The economic state of play is very different now to even just a few decades ago
Economic coercion is the West’s favourite tool to influence Russian behaviour. But with oil prices rising, Russia’s economy growing, and the West backing off from pledges to exclude Russia from SWIFT, this policy seems to have reached a dead-end.
In 2014, the Russian economy was struck by a double-whammy. First, the oil price collapsed. And second, Western states imposed a series of sanctions in response to events in Ukraine. The immediate impact on Russia’s economy was dire, sending GDP plummeting.
Economists had problems determining which was more responsible for Russia’s problems — the oil price or the sanctions — but most came down in favour of the former. Cheaper oil translated into a less valuable ruble, which increased the price of imports and created inflationary pressures. To this end, the Central Bank responded with higher interest rates, depressing demand and thereby GDP.
The economic crisis of 2014 created hopes in the West that Russia could be brought to its knees. Pundits predicted that cheap oil was here to stay. Beyond that, the introduction of so-called ‘sectoral sanctions’, targeting Russia’s energy, financial, and military industries, was meant to strangle what were seen as the most vital sectors of the Russian economy.
It would not be long before Russia would be bankrupt, some claimed. Speaking in Ottawa in November 2014, former Russian Finance Minister Mikhail Kasyanov stated that within two years, Russia would have used up all its financial reserves and would have to severely cut government spending. The Russian people would then turn away from the government en masse. In the face of cheap oil and sanctions, the ‘Putin regime’ was doomed.
It didn’t turn out that way. Sanctions had a rather marginal impact on the Russian economy. The government responded effectively by important substitution, providing financial aid to threatened sectors, and finding new sources of much-needed technologies (most notably China). This came at a price, but Russia weathered the sanctions storm quite well.
Rather than declining, Russian oil and gas production has remained steady. Moreover, the price of hydrocarbons has rebounded. This week, Goldman Sachs issued a prediction that oil would reach $100 a barrel by the end of the year, as the world economy recovers from the Covid-induced recession, and demand for oil and plastics increases. Suddenly, the picture is looking very different from what it did in 2014.
In fact, the Russian government is flush with cash. Russia’s international currency reserves hit a record high of $600 billion last year. Meanwhile, the country’s debt in relation to GDP is one of the lowest in the world — especially given that, much like other former Soviet states, much of its GDP is uncounted, off the books in the black and grey economies. This compares very favourably to Western states, who have borrowed on a massive scale during the Covid pandemic and are afloat in a sea of debt. It’s the West that is looking bankrupt, not Russia.
That’s not to say that all is well with the Russian economy. Inflation has risen to 8%, and the World Bank predicts that GDP growth will slow from 4.3% in 2021 to 2.4% in 2022. This is far below the rate Russia needs in order to catch up economically with the West. Still, it is growth, not decline. The Russian economy suffered much less than many other countries during the Covid pandemic and has recovered faster. Russia is perhaps not doing well, but it’s not doing immensely badly either.
All this undermines Western sanctions policy. If the purpose of sanctions was to punish, they haven’t succeeded. If it was to deter Russia from further "aggressive" acts against Ukraine, then it’s impossible to prove that they haven’t worked (given that one doesn’t know what would have happened in a universe without sanctions), but one has to doubt it. Given Russia’s success in riding out past sanctions, Russia has less reason to worry about them in the future. It has also reduced its dependency on the West. The deterrent value of sanctions is weak.
Unfortunately, rather than recognizing the pointlessness of sanctions, many in the West are now doubling down on them, allegedly as a means to deter Russia from invading Ukraine. Top of the list of proposed measures is excluding Russia from the SWIFT system that underpins international trade by facilitating financial transfers. If put into practice, this would make it very difficult for Russia to sell goods and services abroad, and as such it would be potentially very harmful.
The problem, however, is that it would harm many Western countries too. The Russians aren’t going to hand over oil and gas for free. If Russia were excluded from SWIFT, European countries that depend on Russian supplies, such as Germany, would find themselves deprived of energy to heat their homes and power their industries. American LNG could not make up the difference.
Understandably, therefore, people are having second thoughts. On Monday, the newspaper Handelsblatt reported that the German government had decided SWIFT should not be part of any future sanctions against Russia. If this is true, then the most significant threat against Russia has been removed.
In any case, were Russia to decide to invade Ukraine, it would be because a decision had been made that vital national interests were at stake. At that point, only military threats could deter the Kremlin from action, not economic ones. But Western states have ruled out fighting to defend Ukraine. In short, the idea that Russia can be deterred is a fallacy.
In practice, all these threats do is annoy. For some in the West, that’s enough. Writing on Saturday in the Toronto Star, veteran anti-Russia campaigners Bill Browder and Marcus Kolga claimed that the fact Putin was annoyed by sanctions was proof they were working. But this is a silly argument. Sanctions are meant to change the target’s behaviour in a way that suits the sanctioner. But it’s hard to see how angering your target translates into him behaving in a way that suits you. More likely, the result is the opposite.
The past few years show that the idea Russia can be economically coerced into political concessions, or so crippled that its population rises up against the government, is completely mistaken. Western policy is thus at an impasse. Today Russia enjoys high oil prices, vast reserves in the bank, and the knowledge that the West can’t follow through with its worst threats without severely damaging itself. Western threats are not, therefore, very meaningful. If we want Russia to act in a manner more suiting our own interests, we need to find a new approach.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.