As Russian tanks roll through Ukrainian villages and missiles bombard the country’s cities, the United States and Western countries have pushed back economically against the breach of international norms. The result? Severe damage to the Russian economy.
President Joe Biden repeatedly made it clear the U.S. will not send troops to fight the Russians unless the Kremlin decides to violate the territorial integrity of NATO. So instead of directly fighting strongman Vladimir Putin’s forces in Ukraine, Western powers have decided to wage economic war against Moscow to squeeze the country’s economy into submission.
“We are inflicting pain on Russia and supporting the people of Ukraine. Putin is now isolated from the world more than ever,” Biden said in his State of the Union address. “Together with our allies — we are right now enforcing powerful economic sanctions. We are cutting off Russia’s largest banks from the international financial system.”
The economic situation in Russia has been so dire that trading at Moscow’s stock exchange has been indefinitely halted, and it is unclear when regulators plan to reopen trading. The day after Russia invaded Ukraine, the MOEX Russia Index plunged as much as 45%.
Perhaps the most significant action the U.S. and the European Union have taken against Russia has been going after Russia’s foreign currency reserves.
Bruce Jentleson is a former State Department official, a Duke University professor, and a distinguished fellow at the Woodrow Wilson International Center for Scholars. He told the Washington Examiner that he thinks Biden has been proficient in applying sanctions against Russia following the invasion. He said he was impressed with how the U.S. targeted and froze a big chunk of the more than $600 billion currency reserve that Putin built up as a cushion.
Jentleson also pointed out the multilateral nature of the sanctions Russia is facing.
“There have never been sanctions before, other than those authorized by the United Nations Security Council, that have had such breadth of support,” he said.
For example, Switzerland, which long prided itself on its geopolitical neutrality, took the historic step of freezing the assets of Putin and hundreds of other people sanctioned by the EU soon after the invasion. Additionally, Singapore, which has never joined sanctions not authorized by the U.N., imposed financial restrictions against Russia in light of the war.
Additionally, the World Bank said it has “stopped all its programs” in Russia and its European ally Belarus in response to the invasion.
Another action that the West has taken against Putin’s Russia is cutting some financial institutions out of the SWIFT network.
Cutting SWIFT has generally been viewed as a nuclear option in the world of sanctions. However, by no means have all the banks been barred from SWIFT, according to Scheherazade Rehman, a professor of international finance at George Washington University.
The Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, is the primary secure messaging system that facilitates cross-border financial transactions and money transfers. SWIFT is overseen by the National Bank of Belgium and is used by 11,000 banks and institutions worldwide.
Rehman pointed out that while seven Russian banks have been barred from SWIFT, including Russia’s second-largest bank, there hasn’t been a wholesale blockade on the entire Russian financial system because some European countries, particularly Germany and Italy, don’t want significant oil and gas disruptions.
“SWIFT is a messaging system. It cannot differentiate between the types of payments, so it can’t differentiate oil and gas payments with other retail [payments],” she told the Washington Examiner, noting that the West has allowed two such banks to continue using SWIFT because they are the main channels of payments for Russian oil and gas.
Some experts don’t think U.S. and Western pressure has gone far enough despite the tranches of sanctions.
Nate Sibley, a researcher at the Hudson Institute’s Kleptocracy Initiative, said that in his view, there is an “inaccurate” perception about how strong the sanctions could be and “need to be.” He noted there are still some Russian banks that are operating completely unsanctioned, adding that to squeeze Putin’s regime thoroughly, there would be full blocking sanctions against the country’s financial sector.
He also pointed out that Russia makes a lot of money exporting things such as chemical products, machine equipment, and precious metals. He said those industries, in addition to large swaths of the Russian energy sector, have evaded punishment.
Sibley said he thinks the Biden administration should have used some of the sanctions it has now applied before the invasion as a form of deterrence.
“They’re pursuing the sort of deterrent policy when they’re into sort of punishment territory now,” he said during an interview with the Washington Examiner.
Another blowback against Russia is how corporations have divested Russian interests. For example, BP announced that it would be exiting its 19.75% stake in Rosneft, accounting for about half of BP’s oil and gas reserves. Shell also said it is exiting all its investments in Russian projects due to the invasion of Ukraine.
Those companies weren’t ordered to divest but rather did so because they saw the negative business consequences of remaining tethered to the Russian regime, Jentleson said.
Regardless of the differing views over how aggressive U.S. sanction policy should be, average Russian citizens feel the effects. After the invasion, and as the ruble tanked, Russians were seen waiting in lines at ATMs from St. Petersburg to Siberia, attempting to pull out money from the banks.
The visceral economic effects of higher interest rates and inflation will undoubtedly drive domestic discontent with Putin’s war.
Rehman said that as the ruble falls, inflation will worsen for the Russian economy.
“This will absolutely hurt the Russian people very badly. And you might not see it right now, but in the medium- to long-term, this is a devastating blow to the Russian economy and specifically to the Russian people, which in and of itself might incite a reaction against Putin strongly internally,” Rehman said. “The fact that we went after the Russian central bank is very significant, an unprecedented step that we have taken.”
Ardavan Mobasheri, an economics professor at the University of Richmond, said that by cutting off capital and international markets, there would be an increase in scarcity for Russia and its 144 million residents. In addition, he said that the middle and working class would feel the effects of sanctions through higher prices — not just the oligarchical elites in Moscow.
“That’s across the board, from consumer products to even some services,” he said. “They’re going to feel it, from bread to pasta to vodka to electronics.”
He said that if the examples of other heavily sanctioned countries are taken into account, such as Iran, Venezuela, and Cuba, Russia’s upper-class citizens might experience minor discomfort. They will try to find ways around the sanctions and ways to insulate themselves from the economic blowback.
“You could see, in terms of the oligarchs, if you will, some elements of being able to survive and, ironically, maybe even thrive,” Mobasheri told the Washington Examiner.
Is there an off-ramp for Putin? Some contend that the billionaire oligarchs who hold significant stakes in Russian industry could be squeezed into pushing Putin to change course, although Sibley says not so fast.
While it is worth targeting the Russian oligarchs as part of an international sanction regime, those oligarchs don’t wield the same influence over Putin and the Russian government as they did in years past.
Sibley explained that while Russia was an oligarchy where Putin had to answer to those economic titans a decade ago, that has changed in the last five years. In that time, Russia went from a kleptocratic oligarchy toward more of a dictatorship.
“This seems very much to me to be one man’s decision,” he said of the Kremlin’s invasion of Ukraine, calling Putin a “totalitarian madman.”
As for the future, Sibley said he is looking for either a coup from the elite or civil unrest from the people of Russia in response to the Western economic pressure campaign.
Likewise, Rehman said that how the Russian people respond to the crush of economic malaise and Putin’s incursion into Europe will be essential to what happens in the coming weeks and months.
“Conquering a country is one thing. Holding on to it successfully is something entirely different,” Rehman said. “The goal of all of this is to inflict so much pain on the Russian economy and the Russian people that they, in turn, don’t support this war, and it’s already happening.”
