Economic Sanctions: The Reappraisal of a Financial Tool for Conflict Resolution in the Russian Context
Russia’s recent military intervention in Ukraine has unleashed a barrage of economic sanctions from various Western and allied nations, including the US, the EU, the UK, Canada, Australia, New Zealand, Japan, and Taiwan, all supposedly aimed at curtailing Russia’s territorial ambitions. These sanctions have specifically affected certain named Russian billionaires and politicians, freezing their foreign bank assets and imposing travel bans, as well as some Russian financial institutions (banking sector, national wealth fund, finance ministry) and elements of the nation’s energy, aerospace, and military-industrial sectors. The sale of “golden passports”, which has allowed high net-worth Russians to secure foreign citizenship in exchange for substantial financial investments in host countries (£2 million or more in the case of the UK), is also to be stopped.
At the outset, on 22 February 2022, the UK specifically targeted five smaller Russian banks as well as three Russian oligarchs, with close ties to Vladimir Putin and already under US sanctions since 2018. Around the same time, German Chancellor Olaf Scholz delayed certification of the £8.4 billion Nord Stream 2 natural gas pipeline in the Baltic Sea, which links Russia and Germany and is owned by the Russian state-backed Gazprom corporation. On February 25, the UK amplified its initially desultory response and announced a 10-point sanctions package on Russian banks. Meanwhile, the EU and the US have banned all transactions with the Russian central bank.
More recently, selected, as yet unidentified, Russian banks are being banned from the SWIFT (Society for Worldwide Interbank Financial Telecommunications) international payments system, which enables secure currency transfers through IBAN and BIC banking codes, thereby facilitating global trade and debt payments. Around three hundred Russian financial institutions, more than half, are reported to use SWIFT, which connects over 11,000 financial institutions worldwide.
Economic sanctions have been defined by Hufbauer and Schott as “the deliberate, government-inspired withdrawal, or threat of withdrawal, of customary trade or financial relations”. Such sanctions are intended to signal disapproval of the target nation’s actions and also reassure a domestic population clamouring for action that economic pain is indeed being inflicted on the chosen target. Their effectiveness can be, at times, hard to identify, especially when the intended targets retain the capacity to bypass these sanctions and to buffet themselves from their impacts.
Sanctions may affect the target nations in one of three main ways, by either banning exports, restricting critical imports, including military hardware and key technologies, or by obstructing financial flows, which might include the freezing or seizure of foreign bank accounts and preventing transactions in foreign currency markets. Apart from trade sanctions, foreign aid and investment can also be restricted. One of the problems is that these sanctions may disproportionately affect ordinary citizens, with the most vulnerable in society feeling the brunt of economic pain, while those in charge are mostly shielded from its effects. This obviously makes targeted sanctions preferable to comprehensive sanctions.
Economic sanctions have met with varying success in the past, and Russia is already the subject of many Western sanctions, yet still retaining its position as the 11th-largest world economy. It is too early to speculate on the possible impact of sanctions, especially since the situation remains fluid, with ongoing talks between Russia and Ukraine.
The world’s second-largest economy, China, has declared itself as a ‘partner’ and will not impose sanctions on Russia, while the sixth-largest economy, that of India, has important trade and defence links with Russia which prevent it from threatening Russia’s economic interests. Among Russia’s other defences against sanctions are its considerable gold (more than 2,000 tons), natural gas, and oil reserves, and its cryptocurrency holdings, which can bypass financial regulatory systems. Moreover, globalisation means that Western and Russian economies have become interdependent in areas, with particular implications for energy security, and with many major Western financial institutions holding Russian securities.
The economic sanctions on Russia seem somewhat patchy, are by no means comprehensive, and frequently only of symbolic value. These sanctions seem unlikely to cripple Russia’s economy as threatened, although they will undoubtedly inflict some immediate economic pain, yet to be meaningfully quantified. Some short-term effects of the sanctions have already come to notice. On 28 February 2022, the Russian central bank raised the borrowing rate from 9.5 to 20 per cent. The rouble was meanwhile devalued, the Moscow stock exchange closed to trade in stocks and derivatives, and the Western media reported on a rush on Russian banks, with long queues of citizens forming at ATMs, desperate to withdraw their cash deposits. In the worst-case scenario, the rouble may collapse, and hyperinflation and growing unemployment may add to the woes of the Russian public, while having much less impact on business and political elites. It would seem that the best way for all parties concerned is to damp down the aggressive rhetoric and to strive for a peaceful compromise through diplomacy rather than warfare, in the best interests of all citizens concerned, whether Russian or Ukrainian.
Ashis Banerjee