As Russia’s war against Ukraine enters its third year, lawmakers in Washington are arguing over whether to continue sending military aid. The doubts are less in the case of the financial campaign against Vladimir Putin.
After having acted against Russian entities, foreign accomplices are now threatened with “secondary sanctions.” In December, the White House signaled that it would put the dollar system out of reach of any bank that gave Russia access to sensitive assets.
Following the murder in prison of Alexei Navalny, the main Russian opposition leader, new sanctions were announced on February 23. The European Union has just agreed, on the 21st, to the thirteenth round of sanctions against Russia, also directed against Chinese companies suspected of helping Putin’s war effort. The problem is that the sanctions are not working well.
Since February 2022, the United States, Europe and their allies have deployed sanctions against more than 16,500 Russian targets, according to a tracker maintained by Castellum.ai, a compliance verification agency. With them, attempts have been made by different means to curb Russian oil revenues, prohibit the export of sensitive products to the country, freeze central bank reserves and isolate some Russian banks from the global financial system.
The idea was to use the West’s influence over global trade and finance to prevent Putin from obtaining the technology and hard currency needed to wage war. The set of sanctions directed against one of the largest economies in the world was considered unprecedented; The Economist pointed to the possibility that the resulting shock could lead to a liquidity crisis or even a coup d’état.
The reality has proven to be drastically different. The Russian economy has proven more resilient, and the sanctions effort much more elusive than expected. Shortly after the war began, the IMF forecast a contraction in Russian GDP of more than 10% between 2021 and 2023. In October last year it estimated that output may actually have increased slightly during that period. Furthermore, the war has demonstrated how quickly global trade and financial flows find ways to circumvent the barriers erected in their path.
Take crude oil trading as an example. In 2022, around 60% of crude oil from western Russia was transported by European vessels. Then, the price cap imposed by the G-7 countries prohibited shipping companies from transporting Russian oil if it was not traded at less than $60 a barrel.
In response, a parallel infrastructure was developed outside of Western control and tasked with transporting much of the Russian oil at a higher price. Today more oil is traded in Dubai and Hong Kong than in Geneva. The West’s control over the global energy order has weakened considerably.
Other trade flows have also adapted. The West never tires of adding Russian companies and individuals to its blacklists. However, much of the world’s population lives in countries that refuse to apply Western sanctions, and there is little that can be done to prevent new companies from appearing and doing business there.
As EU exports to Russia have plummeted, places like Armenia, Kazakhstan and Kyrgyzstan have begun to import more from Europe… and have mysteriously become major suppliers of critical goods to Russia.
All of this explains why the United States and Europe are now resorting to secondary sanctions. The fact is that these suffer from another problem: although they are powerful, they have disturbing side effects. The mere threat of secondary sanctions can bring down a bank.
When the United States declared in 2018 that it would consider labeling ABLV Bank, a large Latvian lender, as a money laundering entity for having partly helped North Korea evade sanctions, foreign depositors and creditors fled and the bank collapsed within a matter of days. Chinese banks are already more cautious in their dealings with Russian companies, for fear of Uncle Sam’s influence.
Unfortunately, in the long term these exercises of power will erode the influence that the United States has over the global financial system, and which brings it real benefits. Even America’s staunchest friends in Europe hate such secondary sanctions, which have in the past brought huge fines to some of its banks.
To enforce sanctions, the United States would have to be willing to cause disruption in places like India, Indonesia, and the United Arab Emirates, countries that have no desire to be part of the sanctions effort. If it aggressively asserts its power, the United States risks alienating those same emerging powers it wants to court at a time when the world is fragmenting.
And that has the potential to weaken their control over the global financial system, as it encourages them to escape its grasp and avoid the dollar. Last year, more cross-border payments were made in yuan than in dollars in China for the first time. Other countries may be tempted to follow the same example.
For policymakers in Washington and Brussels, sanctions have a seductive appeal. At a time when political support for war financing is collapsing, they seem like a cheap way to weaken Russia and defend Ukraine. However, the last two years show how illusory such an idea is. Sanctions are not doing enough, and strengthening them will be counterproductive in the long term. There is no magic weapon; Financial warfare is no substitute for sending the money and weapons Ukraine needs.
© 2024 The Economist Newspaper Limited. All rights reserved
Translation: Juan Gabriel López Guix
