The Case for Stronger Russia Sanctions

The claim that Western sanctions against Russia do not work or are unjustified does not hold water. Russia’s economy has been stagnant since Western sanctions were imposed seven years ago, and the Kremlin’s continued hybrid war against the West has made an even tighter sanctions regime an urgent priority.

Who thinks Western sanctions on Russia have been ineffective and unjustified? The Kremlin peddles this line, of course, but then contradicts itself by calling for sanctions to end. One also hears similar arguments from investment bankers hawking Russian bonds. Obviously, they would benefit from the lifting of sanctions that have crushed foreign direct investment into Russia. Beyond these two groups, the only others opposing the current sanctions are authoritarian politicians and academics hoping to ingratiate themselves with the Kremlin.

In any case, the argument against sanctions holds no water. In 2014, Russia annexed Crimea and launched an (unofficial) military offensive in eastern Ukraine. The United States and the European Union could not remain passive in the face of such blatant violations of international agreements, so they responded sensibly. As a result of severe financial sanctions, the Kremlin stopped its offensive after having seized only 3% of Ukraine’s easternmost territory, far less than what Russian President Vladimir Putin had envisioned on April 17, 2014, when he advocated taking all of southeastern Ukraine to re-establish “Novorossiya.”

The sanctions have had the intended economic effect. Whereas Central and Eastern Europe’s GDP has grown by 3-5% per year since 2014, Russia’s has stagnated. The Kremlin blames this on low oil prices; yet while oil and gas prices have risen, Russia’s economy remains flat. Among the EU countries,  has a lower per capita GDP than Russia today.

Whenever Putin must talk about the economy, he boasts about Russia’s current-account surplus, nearly balanced budget, minimal public debt, and vast international currency reserves. But these have all been bought with extreme austerity policies. While Putin’s economic program has preserved his own ability to act aggressively even under Western sanctions, it has immiserated Russian households, reducing real (inflation-adjusted) disposable incomes by 11% between 2013 and 2020.

It is Western financial sanctions that have forced Russia to tighten its purse strings by repaying a large share of its foreign debt. Total foreign debt fell from $729 billion at the end of 2013 to $470 billion at the end of 2020, while more successful emerging economies have increased their foreign debt, and thus investments, by 30%.

In 2015, the International Monetary Fund estimated that Western sanctions would cost Russia 1-1.5% of GDP growth each year that they remained in place. And in a recent paper, Maria Snegovaya of George Washington University and I determined the true costs of the sanctions to have been a sizable 2.5-3% of GDP per year since 2014. The difference reflects the additional costs of Putin’s xenophobia and austerity program, which has resulted in less available capital, lower foreign direct investment, a stricter monetary policy, and an absence of fiscal stimulus.

Remarkably, Putin does not even appear to care about his country’s stagnation. In a July 2020 “Executive Order on Russia’s national development goals through 2030,” he committed to “ensure steady growth in household incomes and pensions not lower than the rate of inflation,” implying a continuation of no real growth at all.

Since returning to the presidency in 2012, Putin has shut down all discussion about economic reform. Instead, he has perfected his system of kleptocracy, concentrating the country’s wealth in the hands of his rich friends and the security services, while eliminating any rule of law.

Putin’s most vocal complaints about sanctions have been on behalf of his closest friends and cronies. In 2014, after the US imposed sanctions on the St. Petersburg billionaires Yuri Kovalchuk, Arkady and Boris Rotenberg, and Gennady Timchenko, Putin publicly defended them at least five times in the space of a year. He even made an argument, atypical for him, on humanitarian grounds: “Mr. Timchenko’s wife had serious surgery and was unable to pay for it because her bank account and credit cards were frozen. This is a flagrant violation of human rights.”

It is clear that the West should focus its sanctions on Russian elites. When the US imposed sanctions on seven oligarchs close to Putin in April 2018, the Russian stock market plummeted 11% in one day. And yet, neither the US nor the EU has followed up on these obvious lessons of the past seven years.

In January, Vladimir Ashurkov, the executive director of jailed opposition leader Alexei Navalny’s Anti-Corruption Foundation, wrote an open letter to US President Joe Biden naming 35 top Russian officials and businessmen who should be sanctioned. But neither the US nor the EU has acted against any of them.

Meanwhile, Putin has been escalating his asymmetric warfare against the West. He has stuck to hybrid techniques – cyberattacks, poisonings, assassinations, hostage-taking, corruption – that cost little and will not provoke a full-blown response. Faced with this aggression, the West must counter in its own asymmetric fashion. With a combined 2020 GDP of about $48 trillion against Russia’s GDP of $1.5 trillion, the West’s comparative advantage clearly lies in economic and financial sanctions.

Russian citizens, including the Kremlin elite, hold about $1 trillion of offshore anonymous funds in the West. Since these fortunes can have a corrupt influence on Western politics, new transparency legislation is needed to uncover them. America’s resumption of cooperation with its allies under Biden is welcome. But now, the US, the EU, the United Kingdom, and Canada must step up their Russia sanctions. Judging by Putin’s recent  denying that the Ukrainians are a real people, worse behavior from the Kremlin is sure to come.

The West needs to stand united against Putin’s hybrid warfare with more financial sanctions targeting Kremlin oligarchs and their families. The sanctions are working, and they are a far more humane alternative than war.

Anders Åslund, a senior fellow at the Stockholm Free World Forum, is the author of Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.

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