Can the current European sanctions against Russia have a significant effect?

Question

Many European countries and the EU itself have imposed economic sanctions on Russia over its invasion of Ukraine. However, according to this Guardian article citing this study, European nations are also still paying Russia almost three hundred million dollars a day to buy fossil fuels:

Vladimir Putin’s war in Ukraine is being bolstered by $285m (£217m) in oil payments made every day by European countries, new analysis by the Transport & Environment (T&E) thinktank has found.

What's the point of blocking some Russian banks from SWIFT or impounding the assets of people linked to the Russian government if, at the same time, the very same states are giving that same government hundreds of millions of dollars a day?

I have seen various claims that the sanctions are crippling Russia's economy, but how much difference does it really make if it is still also receiving these significant sums of money?

Answer 1

Germany has pressed for making exceptions to the SWIFT ban, so they could keep buying energy. On the short term, it's not easy to find a replacement, specially for the gas.

Germany has, due to political mistakes in the past, become heavily dependent on Russian energy. A former German chancellor is working as a lobbyist for Russian Gazprom. Angela Merkel also contributed to this situation setting a deadline for closure of atomic reactors.

During the years, political discussion in Germany against this situation always ended with German advocates parroting "This is an economic project, not a political one." Now it's too late to think strategically.

Are the sanctions causing significant damage? yes they are, if you consider companies like Airbus, Boeing and all ancillary services related to air transport, like insurance, maintenance, spare parts. Russia is heavily reliant on air transport, due to its sheer size. And although they can keep flying Western aircraft at home, its international routes are blocked. China is also not willing to provide parts, since it does not want to damage its relationship with the West.

The same is the case with logistic companies like FedEx or UPS.

And there also all sorts of assets being frozen across the EU: Russian central bank money, mansions, yachts.

Do non-essential life style services and products like McDonald's, Starbucks and so on cause any damage? Rather small, a little bit unemployment and making people aware that something big is going on.

same states are giving that same government hundreds of millions of dollars a day

Nitpick: They are not 'giving' them, they are buying gas, oil and coal. Not having energy could cause more damage on some EU countries than Russia. The US did not rely heavily on Russian energy, so they could cut the plug.

Answer 2

If you look at the effect of the sanctions in Russia they seem to be quite effective inspite of the ongoing payments for gas. First 300m US$ per day comes to 110 billion $ per year, which corresponds to 6.4% of the Russian nominal GDP (1710 billion $ in 2021 according to wikipedia).

Now it is hard to quantify right now how big the economic damage of the sanctions is but one reference point is that the exchange rate of the ruble to $ fell by about 25% since the war started. So even if the Russian GDP stays constant in rubles, it lost about 400 billion US$. The Russian GDP is not staying constant, it is in freefall and no matter how you measure it, the effect will be much bigger than 6 or 7% of GDP.

Of course the Russian economy would crash even harder if there was a stop to the gas deliveries but the sanctions are already quite effective as they are.

Edit: It seems I didn't check carefully enough when looking for the currency exchange rate. Trade is somewhat suspended and not all exchanges still have accurate quotes. It seems that the ruble fell by more than 40%, from around 1.3 $ per 100 rubles to around 0.75 $ per 100 rubles as of March 13th 2022.

Answer 3

It's generally impossible to economically sanction a country trading with you without also hurting yourself to some degree. But the keyword here is "some". How much that is depends on several factors like how easy it is to replace the imports from said country or how much money you were making exporting there, compared to your overall economy.

The reason why the US could sanction Russia oil & gas exports but the EU can't do it is the relative size of those imports. Well, the EU announced a plan to stop those imports by 2027, which is probably too long to make a difference in the war, but it will probably make a difference in containing Putin's money making in the long term. The Soviet Union took decades to fall to the combination of internal mismanagement and external containment.

