With no appetite for military confrontation, the U.S. and its allies are relying on sweeping economic sanctions to persuade Russian President Vladimir Putin to pull out of Ukraine.
But the effectiveness of those measures is anything but certain, relying on a host of factors that includes how much China is willing to come to Moscow’s aid.
Placing a stranglehold on Russia’s $1.5-trillion economy will not be easy, especially since it began trying to buffer itself from international sanctions after it annexed Crimea from Ukraine in 2014.
Russia has sidelined growth to pare down its debt and built up its reserves of foreign currency and gold — so much so that it reached record levels this year at over $640 billion.
The reserves help soften the financial blowback of Russia’s invasion. On Thursday, the Russian central bank pumped liquidity into the country’s banking system and sold foreign currency for the first time in years to prop up the ruble, which plunged to its weakest level since 2016.
President Biden announced Thursday that U.S. and European allies would sanction five Russian banks holding about $1 trillion in assets and block high-tech exports. Russian oligarchs, said to be members of Putin’s inner circle, were also targeted by sanctions.
On Friday, Biden said he would join the European Union in sanctioning Putin and his foreign minister, Sergei Lavrov. His administration later announced it would sanction the Russian Direct Investment Fund, a sovereign wealth fund.
As it stands, those measures are highly unlikely to inflict enough pain on Moscow to trigger a reversal in Ukraine, analysts said, noting that any sanctions imposed now are likely to be too little, too late.
“Sanctions in this case, where Putin was clearly driven to expand the Russian empire, would have to be truly draconian to have had a chance of success,” said Gary Hufbauer, a sanctions expert and a senior fellow at the Peterson Institute for International Economics.
Hufbauer said sanctions achieve their goals in only a small percentage of cases, and are more likely to succeed when they’re targeted at specific economic goals or countries with unstable political regimes. Hufbauer puts the overall success rate at around 25%, mostly in minor cases of international conflict.
The effects of harsh sanctions tend to fall disproportionately on the populace of a country, as opposed to its political and financial elite, to the extent that Hufbauer likened them to economic carpet bombing, and noted that economy-wide sanctions have sometimes had the unintended effect of consolidating power in the existing regime. He cited the entrenched leadership of the Castro and Kim families in Cuba and North Korea, respectively.
“Sanctions enable the ruling group to better control the whole economy, and when you better control the whole economy you can really induce or compel a lot of people to support you,” Hufbauer said.
At the same time, the EU is seeking to change the personal calculus in regard to Putin and Lavrov. In a tweet Friday, Latvian Foreign Minister Edgars Rinkevics announced that the EU would freeze both men’s assets, along with other sanctions against Russia to try to force a halt of its invasion, the Associated Press reported.
The move drew skepticism from some sanctions experts.
“These are more symbolic,” said Michael Zweiback, a former U.S. federal prosecutor who handled national security investigations. “Putin and Lavrov are very well insulated from such action.”
Sanctions would have to go deeper into the lives of Russia’s elite to place pressure on Putin, others said.
“Seizing the estates of Putin cronies, denying them visas, and taking away their right to send their kids to elite schools in the U.K., Switzerland and other favorite destinations would impose a real lifestyle change on Putin’s oligarchs and high officials, most of whom fancy themselves as citizens of the world and prefer living and stashing their stolen fortunes in the West,” said Steve Fish, a professor of political science at UC Berkeley.
Biden has said the U.S. is also prepared to issue more sanctions. To sting, experts say, they would have to target Russia’s chief industry: energy. Oil and gas account for nearly 60% of Russia’s exports and about one-fifth of its economic output.
But Washington and its allies have been reluctant to focus on that sector because the European Union relies on Russia for more than 40% of its natural gas supplies, and the Biden administration is under growing pressure to tackle rising energy costs against stifling inflation. The attack on Ukraine has already sent Brent crude oil, the global benchmark, to its highest level since 2014 at $105 a barrel — enriching Russia’s coffers.
Those rising prices are one reason the White House declined to back calls to block Russia from the global financial messaging system used by thousands of banks known as SWIFT. The administration said doing so could be so disruptive to clearing transfers of funds that energy costs would soar further.
If Russia were barred from the global banking system, it could take a page from Iran and North Korea and try relying on cryptocurrency to settle payments, though it would be untested on an economy of Russia’s scale. Eastern Europe — Ukraine specifically — is already a hotbed of illicit cryptocurrency activity, according to Chainalysis, a Singapore-based blockchain research firm.
Moscow announced last November that it would release a prototype of a digital ruble by this year, a currency that could reduce Russia’s exposure to the dollar and international sanctions.
“I think it’s the future for our financial system,” Russia’s central bank governor, Elvira Nabiullina told CNBC last year.
Current sanctions against Russia could take months, if not years, to bite. Their severity could be weakened by a country like China, which has steadily increased trade with Russia. Beijing could offer to purchase more oil and extend loans through its state-owned banks, but analysts are doubtful China will breach sanctions and risk alienating itself from the West.
“China’s leadership is trying to straddle a geopolitical divide,” Mark Williams, chief Asia economist for research firm Capital Economics, wrote in a note to clients. “Russia is an ally, but being seen to take its side would hasten China’s decoupling from the West. Most likely, China will support Russia financially and through trade as much as any Western sanctions allow. Small companies and banks may breach sanctions, but larger firms and the government won’t risk a further rupture in relations with the West.”
That doesn’t mean China won’t continue doing business with Russia. It craves its oil and gas and recently struck a deal to import wheat. But China is unlikely to do Russia any favors, opting instead to capitalize on its ally’s difficult position.
“China doesn’t provide charity, even to its strategic partners,” said Elizabeth Wishnick, a senior research scientist at the Center for Naval Analysis, a U.S. Navy think tank. “I would expect China to continue to be hard-nosed about the investments it will make in Russia.”