17 months into the war, it’s high time we revisited the topic that’s been largely overlooked recently, but that hasn’t lost its relevance:
the sanctions.
It’s painfully obvious today that the anti-Russian restrictions of an unprecedented scale haven’t measured up to expectations.
Saying it hasn’t had any effect whatsoever would be an overstatement.
Russia’s economy finds itself in survival mode and can barely bounce back to the path of development.
Such a large federal budget deficit against the slashing of costs has happened for the first time in Putin’s entire tenure.
The war proves costly.
But when your economic ties to the nations responsible for half the world’s GDP are impeded, it’s even costlier.
That said, this isn’t the kind of effect that was expected.
A gradual decline of Russia’s economy isn’t exactly your fastest war-stopper.
People were expecting a plunge, which hasn’t been the case.
Russia’s economy may have hit the bottom, but it shows no immediate signs of collapsing.
We’ll spare you the discussion of Russia’s basic economic facts.
After all, once your growth has been stunted for 14 years,
you’re in the middle income trap, and your GDP is mostly made up
of commodity exports and government-run businesses,
you’re hard to deal with.
If you haven’t got something, it’s hard to lose it.
If you haven’t been born, you won’t die.
If your annual growth figures fall within the rangebetween 0 and 2%, you’ll hardly notice a 2% recession.
Today, we’ll discuss the sanctions’ efficiency and try to figure out why their effects have fallen significantly short of what was expected.
If you want a one-word answer, the world will be “inconsistency.”
The Mechanics of Sanctions
First, you adopt a policy banning Russian oil imports in the E.U.,
the ban being effective six months later and excluding pipeline oil and exports to Hungary.
Second, the rule has yet to enter into force, but already provides for multiple exceptions.
Third, you’ve got no clue as to how to tackle third-party imports of Russian oil.
Fourth, the policy doesn’t provide for sanctions applicable to those who bring you tankers full of Indian oil produced in Western Siberia.
When you have all this, the effects are predictable.
One, it’ll lead to a surge in oil prices because faced with uncertainty,
European companies will be filling all of the depots, tankers, barrels, and even Mason jars they can get their hands on with oil.
Two, those who you’re planning on punishing or forcing to stop the war will have a legit suspicion it’s all a joke.
They’ll think what you’re aiming to do isn’t to stifle the Russia-bound cashflow
but to threaten to strip Putin of the money he uses to bankroll the war.
But not today, not quite, and not the money really.
If you roll out your sanctions followed by a 30-page appendix of exceptions for your own soft landing to mitigate the risks,
all these restrictions may take forever to actually start working.
The hell will freeze over and melt back down — they still won’t get off the ground.
The example with the oil embargo is here for a reason.
Along with other commodity export restrictions, it’s finding ways to work.
With Brent crude oil trading at $80+ per barrel, the ruble trading at $0.01 is an undeniable indicator.
Russian oil is now a tough sell. It can only be sold at a huge discount.
Both gas and coal exports have tanked, too.
No amount of doctoring the stats, classifying the figures,
or restricting currency exchange transactions can help hide the fact the inbound cashflow has plummeted.
But this effect took a full year to start working. Prior to that, Putin had enjoyed 100s of billions of export dollars.
Not export revenue,
but the difference between what he would’ve normally wanted and what he’d received amid the deficit-whipped panic.
The amount of money available may have dropped, but Putin is still very much in the black, he’s still shuffling the house chips.
The mechanics of the sanctions takes too long to unfurl.
As a result, the sanctions failed to strip Putin of his war fund —
not just that, they helped him grow a financial cushion,
Nonetheless, the export sanctions do follow a certain logic and seek an achievable goal.
True, they work poorly, they work slowly, but they work. Do you know what’s way worse? The import restrictions.
That’s where the emulation of real actions hits its worst.
Indeed, there are products whose trade is either under strict control (like armaments and military hardware) or significantly limited.
Products of the latter category are manufactured in such minuscule amouts, you can trace each one of them.
Suppose you need spare parts for an ultra-precision industrial machine,
and they only produced by a Canadian company whose clientele easily fits into a single A4-sized sheet.
You may need jet engines, specialized software, or heavy-duty industrial equipment, you’re most likely crestfallen.
Large mining bucket-wheel excavators are sold in such scant numbers,
you can easily figure out who the middleman is once this huge dig turns up smack on the middle of Siberia.
This is a sensitive topic whose importance shouldn’t be downplayed.
If you ask a manufacturing industry pro or an aviation pro, they’ll rattle off a laundry list of problems most of which can’t be solved.
They may be bragging about the achievements of import substitution on public,
but the level of Russian machine building and aircraft manufacturing doesn’t even connote the word “achievements.”
But these problems seem to have affected just limited imports.