And make no mistake, this is not 2014. The sanctions against Russia today rival those imposed on the Soviet Union: Moscow stock market still closed, ordinary Russian citizens cannot exchange their currency for USD/EUR, numerous Western companies departing threaten to leave tens of thousands of unemployed. Russia will probably have to resort to nationalization or receivership (they talked about this "external management"). All of which makes their economy more Soviet-like.

Answer 4

Sanctions are Effective

We don't need to ask analysts or economists. We just need to observe Russia itself:

• Russia admits that sanctions have frozen about half of total foreign reserves (which was the war chest Putin was counting on to fund this little adventure)
• Russian consumers expressed their confidence in the ruble by making a run on the banks
• Russians expressed anger and panic over the departure of Western brands
• Russia has threatened to nationalize said brands
• Russia has threatened to abandon astronauts on the ISS
• Most significantly, Russia has called the sanctions equivalent to a declaration of war

If this isn't convincing evidence of the effectiveness of sanctions, I guess you would just have to go visit in person to assess the situation.

Answer 5

The effect of the sanctions is not limited to loss of sale revenues. In fact the loss of revenue is the least important (but not unimportant) component of the sanctions.

But let's look at both the effect of the loss of sales and the other (more important) effects.

Reduced fungibility of commodities.

Restricting Russia's ability to sell commodities in an open market gives a bargaining advantage to the buyers. Which means Russia will (for example) be forced to sell oil to China at a price which is lower than it would have gotten on the free market. The less buyers there are, the less optimal an asking price you can name for what you sell.

Restricting Russia's ability to buy goods and services will mean inability to buy some products altogether and being forced to pay for other products at a much higher rate. If you can only ask for $90 for oil that everyone else gets $100 for, then you still have $90. But if you are forced to pay for everything you buy in dollars twice as much, then your $100 worth of oil only give you $90/2=$45 worth of purchasing power.

Net effect, or multiplier effect.

Most of modern production relies on standardized parts. There is virtually no country that can produce top-of-the-line products from raw materials. Not having access to some components sets back production. This includes all production lines, including the military ones.

Production is only as advanced as the least advanced components available for it. Denying Russia the ability to purchase most advanced components and equipment either significantly reduces Russia's ability to develop and manufacture advanced weapons systems or it makes such manufacturing extremely expensive. This is not limited to just electronics. It's also involves advanced metal alloys, advanced chemical manufacturing, etc.

As a hypothetical example, imagine having a design for an advanced fighter jet which requires specialized chemicals for its paint and specialized metal alloys for its wings. Even if there are experts in Russia who could understand the manufacturing process of producing such alloys and chemicals, it would take building new factories for those experts' expertise to become useful. And building of the factories could quickly run into similar problems, too. Because most equipment construction processes assume access to more materials than maybe available during a sanctions regime.

But you don't need to think of processes as advanced as weapons manufacturing. Imagine a candy factory which gets its candy wrappers from a 3rd country. If the candy wrappers are no longer available, the candy cannot be shipped, so it cannot be produced. Can a different wrappers manufacturer be used? Sure, when everything is replaceable. But what if it isn't anymore? Most likely, the solution will be a lower-quality wrappers produced by a make-shift manufacturer (the least expensive one that can be brought on-line quickly). Will the candy sell as well as it did before? Not likely. If it could have been sold on the cheap before, it would have been.

Decreased specialization.

Most of the production gains result from increased specialization. This happens even on the individual level for people. Not having to cook everything from scratch creates more time to hone the skills used at work. Spending more time on the upkeep means spending less time on advancing. Not having access to products produced by other specialists means having to create replacement products produced by non-specialists.
For example, imagine having to repair computer power supplies when they go bad, instead of replacing them. Imagine that you have down time whenever you have the need for it to get repaired. Now imagine that the same shop that sells computers also repairs power supplies. The level of expertise of the workers, in understanding the existing components, goes up. But their ability to acquire even basic knowledge of new components is sacrificed.

This is how entire societies fall behind and quickly.

Answer 6

The effectiveness or not of sanctions is an often debated point. For example, I was reading up on the actual impact in one of the "success stories", South Africa de-Apartheiding in 1994. Even there the story isn't crystal clear and it took years in any case.

