This is a cautionary tale.
Sanctions can work, but they can often take a long time, and those enforcing the sanctions most often be prepared to suffer as much as those being sanctioned.
Suddenly, in the course of a sudden and brutal 24-hour period, the West has pivoted from deterrence to punishment.
Russia is in the cross hairs. And the goal of the world’s democracies is to transform it from a reasonably prosperous autocracy to a pariah nation en route to an utterly failed state whose leadership will have nothing to offer its people.
But there are a host of speed bumps before the West can be sure of arriving at such a position, or of changing the behavior of Vladimir Putin. Foremost is the reality. By now, Russia has become so accustomed to sanctions that it’s learned to live with whatever pain they’ve managed to inflict and somehow prosper.
The first round of sanctions, layered onto Russia following its first seizure of Ukrainian territory in 2014 when its troops rolled without resistance into Crimea, did nothing to dissuade Putin from his most acquisitive urges. And the latest round of sanctions against a pair of Russian banks and a small group of oligarchs two weeks ago did nothing to divert Putin from his intention of invading and swallowing Ukraine.
The latest round of sanctions, announced by President Biden 16 hours after the Russian invasion of Ukraine began, gave little real hope that they would be of an amplitude that could in fact change the world where Putin operates. More banks were added to the sanctioned list, as were some state-owned enterprises. Still immune was the entire Russian oil and gas industry—Biden clearly fearing a blowback of massive increases in energy prices in the U.S. and Europe. And while his troops were pressing on toward the Ukrainian capital of Kyiv, Putin was shoring up his own, slim rank of international friends and allies, meeting in the Kremlin with Pakistan’s president Imre Khan, cheek-by-jowl, not at opposite ends of a cartoonishly-long reception room table as he has met western leaders from France’s Emmanuel Macron to Germany’s Olaf Scholz.
So, whether the latest round will work going forward depends on a whole lot of factors it’s worth understanding before they begin to bite on either end. For sanctions can often be as pernicious for those sanctioning as for those who are being sanctioned. And even if the world did succeed in isolating and impoverishing Russia, there have been others, particularly North Korea, that have existed in such a state for decades without changing their malignant courses.
Russia has had a lot of time, and invested considerable effort, in calculating how to subvert or withstand each successive wave of sanctions, especially since the big wave that followed its 2014 forced annexation of Crimea and subsequent attacks on Putin political opponents such as Alexei Navalny. Russia has adapted to, learned how to minimize, then finally managed to live with their impact.
First, Putin, his friendly oligarchs and especially the banks that serve all their interests, have carefully and meticulously stockpiled sufficient foreign currency (especially dollars and euros), gold and other assets to survive even blanket efforts to remove Russia from the global financial system—at least for a time. And it has determinedly pivoted from the dollar as a foundation of its financial wealth.
Last June, Finance Minister Anton Siluanov announced it would be removing all dollar-denominated assets from its $186 billion rainy day National Wealth Fund. Within a month, its share of euro assets stood at 40 percent, the Chinese yuan at 30 percent and gold at 20 percent, with the Japanese yen and British pound each at 5 percent. At the same time Russia has been frantically reducing its total national debt. As of last August, its total debt amounted to $300 billion or just 18.4 percent of its GDP, compared with America’s $28.53 trillion in debt or 132.84 percent of GDP and China’s $2.4 trillion or 270.1 percent of GDP.
Russia, by judicious management of its vast oil and gas reserves and the revenue it accumulates from them each year, has become one of the world’s least indebted nations. And it’s among the least reliant on the world financial system from which the United States and Europe are now seeking to remove it as a foundation of the new sanctions regime.
“This is going to be much more of a slow burn,” said Julia Friedlander, a senior fellow at the Atlantic Council who served as the top White House adviser on the European Union and economic issues during the Trump administration.
On Thursday, as the full-scale assault on Ukraine began, the Russian stock market’s two leading indexes, the MOEX and the RTS plunged respectively 37 percent and 41 percent. Shares of the largest listed bank, Sberbank lost half their value, the state gas conglomerate Gazprom shed 41 percent and privately-held Lukoil lost 31 percent. But stock investments in Russia are hardly broadly held and hardly foundations of Putin’s hold on power.
Indeed, with the invasion, the prices of oil, natural gas, wheat, aluminum and nickel surged, with oil passing the $100 per barrel mark for the first time since 2014 and aluminum hitting an all-time record of $3,449 a ton. As it happens, one of Putin’s leading oligarchs, Oleg Deripaska, made his fortune on aluminum through his company Rusal. Although Rusal has already fallen under sanctions, and its share price plunged 35 percent today, Deripaska remains a major force in Russia and beyond. Moreover, with Russia as the world’s second-largest producer of natural gas and a major oil producer, these surging prices simply mean more profits to bolster Russia’s currency reserves.
It also means considerably more pain for the western economies that are attempting to punish Vladimir Putin. And far more pain for Europeans than Americans at least in the short run. Austria’s Raiffeisen Bank and Italy’s UniCredit hold the bulk of the 6.3 percent of assets in the hands of foreign lenders in Russia’s banking sector. U.S. banks hold less than 1 percent.
At the same time, President Biden has pledged not to cut off Russia from Swift, the Belgian-based financial transfer system that links more than 11,000 financial institutions around the world and is the lubricant of the global banking system. Such an action would simply cause too much damage to the world’s financial networks and could even lead to development of alternative services.