A ban on electronics sales, car sales, and spare parts sales —
something that’s produced by millions and 100s of millions — was doomed right out of the gate.
In today’s world, you can’t just build a war between the side that has a lot of cash
(the poorly conceived export sanctions led to just that) and the side that has the goods.
This is almost as surreal as eradicating drug trafficking.
A microchip won’t ship to Russia, but it will to Kyrgyzstan. If it doesn’t ship as a separate device,
it will as part of a TV, a router, a maching machine, a smartphone, or medical equipment.
Military technology and civilian technology are only divided by a fine line.
Ring camera chips only take a soldering iron and a chop programmer to be repurposed for use in cruise missiles.
Those who were intent on “preventing Putin from accessing the war technology”
seemed to have no clue how exactly they were doing to do it.
In today’s world, a missile’s firmware is so similar to that of an Xbox controller.
The only salient result of the import sanctions was the wild enrichment of the post-Sivet countries
that act as a middleman.
Electronics, technology, cars, luxury items — all these sanctioned products have been shipped to Russian
en masse. Granted, there are certain transaction fees, and the final price for these products is sizably
affected by longer routes. But with a bonus of 100s of billions of free petrodollars, that’s survivable.
WHY IT WENT WRONG
Why is it that most sanctions didn’t just fail, but were doomed to failure from the very outset?
Why is it that the very phrasings behind these sanctions are unfeasible?
Why were these vital restrictions introduced so chaotically and sloppily?
One, it’s the unprecedented nature of the current situation.
Over the previous 80 years, no one had launched a large-scale war in Europe.
Over this period, there were no wars between the industrially advanced nations.
No one had ever tried to halt a big hot war with sanctions.
No one had ever imposed such massive sanctions on the world’s 11th economy,
ranked No. 1 in oil production and No. 2 in gas production.
Granted, Russia’s economy hadn’t been integrated into the global economy the way it could’ve,
if it had been run by a more sensible government.
But the extent of its integration was too large to just banish it from the
global system without incurring significant losses.
There has never been a backup plan, either.
There’s no international institution that could’ve created a task force to coordinate sanctions coming
from different nations for them to work smoothly.
There’s no distinct legal framework on how to introduce sanctions, enforce them,
and punish those who try to bypass them.
It’s not that I’m trying to cook up excuses for Western politicians.
It’s just that all of the restrictions introduced over the past 17 months have been rushed.
There were no turnkey policies or relevant experience.
Perhaps Russia will eventually set a precedent that will be used for planning
and imposing large-scale sanctions in the future.
Two, Putin’s regime is very rich. The money they have doesn’t stem from their efficiency —
they’re just provided by the ceaseless stream of petrodollars.
Unlike Western democracies, Putin has a blank check when it comes to spending this money,
from a gray fleet of tankers bypassing the restrictions for Russian oil exports to procurement capabilities
for war-related components to political lobbyisn and direct corruption of Western politicians
and entire political institutions.
How much dough is there in European political parties’ funds or in official’s offshore accounts?
How many decision-makers of the sanctions policy earn a shadow salary from, say,
a Romanian bank owned by Putin’s former frat buddy?
Only historians will come up with accurate estimates in the future.
But the fact that Germany’s former chancellor Gerhard Schroeder joined
the board of Rosneft almost immediately after stepping down as Germany’s leader points
to the real scale of Putin’s money invading the political establishment of the E.U.
Three (the most obvious reason), advanced democracies have their flaws.
True, the decisions there take a long route before they get finalized.
They take into account the interests of their voters and businesses, lump it or like it.
A democractic government can’t go, “We’ve decided this and that,
and we don’t care how hard it’s going to hit you.”
That’s a line of an autocrat, but a democratic government engaged in such obsessive-compulsive
harm will soon end up getting kicked out of their offices.
That’s what makes democracies a good and safe place to live.
But that’s what curbs the authorities’ decision-making capabilities.
Foreign policy will always be on the current agenda’s last page together with crossword puzzles and horoscopes.
However, an autocracy can leverage its propaganda machine to convince people that events
in Washington and Kyiv are vitally important to them. In a democracy, this move won’t work.
ALTERNATIVE
We’ve discussed why the sanctions haven’t worked the way they should have.
Now let’s figure out what may have been done.
The answer is simple. Just ask yourself what Putin needs for this war to drag on.
Two things: money and brainpower.
He desperately needs both petrodollars and college-educated and well-qualified pros.
Don’t make a mistake of thinking the war is being fought through the hapless folks thrown into trenches.
For this war to go on, Putin needs a functioning economy above all else.
But for it to work in Russia, the country has to have well-qualified pros.
These include IT specialists that ensure the functioning of all sorts of things from banking to food delivery apps.
Talented managers to keep their companies afloat despite the embargo imposed
by their major counterparties.
Skilled officials who have thwarted a macroeconomic disaster in Russia.
