War in Europe

2014 and Now: Will Sanctions Change Putin’s Calculations?

The global reaction to Russia’s invasion of Ukraine has been swift and severe. The condemnation of the invasion was widespread, ranging from governments to the sporting and culture worlds. While leaders from around the world spoke out against Russia’s aggression, UEFA moved the prestigious 2022 Champions League Final, planned in St. Petersburg, to Paris. Formula 1 announced the cancellation of the upcoming Russian Grand Prix. Even Eurovision, one of the most popular European events, banned Russian from competing in this year’s edition. In probably the most impactful sporting move, FIFA, hardly known for its principled moral stances, banned Russia from competing in the upcoming 2022 World Cup. While these soft power responses will no doubt cause pain and some economic loss for Russians, the primary tactic to counter Russia has been that of economic sanctions from the U.S., the European Union (EU), and their allies. 

The initial economic response to Russia’s invasion appeared somewhat uncoordinated and inadequate. In the first stages after Russia’s invasion, the U.S. announced sanctions against the two largest Russian banks, froze Russian assets of state-owned banks located in the U.S., and banned Americans from purchasing Russian sovereign debt. Elsewhere, the EU enacted sanctions that would cut “70% of Russia’s banking system off from international financial markets,” and the U.K. sanctioned more than 100 entities, among other measures.

As Russia has maintained its assault on Ukraine, the West continues to escalate their responses, coordinating on a number of increasingly impactful sanctions designed to strangle the Russian economy. Over the weekend, the U.S. and its allies significantly increased their response to Russia by levying a severe range of unprecedented sanctions. After levying sanctions on Vladimir Putin himself, the U.S. levied sanctions against the Russian Central Bank to prevent Russia from utilizing its more than $600 billion in foreign currency reserves to mitigate against sanctions. As a senior U.S. official toldthe Financial Times, Russia “is getting kicked off the international financial system.” This marks the first instance of a G20 central bank incurring sanctions, as this strategy had previously been reserved for targets such as Iran or Cuba. Further, after some initial debate, the U.S. and the EU agreed to remove major Russian banks from the Swift (Society for Worldwide Interbank Financial Telecommunication) global financial messaging system, a move that will severely hinder Russian banks’ ability to conduct international transactions.

The ultimate end goal of these sanctions is to bring Russia to the negotiating table and end its assault on Ukraine, although how successful these measures will prove remains to be seen. Yet this robust, coordinated, response marks a departure from the 2014 response to Russia’s annexation of Crimea and intervention in eastern Ukraine. Although several experts have noted Russia’s post-2014 attempts to “sanctions-proof” its economy, the recent steps the U.S., EU, and allies have taken imply that policymakers likewise learned from that experience and intend to make a stronger stand against Putin’s aggressive and illegal acts of war.

The 2014 Sanctions and Lessons Learned

Following Russia’s annexation of Crimea and incursions into Eastern Ukraine in 2014, the U.S., EU, and others attempted to punish Russia for its violations of international law. However, these measures were much more reserved than the most recent steps taken. Initially, sanctions against Russia primarily targeted its dealings with Crimea after it unilaterally annexed the former Ukrainian territory. These sanctions targeted individuals and entities involved in the annexation, as well as anyone wishing to do business in or with Crimea. While these sanctions did not impact Russia directly, they constructed significant barriers for doing business in Crimea that imposed financial costs for the Russian government.

After Russia continued to intervene in Eastern Ukraine, leading to Russian-backed forces shooting down a Malaysian Airlines plane and killing hundreds of civilians, both the U.S. and the EU implemented more aggressive sanctions. These included “targeting state-owned banks, imposing an arms embargo and restricting sales of sensitive technology and the export of equipment for the country's oil industry.”

These sanctions did have an impact, although the ultimate costs are the subject of some debate. As foreign investors were unable or unwilling to deal in Russian debt, Russia was forced to restructure its debt internally and do without foreign investment. The Atlantic Council estimates that as a result, Russia missed a potential $479 billion in foreign investment, which was around a third of Russian GDP as of May 2021. Further, Russia’s GDP certainly suffered somewhat from the Western sanctions, although there is considerable debate over how much – some estimates go as high as 8%, while Ukrainian analyst Aleksey Kushch told Al Jazeera that Russia’s losses remained below 1% of its GDP.

