Putin’s invasion of Ukraine has stunned the world and left many of us reeling as scenes of horror and destruction are emerging from Eastern Europe. As we near the fourth week of the military conflict, a peaceful resolution for both countries still looks unlikely. NATO and its allies have remained resolute in imposing economic sanctions to oppose Russia, rather than engaging militarily.
Tensions between Russia and Ukraine are deeply entrenched, owing to inextricable historical and cultural roots, as The Kremlin scorns Ukraine for referring to their unity during the Soviet years as occupation. The reality however, is “a thousand-year history of changing religions, borders and peoples”. Over the centuries, the Russian and Austro-Hungarian Empires, Poland, and Lithuania have all wielded jurisdiction over the current territory of Ukraine, which first asserted its modern independence in 1917; through the formation of the Ukrainian People’s Republic. Russia eventually regained control of Ukraine, making it part of the newly established Soviet Union and retained power in the region until World War II, when Germany invaded.
In Putin’s telling, the modern Ukrainian independence movement began not in 1917 but during World War II. Under the German occupation of Ukraine, between 1941 and 1944, some Ukrainian independence fighters aligned themselves with the Nazis, whom they viewed as saviours from Soviet oppression. Hence, in his February 24 speech, Putin continued to characterise modern Ukraine as a Nazi state by claiming “demilitarization and de-Nazification of Ukraine” to be the key goals of the invasion. The reality on the other hand, is that the President of Ukraine, Volodomir Zelenskyy is in fact Jewish, with grandparents who were killed in the Holocaust. As baseless as Putin’s war agenda seems to ordinary citizens and policy experts alike, this conflict has been consequently coined as ‘Putin’s war’.
In opposition to Russia, is NATO and its partner states. The North Atlantic Treaty Organisation comprises of 30 members; however Ukraine is not one of them. As a result, NATO’s Collective defence pledge (Article 5 of the North Atlantic Treaty) doesn’t apply to Russia’s attack and so members like the USA or the UK cannot come to Ukraine’s defence when its borders are breached. This means economic sanctions are an important, tangible method by which the West may condemn and punish Russia’s actions. A sanction is a penalty imposed by one country on another, usually to prevent aggression or breach of international law. Sanctions are often designed to hurt a country’s economy; or the finances of individual citizens such as leading politicians. Here, the intention is to isolate Russia from the world economy in an age of increased global trade and economic interdependence. At least, at this stage it is clear that they have not achieved the end goal of forcing Putin to cease the war.
Just recently, Russia has surpassed Iran and North Korea to become the most sanctioned state in the world. The following measures have been implemented, with the West assuring there is more to come:
- The US has banned Russian oil imports
- The EU, US, UK, Japan and Canada are cutting off key Russian banks from the international SWIFT payment system
- Many European states have closed of their airspace to Russian airlines
- Personal sanctions on President Putin and Foreign Minister Sergei Lavrov have been imposed by the US, EU and UK
- Germany has halted approval on Russia’s Nord Stream 2 gas pipeline, a major investment by both Russia and European companies
- The EU has already targeted 351 Russian MPs and aims to limit Russian access to finance, technology and defence
- The UK says all major Russian banks will have their assets frozen, with 100 individuals and entities targeted; Russia’s national airline Aeroflot will also be banned from landing in the UK
- The US is targeting 10 of Russia’s biggest financial institutions
- The Russian city of St Petersburg will no longer be able to host this year’s Champions League final and the Russian Grand Prix will not take place in Sochi.