If these people were putting their knowledge to good use somewhere else
or if they had just left and were sitting there doing nothing,
Russia would have run out of resources just like that.
As long as the paychecks involve real money, this money can buy you goods and services,
the terminals accept debit cards, the laptop you’ve bought at a local marketplace ends up
at your doorstep in a couple of hours, and the idea of a decent life isn’t a joke, they can keep the war effort going.
This idea isn’t kept alive by the deranged shotcallers from the Security Council, MPs, or public statesmen.
These are the people whose actions and statements are mangling the remnants of normalcy in Russia.
The Russian government and economy are kept alive by 100s of thousands of smart, college-educated,
and highly skilled individuals who aren’t excited about this war and, moreover,
have to overcome the resistance of those unhinged officials.
The prevalent sentiment among them, especially in the IT crowd, was clear from day one of this war.
People yearned to leave, not just separately but the entire departments, companies even.
They don’t want to be associated with this war.
They don’t like what’s going on.
At one point, the Ministry of Digital Development began showering the IT personnel with benefits
as all of the latter seemed to be intent on leaving the country.
It all prompted a brain drain that could’ve rendered Putin’s Russia a 20th-century nation.
The money was also looking toward the door. Russia has never been a country with a government
that can be trusted where you can plan well ahead.
Especially if you have enough money to get busted by law enforcement.
But things escalated to a point where owning assets in Russia is the dumbest thing to do.
A few weeks into the war, the two biggest components that keep it going — money and brainpower —
were seen getting their one-way tickets punched.
The government was so shocked, it could barely effect the process.
It’s the Western countries that helped halt that process by saying both to the money and brainpower
they weren’t welcome.
We’ll do our utmost to deny you both a visa and a debit card.
We’ll do our utmost to deny you a visit even if you have an active visa.
We’ll revoke your residency permit and seize your bank accounts.
Just bear in mind that any money you bring to our countries makes it to our banks’ checking accounts
only because we’re so generous.
So far, we let you use your own money, but it won’t last forever, and you won’t be notified.
We’ll try our hardest to deny you entry, but even if you gnaw your way through and have a burlap sack
full of money dangling from your shoulder, we’ll keep reminding you
that you’re a very bad guy responsible for this war.
Early into the war, both the money and the brainpower were escaping Putin to an extent where
he was powerless to reverse the process.
But Ukraine’s allies made it crystal clear, “You’ll be better off staying home,
sticking your tongue up your bungholes, and funding the warring government.
Try to come here and bring your money along — and you’re running a risk
of ending up as a penniless illegal immigrant.”
There could be no better gift to Vladimir Putin.
There was nothing else that could inflict more damage on Ukraine and their own countries.
Instead, they could’ve gone, “Dear friends, you’ve got a lot of money and a lot of human capital.
We need all of it badly. And we don’t want Putin to have it all.
Come on over. We’ll offer you an expeditious residency scheme.
We’ll help you rebuild your businesses from scratch.
We gather that you’re not refugees from the Middle East requiring a government subsidy.
You’re not a hassle to our taxpayer. You’re, in fact, our new taxpayers.
Just catch the nearest flight, and you’ll do three things: strip Putin of his resources,
provide us with new resources offsetting the backfiring of the sanctions, and wind up safe.”
Imagine they would’ve done it this way, especially coupled with a harsher restriction on the petrodollar flow.
Imagine if a pipeline that bankrolls Putin’s war efforts had been cut short right off the bat,
while expanding the pipeline helping his resources escape from him.
That would’ve landed the Russian government in a fine kettle of fish.
Imagine a skilled Russian official, a talented manager, or an IT pro greeted in the arrival lounges of European
and American airports
Imagine that each of them was provided assurances: no asset freezes,
no residency or visa issues, and no risk of being kicked out. A package of benefits.
What if leaving wasn’t associated with going through the ultimate wringer
and was a go-to option for entire divisions of the government and large IT businesses?
No foreign currency limitations would’ve prevented creeks of money flowing out of the country,
and the rouble exchange rate would’ve shot up through the roof, with no Central Bank talent to stop it.
How do you wage a war when your state is falling apart? There’s just no way you can do that.
And this kind of strategy would make perfect sense for Western countries.
Instead, Western countries didn’t do any of that while doing a lot to help the regime get its s__t together.
Desperate people don’t even consider leaving or transferring their money.
They are forced to stay and try to survive this war.
The war has been going on for 17 months now. Much of what looked like unprecedented developments back
when it started now looks clear. So far, Putin has managed to tackle the pressure coming
from Western countries. Russia’s economy is far from even remote growth opportunities,
but a devastating crash that would jeopardize current stability isn’t coming anytime soon.
We’ll wait and see if the Western countries’ strategy is going to change.
See you tomorrow!