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The writer is a non-resident senior fellow at the Peterson Institute for International Economics. She is a director of the International Affairs Program and vice-president for foreign policy at the Kyiv School of Economics
Russia has faced unprecedented sanctions from the US, the EU and their allies following its 2022 full-scale invasion of Ukraine. One day, the US may need to sanction on this scale again, possibly China over a potential conflict in Taiwan. If this happens, valuable lessons can be learned from the Russia case, which has not been an unequivocal success.
The primary lesson is that seeking complete isolation of a large, complex and globally-integrated economy is costly and unattainable. It took coalition governments almost a year to reduce purchases of Russia’s oil and gas — and many of their corporates are still actively engaged in trade with Russia.
Although Moscow’s statistics should be approached with great caution, two years into the war, Russia’s economy appears to have stabilised, supported by nearly 10 per cent of GDP in war-related fiscal stimulus and sanction coalition countries’ reluctance to stop buying Russian oil and gas. The Russian government’s statistics agency estimates GDP growth of 3.6 per cent in 2023 following a moderate contraction in 2022.
But even if the impact of sanctions was not as catastrophic as initially anticipated, Russia lost close to $170bn in exports due to them, experienced much weaker growth compared with other commodity exporters, and its medium-term outlook is bleak.
The first lesson from the experience is that, just as Russia began preparing for another round of sanctions after the ones that were applied in 2014, China — and indeed other nations — are unlikely to be caught off guard. In the past decade, Russia has reduced its external vulnerabilities by implementing macroeconomic adjustments akin to the most severe IMF programmes. Both Russia and China have introduced their own domestic payments systems and intensified efforts in digitalisation.
Consequently, when Russian banks were selectively disconnected from the international payments system, Swift, they scarcely felt the impact. The voluntary withdrawal of Visa and Mastercard affected only those Russians fleeing Putin’s regime, while domestic banks continued processing the cards.
The second lesson is that the consequences of non-compliance must be strong enough to affect companies. Evasion of sanctions is a predictable reaction for companies drawn to profitable markets. Introducing steeper penalties coupled with an increased likelihood of detection can significantly reshape their risk-reward calculus.
The US has become accustomed to the effectiveness of its financial sector sanctions. However, this is not the case for areas where it lacks leverage or capacity, such as export controls or the oil market. Under-compliance with one measure risks bringing down credibility as a whole.
The third lesson is that garnering multilateral support is challenging when the target country holds significant economic influence. The US, the EU and allies have struggled to rally countries for whom Moscow’s aggression in Ukraine is not a pressing political concern and trade with Russia is lucrative. China has now become Russia’s largest trade partner, surpassing the EU, with trade exceeding $200bn in 2023. India increased Russia’s share in its total oil imports to 35 per cent in 2023, from 2 per cent before the war.
In the case of China, the US would need to look for vulnerabilities while remaining realistic about the limitations of sanctions. China has greatly benefited from integration into global markets, resulting in positive spillovers, notably in research and development.
Yet while China’s surpassing the US as the world’s largest economy was a foregone conclusion for many years, its nominal GDP has recently plateaued relative to the US. High domestic savings notwithstanding, over-investment has shifted from property to manufacturing and adverse demographics poses significant challenges. Similarly to Moscow, Beijing may struggle to address structural issues without risking political stability.
The experience with Russia is an invaluable opportunity to sharpen sanctions as a foreign policy tool. Improvements are needed in export controls, particularly as China, itself a target of those controls, appears to be helping Russia evade sanctions. More responsibility needs to be placed on corporates to prevent Russia from selling oil above the price cap and accessing western-made arms components. Finally, the financial industry, where the US controls the critical nodes, can play a supporting role, as improvements in other areas take place.
We are at risk of undermining our sanctions if the private sector — and malign actors — learn that we cannot enforce new measures. The US needs to set realistic objectives, and use its might.
Source: Economy - ft.com