The fact is that the most painful sanctions in this respect are also those that would most directly and immediately impact Russia and its few allies and friends.
At the head of this very short line is China.
Xi Jinping is potentially the savior of Vladimir Putin. At the Beijing Olympics, the two leaders met and issued a lengthy joint statement that opposed “further enlargement” of NATO and pledged “no limits” nor any “forbidden areas” in their cooperation. But of even greater significance, Gazprom signed a 30-year agreement to supply natural gas to China, with payment in euros to reduce reliance on the dollar while bolstering Russia’s hard currency reserves.
The question is just how far China is prepared to go in this direction, down the road with Moscow. In particular, would China really be prepared to help Russia subvert sanctions as it has helped North Korea and Iran, quite effectively, in recent years. After all, China is clearly watching closely the outcome of Russia taking over territory that it once controlled and that has since become a functioning democracy. Beijing has long been contemplating just how to reel in Taiwan, similarly, situated since the creation of the communist state on the mainland more than 70 years ago.
In the early hours of Thursday, as Russian forces were rolling into Ukraine, the Chinese foreign ministry refused to characterize the Russian attack as an invasion, the government’s spokeswoman instead turning on the United States as “fanning up the flame,” and asking “how do they want to put out the fire?”
Moreover, China would clearly want to avoid being roped into sanctions levied on Russia. At the same time, it is quite clear that it would not want to roil its efforts to bolster trade with the United States and especially with Europe where the EU has been making efforts to cultivate trade and economic relations with China independent of the U.S.
The history of the utility of sanctions more broadly as a vehicle of change in government behavior has also been somewhat questionable. When they work, they must be quite uniformly be applied and every effort at subverting them must be avoided at all costs, while the penalties for such avoidance are quite clearly and directly spelled out.
The first sanctions undertaken by the United States date to its earliest history when, during the second term of President Thomas Jefferson, Congress passed an embargo on trading with either Britain or France who were themselves engaged in the War of the Fourth Coalition. The U.S. sought respect from both sides, which it failed to win, and Jefferson lifted the embargo in 1809 after two years.
Ever since, the United States, more recently in conjunction with the United Nations, has used sanctions periodically with varying impact. America’s embargo on Cuba began on March 14, 1958, when the dictator Fulgencio Batista (which the U.S. was backing) was overthrown by Fidel Castro. Limited at first by 1962 it was extended to an end to all trade with Cuba and, with some modifications, still exists. Again, with increasingly limited impact. Fidel Castro and his spiritual heirs have remained in power to this day.
Among the most successful sanctions regime was levied against South Africa in an effort to bring an end to apartheid. Launched in November 1987, it eventually attracted 130 countries in a voluntary international oil embargo which was finally lifted in 1994 with the election of Nelson Mandela as president.
Perhaps the broadest sanctions, with the least tangible impact, are the sanctions that have been imposed on Iran in various waves especially since its nuclear weapons program began to be taken seriously, but especially since Donald Trump pulled the United States out of the JCPOA agreement that had successfully frozen its efforts at nuclear enrichment. Again, in trading its oil with a number of nations prepared to avoid the embargo—especially China, a reliable customer for its oil and natural gas—Iran has managed to survive, even resume quite robustly its path toward a nuclear future.
Today at least 15 countries are currently the subject of some sanction or other. But Iran, North Korea and now Russia are the subjects of the longest-running and most sweeping sanctions. In none of these cases are they working very well at all.
What they all have in common has been the ability of the target countries to find some means of subverting them or living with them, if not thriving.
North Korea has been under sanctions of one sort or another since the Korean War cemented a brutal communist regime north of the 38th parallel. Loosening and tightening depending on the nature of the infraction, especially since the first test of an atomic bomb in 2006, they have been drawn and today are tightly enforced by the United Nations under Security Council Resolution 1718, the most stringent of nine sanctions regimes. As it happens, each has been passed unanimously, with China abstaining in all cases, not having cast a lone veto in the Security Council since 1999. At the same time, the U.S. has imposed even tighter sanctions on North Korea. And it has largely succeeded in turning the North into a pariah verging on an utterly failed state. Yet, North Korea exists today purely by virtue of the sufferance of China.
It is China, which shares a 1,352 kilometer (840 mile) land border with the North, that has allowed the regime in Pyongyang to function, and all too often subvert the various sanctions. North Korea has become an adroit user of vast black market shipping networks, taking advantage of porous inspections in ports and transit facilities across Africa, the Middle East, and Southeast Asia. And China itself recognizes that it’s one thing to have a pariah nation along one of its critical frontiers and another to have a totally failed state barely a stone’s throw—or short-range missile launch—from some of its major population centers with 25 million North Koreans desperate to flee utter starvation.
What should not be forgotten, however, is that China also shares a 4,195 kilometer (2,607 mile) border with Russia. The last thing China would want is to have another, far larger failed state on this frontier. And the West does have the means to turn Russia into a pariah state, not unlike North Korea. The big question is whether China is prepared to play along to its own supreme detriment. And especially, how long western democracies can bear the pain as well.
None of this should suggest that the United States and the world should not punish Russia to the fullest extent possible. Merely that any such actions should be taken with eyes wide open as to how long they might take to work, with the risk that they might not work at all.