Although these sanctions did impose additional costs on Russia for interfering in the Eastern Ukraine clashes, they ultimately did not force Russia to retreat from its positions. Some, like former U.S. Coordinator for Sanctions Policy Daniel Fried, argue that the 2014 sanctions deterred Putin escalating the conflict further at the time. As Fried maintains, these sanctions provided eight years of “relative peace,” although he concedes that “Maybe we should have kept the pressure on.”

On the other side of the equation, Putin and Russia worked over the past eight years to learn from these lighter sanctions to “sanctions-proof” the Russian economy to mitigate against future sanctions from Western governments. As previously noted, Russia currently holds over $600 billion in foreign currency reserves. Even more notable is the relatively low amount of U.S. dollars included in Russia’s reserves. Since 2018, Russia has undertaken efforts to “dedollarize” its central bank’s assets, moving towards alternatives including gold, the Chinese yuan, and the euro, among others.

While in 2018, Russia’s assets were almost 30% American securities and merely 4.7% Chinese, today only 6.6% of Russian reserves are based in American securities, with Chinese securities up to 13.8%. Further, Russia increased its gold holdings from 17.2% of total assets in early 2018 to 21.7%. Ideally, this allocation would provide Russia with a significant buffer against Western sanctions – although after its central bank itself has come under sanctions, this strategy has been largely neutralized. As previously mentioned, Russia’s forced move toward holding debt domestically has also served as a sort of barrier against sanctions. Finally, Russia has effectively utilized its natural resources to embed itself in the global economy. Nearly 40% of the EU’s natural gas imports originate from Russia, meaning that any significant sanctions on Russia’s energy suppliers would wreak havoc on European markets. While these strategic maneuvers from Russia have presented challenges, these newest sanctions have indeed had a severe impact on the Russian economy.

Looking Forward – What does this all Mean?

Within a short timeframe, the most recent measures from the West have significantly weakened the Russian economy. On February 28, mere days after the sanctions against the Russian Central Bank were announced, the Russian rouble dropped a remarkable 30% in value. In response, the central bank hiked interest rates from 9.5% to 20% in an attempt to stabilize the currency. The sanctions against the central bank have also left much of Russia’s foreign currency reserves – those stored in foreign banks in Europe, the US, and Japan, among others, inaccessible to the government. Meanwhile, the severity of the sanctions has led energy giants such as BP and Shell to offload their significant investments in the Russian energy market. BP’s assets amounted to $14 billion, with Shell’s listed at around $3 billion – signaling the seriousness of the sanctions threat to any foreign company hoping to do business in Russia.

Despite the severity of the sanctions and the threats facing the Russian economy however, the Russian attack on Ukraine has continued. There are numerous reasons for this, primarily that the sanctions have hardly had time to take effect. Although the early returns have shown significant economic stress for Russia, time will only tell how sustainable the current situation is for Putin, especially if domestic dissent continues to increase. Further complicating matters is that despite the EU referring to these sanctions as the “harshest ever,” there remain significant exemptions for Russian energy transactions.

In fact, in the first 24 hours after Putin initially declared the two breakaway Ukrainian republics as independent, the U.S. purchased 3.5 million barrels of Russian oil and refined products, worth more than $350 million. Meanwhile “the West probably bought another $250 million worth of Russian natural gas, plus tens of millions dollars of aluminum, coal, nickel, titanium, gold and other commodities.”

While these figures come several days before these most recent sanctions, these staggering figures highlight the challenges cutting an economy the size of Russia out of the global economy. Simply speaking, this has never been attempted. Sanctions of this severity have usually been implemented by the U.S. against states it has deemed as dire national security threats, such as Iran and Cuba. In these instances, these nations have learned to adapt, although at significant economic cost to their civilian populations. However, the initial Joint Comprehensive Plan of Action (JCPOA) negotiations, along with Iran’s willingness to come back to the deal even after the U.S. unilaterally withdrew, highlight that coordinated comprehensive sanctions do have the capacity to alter state behavior, even if their success rate leaves much to be desired. While these sanctions will no doubt cause significant economic pain to Russian civilians, whether they will be enough to change the minds of Russian leadership remains unclear.