Yes, there is possibly a bit of theater going on: "we're doing something, honest".

However, if we assume that the West has a vested interest, for whatever reason, in stopping Russia from taking over Ukraine, sanctions are one of the few possible levers and far from the worse.

TLDR:

Unlike lots of past sanction regimes these sanctions are brutal, were imposed very quickly and have a very wide array of participants, some of whom, like Switzerland, probably figured in the list of sanction-mitigating assets Russia could count on. Ditto the central bank's hoard of foreign currency being put offline for now.

These are sanctions, they take a long time. Expecting them to move Putin out right now is unrealistic. But I expect they will weigh heavily on Russia's future decisions and their imposition is also a message China can't ignore, after decades of fairly toothless Western sanctions in other cases.

The long term outlook for gas/oil is in a way even worse - with global warming very much on the mind of European electorates, any gas and oil Russia does not sell now they may not be able to sell later on if the sanctions run some years.

Military aid

This is being done. And it is not without escalation risk - the US took great steps to be "plausibly deniable" in Afghanistan in the 80's - this was bypassed this time.

Direct intervention

Because Russia is nuclear-armed this is a non-starter unless Russia attacks NATO first.

"Strong UN measures".

Russia has a Veto. So, no, not going to happen.

Sanctions

This is being done and make no mistake, they are pretty darn strong sanctions. Personally, I don't remember anything as ferocious and quick to be placed as sanctions in decades of following international news.

---

The Russian-on-the-street, whatever their government is telling them, is also being, very quickly, notified that the "special military operation" is generating a lot of push back. Not least because independent profit-seeking entities like Apple or Starbucks also jumped ship. When even "soulless beings" like an oil major (BP) are bailing, you know there's widespread revulsion.

Body bags will come, but the Kremlin has experience in suppressing their public awareness and sanctions beat them at the ethical level (Russian conscripts getting killed may be a military necessity but hardly cause of celebration).

There is also a misunderstanding how sanctions work. They are never waterproof, they inflict costs. Say you sell $100 of oil that normally cost you $60 to produce -> $40 profits. Given sanctions and time to evade them you might sell that oil at $90 (the buyer is going to ask for a discount and you have bribes to pay). But then your production inputs may also have jumped up to $70. $20 profits now, not $40.

So the West is using both of their realistic options, sanctions and military aid. The only other option is really to do nothing.

In fact the sanctions are so punitive that some say that they need to come with a clear indication of what would cause their withdrawal otherwise Russia may perceive no choice but to double down.

Answer 7

It is not true that sanctions deal the equal damage for both sides. Sanctions usually deal the bigger damage for the smaller side, when the bigger side may have more alternatives of compensating. Be it oil, a permitted aircraft route or advanced technologies - it is easier to find a replacement in the bigger part of the world. Russia is a big country but the union of all countries that are currently applying the sanctions still looks for me larger.

It may appear at first that sanctions against Russia do not impact the living standards inside it but actually not so. Consumer spending on apparel, footwear and accessories fell by 40%, car production dropped by 37%. Spending on required goods increased by 15%, while at the same time median salaries increased by only 7%. Hence the life is changing there, and not into the better side. Semiconductor imports have fallen by 70%.

This means, the sanctions will work, no worries, and it will be more difficult for Russia to stand than for EU and USA to keep them.

Finally, sanctions do not need to be at maximum severity right from beginning. Leaving something that still can be banned or increasing gradually over time allows additional pressure.

Answer 8

The current sanctions hurt both Russia and the EU. Weaker sanctions would hurt both sides less. Stronger sanctions would hurt both sides more. The challenge, then, is to find a level of sanctions that is sustainable for the EU on the long run, yet strong enough to influence Russians.

A cynic might point out that countries which don't buy much Russian oil or gas are sanctioning it, and that countries which would get Ukrainian refugees in any case are extending a gracious, no-visa-required welcome to them.