalation and an end to this catastrophic war.”
The West’s intended consequences of sanctions are already apparent in Russia. The country can’t access some two-thirds of its foreign exchange reserves it holds overseas, its currency has plunged, its interest and inflation rates are soaring and it’s about to default on its sovereign debt, Fitch the credit rating agency says.
Meanwhile, many foreign multinationals are “self-sanctioning” by mothballing their assets across many Russian sectors, or in the case of Shell and BP, selling their Russian oil and gas assets. They aren’t required to do so by formal sanctions, but they are responding to their staff, customers and investors overseas who believe Russia should be held to account for its unprovoked, unjustified and brutal invasion of its neighbour.
And as ever, there are contrarians. One is British American Tobacco, known globally for its brands such as Camel, Lucky Strike, Kent, Dunhill and Rothmans. It says it will keep its Russian factories running for the benefit of its Russian customers and staff. "As a key principle we have a duty of care to all our employees at this extremely complicated and uncertain time for them and their families," it said.
Some impacts, however, are defined in the sanctions. About two-thirds of Russia’s 1,000 or so commercial airliners were built by Boeing and Airbus. Both companies are prohibited from selling spare parts or technical assistance to their Russian operators.
Meanwhile, foreign aircraft leasing companies are required to repossess any of those aircraft landing in sanction-wielding countries. Dublin is a global centre of such leasing activity. Just three Irish companies own one-third of the Boeing and Airbus aircraft flown by Russian airlines.
Aeroflot, Russia’s state airline, has suspended its international schedule because of “additional circumstances that prevent the performance of flights.” Many domestic flights will follow in the absence of spare parts and technical support from Boeing and Airbus. Long distance travel across Russia’s 11 time zones will be badly disrupted.
A large majority of the latest sanctions target individuals – typically politicians, officials, oligarchs and lesser business people. Only 366 of the 2,827 new sanctions are geared to entities. The most critical broad-based sanction so far is the barring of most Russian financial institutions from using the Swift international bank payments system.
But it’s hard to get broad support in the West for sectoral bans. Crucially on Russian oil and gas, the US has implemented an import ban but the EU hasn’t. No surprise, they are acting in their own self-interest.
The US is a small importer and has alternative supplies, plus strong support from its domestic producers who are very eager for new exploration permits and other inducements to expand production.
This week, the US oil industry held one of its major annual conferences in Houston. Pre-the Ukrainian invasion, Biden Administration officials, including John Kerry, its climate envoy, were expected to push the audience on faster decarbonisation. Instead, they eased off that message while encouraging them to increase fossil fuel production.
But the mood of the industry had turned strongly anti-Russian. Once a trusted partner, it was now seen as “not just as unreliable but undesirable as well,” said Daniel Yergin, a highly respected energy industry analyst and leader, who chaired the meeting.
Republicans proved themselves treacherous in their own way. They urged President Biden to ban Russian oil imports. Then blamed him for rising fuel prices. Even though, Biden in his first 15 months in office had already stimulated the oil industry to the point it will likely set a production record this year. Fact-checking by the Washington Post shows every claim the Republicans make on fuel is wrong.
Meanwhile, this week the European Commission unveiled its new energy strategy, explicitly designed to slash the community’s reliance on Russian gas, which accounts for some 40 percent of its total consumption of the fossil fuel, by two-thirds this year and entirely “well before 2030.”
Dubbed REPowerEU, the strategy aims to increase alternative fossil gas imports in the immediate term, but also accelerate deployment of agricultural biomethane, green hydrogen, heat pumps, building efficiency renovations, electrification, and solar and wind farms by 2030.
Reducing Europe's dependency on Russian gas would be "bloody hard" but "possible, if we are willing to go further and faster than we have before,” said Frans Timmermans, the Commission's Executive Vice-President for the European Green Deal, at the strategy’s launch.
"It is time we tackle our vulnerabilities and rapidly become more independent in our energy choices," he said. "Let's dash into renewable energy at lightning speed. Renewables are a cheap, clean, and potentially endless source of energy and instead of funding the fossil fuel industry elsewhere, they create jobs here. Putin's war in Ukraine demonstrates the urgency of accelerating our clean energy transition."
Overall Russia accounts for about 12 percent of global crude oil supply, with China as its largest single customer with a 32.8 percent share of its exports. But a dozen Asian and European countries and the US account for 57 percent of its sales, as the chart below details.
As this group switches away from Russia, their search for alternative suppliers of crude oil and gas, is already facing some difficulties. For example, Saudi Arabia and the United Arab Emirates, two major suppliers, are not joining the anti-Russian rhetoric; and they're telling their OPEC Plus colleagues to stick with the group's existing production targets. And the UAE in general and Dubai in particular are saying Russian oligarchs’ planes and yachts are still welcome.
But fears of a 1970s style oil crisis, in terms of drastically short supply and sky-high prices are overblown for two main reasons: oil supplies are more diversified now and oil intensity in economies – measured by barrels of oil per US$1,000 of GDP – has sharply reduced since the mid-1970s, as this study from Columbia University’s Centre on Global Energy Policy identifies.
Yes, oil prices will be high and volatile globally while oil markets come to terms with Russian disruption. But this is far less of a structural issue in the energy sector compared with 50 years ago and economies are more adaptable.
Russia’s problems will be far greater. For example, its search for alternative oil customers in say African countries will be hampered by its severely reduced access to the international banking payments system. Before it invaded Ukraine, Russia was clocking up more than US$1 billion a day from oil and gas exports.
No doubt Russia is hoping China will buy more fossil fuels from it, and use of the fledgling Chinese alternative international payments system would help it trade with other countries.
But China already drives very hard bargains with Russia on price and terms. For example, it concluded a major long-term gas purchase deal with Russia last year but priced it in euros.
While the two countries share a common liking for authoritarian rule and a common antipathy to the west, China knows how essential its integration into the global economy is for its prosperity.
The issue is explored in this recent column by Tom Friedman in the New York Times. It includes this pithy paragraph:
“The interests of China and Russia today are not identical,” Nader Mousavizadeh, founder and CEO of the global consulting firm Macro Advisory Partners, told me. “China wants to compete with America in the Super Bowl of economics, innovation and technology — and thinks it can win. Putin is ready to burn down the stadium and kill everyone in it to satisfy his grievances.”