Cutting off the Russian energy sector is a two-pronged sanction especially for European nations. The US recently led the charge by banning Russian oil and gas on the 8th of March, however they only receive about 1% of Russian oil exports. Similarly, the UK has planned to phase out Russian oil and gas by the end of 2022, but they too only receive 8% of Russia’s gas. What this means is that their sanctions will not cripple the Russian energy industry on their own, especially if Germany and the Netherlands continue to keep the pipes flowing. For those reliant on Russian oil and gas, this is an extremely tough sanction to recreate as it would be very damaging to their own economy. Russia supplies 26% of the EU’s crude oil and 38% of its gas. Even a brief cut in gas supply would increase energy prices dramatically. On the other hand, the The European Commission published an outline last week to cut EU dependency on Russian gas by two-thirds this year and end its reliance on Russian supplies of the fuel “well before 2030”. With players pulling the plug and halting their dependence of Russian energy, supply chains will undoubtedly change and reconfigure to weaken Russia in the long-term.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) ban is perhaps one of the most significant sanctions that has taken place, as it prevents them from conducting cross-border transactions including receiving payments for exports of oil and gas. When SWIFT banned Iran in 2012 after facing heavy pressure from the US, Iran lost almost half of its oil export revenues and 30% of foreign trade. French Finance Minister Le Maire; in fact expressed this sanction to be a measure of last resort and a “financial nuclear weapon” of sorts. However, the severity of this sanction is mitigated by Russia’s partnership with China and their Cross-Border Interbank Payment System (CIPS). By increasing use of their own System for Transfer of Financial Messages (SPFS) and relying on CIPS for connectivity, the SWIFT ban does not wholly alienate Russia from international capital markets. It does, however, lessen their market share dramatically.
The Nord Stream 2 pipeline is a particularly interesting multilateral project between Germany and Russia that has been of major controversy. Nord Stream requires an undersea pipeline directly from Russia to Germany to transport gas. The current land-based pipelines are situated in Poland and Ukraine and have become aged and inefficient. Moreover, Poland and Ukraine have high transit tariffs, and so the Nord Stream pipeline could bypass all these difficulties. The fear for many EU nations, however, is that if the pipeline commenced, Russia would be granted an even larger monopoly over the EU’s gas supplies. The halting of this infrastructure does not penalise Russia currently, however it is a loss of expected future earnings.
The cumulative result of the numerous sanctions placed on the Russian Federation has been the crash of the rouble by nearly 50% against the American dollar and a 20% rise in interest rates to curb soaring inflation. The combination of Western sanctions, the rising risk of default and the incentive to divest from rouble-denominated assets will further compound the currency. However, Kremlin officials are assuring they have measures to mitigate the economic devastation, as the Russian Central Bank has seemingly built up reserves of over $630bn USD to deal with economic shocks. However, the sanctions targeting the Central Bank and the foreign exchange reserves seem to be the most fateful. Within 24 hours of the US, UK and France freezing Russian reserves, the Russian Central Bank and the Russian elite lost access to 60 per cent of foreign exchange reserves – that is, $388bn out of a total $643bn. They lost access to entire arrays of assets: securities and deposits in Western central banks ($285bn) and in Western commercial banks and brokerages ($103bn). Consequently, The Russian Central Bank is left with $135bn worth of gold in its vaults, $84bn of Chinese securities denominated in renminbi, a $5bn position in the IMF and a residual $30bn in actual cash, dollars and euros. However, there is little room for manoeuvre with the residual amounts as the Central Bank cannot sell gold for dollars and euros now that all financial transactions with it are prohibited. The IMF finances are irretrievable. Russia could have resold the $84bn of Chinese securities, but China’s state banks have also refused financial transactions with Russia. The remaining amount for the Russian Central Bank is $30bn, which is far too little to mitigate the economic ruin that is on its way.
But who is bearing the brunt of these economic sanctions and financial consequences? It seems unlikely that it is Putin or the Russian oligarchs, who have already divested billions in untraceable assets in the Virgin Islands or the like. It is the ordinary Russian people who feel the economic ruin as prices soar and currency inflates. Ordinary citizens who may even disagree with Putin’s war or may have family across the border in Ukraine will have to face the devastation that the rest of the world is bringing upon Russia. It seems outrageously unfair, and it truly is. Yet, the NATO alliance and Putin’s resoluteness have left nations with very few options to respond, with economic sanctions the only method of forcing a player as adamant as Putin to reconsider his course of action. It is his uncompromising commitment to recapture Ukraine that has left his people completely vulnerable to the West’s sanctions.
