Reporting from Moscow: Economic Sanctions May Achieve the Opposite of Biden's Stated Long-Term Goals

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https://outsidevoices.substack.com/p/reporting-from-moscow-sanctions-may?token=eyJ1c2VyX2lkIjoxNTYyMTUyOCwiXyI6IldNSHFkIiwiaWF0IjoxNjQ4Mzg2NjEzLCJleHAiOjE2NDgzOTAyMTMsImlzcyI6InB1Yi0zNDQyMTMiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.CbxLSx5sC19dVuQ09Hrfz7ceoOsB7PSk_LAh3mID7e8&s=r

"During a visit to Brussels for the NATO summit on Thursday, President Joe Biden unveiled his latest Russia sanctions package.

Biden told reporters that the U.S. and the European Union had agreed to sanction more than 300 Russian lawmakers and oligarchs, as well as several Russian defense companies.

Over the past month, Russia has overtaken both Iran and North Korea to become the most sanctioned country in the world.

Some of the measures adopted by the U.S. and its European allies include

the freezing nearly half of the Russian central bank’s $640 billion financial reserves,

expelling several of Russia’s largest banks from the SWIFT global payment system,

imposing export controls aimed at limiting Russia’s access to advanced technologies,

closing down their airspace and ports to Russian planes and ships,

and instituting personal sanctions against senior Russian officials and high-profile tycoons.

Multinational corporations have joined Western governments in cutting economic ties with Russia.

Since the start of the Kremlin’s military campaign in Ukraine on February 24,

more than 450 companies ranging from Apple to McDonalds have shut down their operations in Russia,

according to a database compiled by Yale University’s Chief Executive Leadership Institute.

But what exactly are the goals of the new sanctions regime against Moscow?

Biden has stated that its primary objectives are “to impose severe costs on the Russian economy, both immediately and over time” and to turn Russian President Vladimir Putin into a “pariah on the international stage.”

The New York Times has reported, citing current and former U.S. officials, that another aim is to “create domestic pressure on Putin to halt his war in Ukraine.”

So far, Western sanctions have succeeded in delivering a serious blow to the Russian economy.

The Russian ruble has lost almost 30% of its value against the dollar since February 24, a development which has caused prices on imported goods to skyrocket.

Further exacerbating Russia’s inflation problem is a wave of panic buying in major cities across the country, with shoppers seeking to stock up on essentials ranging from basic food products to medicines.

At the same time, Russian lawmakers have estimated that nearly 96,000 workers have been put on leave following the mass exodus of Western corporations.

Despite these economic costs, however, there is so far little sign that Western sanctions are changing Putin’s political calculus on Ukraine.

If anything, there are some reasons to believe that growing sanctions pressure could encourage the Russian president to harden his stance.

Fyodor Lukyanov, chairman of the Council of Foreign and Defense Policy, a research group that advises the Russian government,

explained to this page that the high costs inflicted on the Russian economy by Western sanctions have put significant pressure on Moscow to compensate for them with military successes.

Consequently, the Kremlin could very well respond to increased sanctions pressure by doubling down on its military operation in Ukraine instead of seeking a diplomatic way out.

“If the West continues to impose new sanctions, then Russia will have no other option but to also raise the stakes because there is no room for retreat,” Lukyanov said.

“There is no option in the current situation that would allow us to smoothly take a step back without suffering catastrophic political consequences.”

A similar argument was made by Dmitry Suslov, a professor of international relations at National Research University Higher School of Economics, one of Russia’s most elite universities.

Suslov told us that there was currently a divide within the Russian political establishment between supporters of a diplomatic settlement with Ukraine and hawkish elements who want to continue fighting until the Russian military succeeds in bringing about “regime change” in Kyiv.

“Western sanctions right now are the central question,” he explained.

“If the West makes it clear that sanctions will at least be partially removed once the military operation comes to an end, then the compromise faction will be strengthened.

However, if Moscow gets the sense that the West is waging ‘total economic war’ against Russia, then Putin will have little incentive to not go all the way.”

Much of the Kremlin’s response to sanctions so far has centered on mitigating the damage to the Russian economy rather than hitting back at the West.

For example, the Russian central bank has sought to keep the value of the ruble from sliding by hiking up its key interest rate to 20% and limiting foreign currency exchanges.

Yet both Lukyanov and Suslov predicted that Moscow could introduce its own export controls if tensions with the West continue to escalate.

Although Russia’s economy ($1.65 trillion) is much smaller than that of the U.S. ($22.9 trillion) and the European Union ($17.1 trillion),

Moscow is a major global supplier of key commodities such as oil, natural gas, grains, timber, and rare earth metals used in the production of computer chips, electric vehicles, and airplanes.

To be sure, such a move would also significantly damage the Russian economy by depriving it of much needed revenue,

but Lukyanov and Suslov suggested that it's a price the Kremlin may be willing to pay if it concludes that the West will maintain its sanctions against Russia indefinitely.

What about the impact of sanctions on Russian public opinion?

It is difficult to fully assess since the Kremlin has tightly regulated domestic media coverage of the conflict in Ukraine, detained thousands of anti-war protestors, and even introduced new legislation that threatens jail time for those who spread “fake news” about the Russian military.

Under such circumstances, many critics of the government’s actions in Ukraine will understandably choose to remain silent.

However, based on the available polling data from a diverse range of sources, there does not seem to be much evidence suggesting that the economic damage of Western sanctions has so far succeeded in turning the Russian public against the Kremlin.

According to a survey published by the state-affiliated VTsIOM agency earlier this week, 74% of Russians support Moscow’s so-called “special military operation” in Ukraine compared to 17% who oppose it.

VTsIOM also said that the share of Russians who said that they trusted Putin rose from 67.2% on February 20 to 80.6% on March 20.

Similar results were reported in a national survey conducted by a group of independent research organizations between February 28 and March 1.

The study found that 58% of Russians backed Moscow's actions in Ukraine, while 23% opposed it.

Denis Volkov, director of the Levada Center, a leading independent Russian polling agency whose surveys are widely cited by international media outlets,

said that the one likely explanation for such polling results was the perception by a majority of Russians that the West is the one most “responsible for the deteriorating situation in Ukraine.”

In late February, a Levada Center poll found that 60% of Russians said that the U.S. and NATO were primarily to blame for tensions around Ukraine compared to just 3% who faulted the Kremlin.

“We often heard from people
in our focus groups the following argument:

‘The West is dragging us into a conflict.
What are we supposed to do?
We can’t retreat,’” Volkov said.

As the economic costs associated with sanctions continue to mount, could Russians begin to change their mind about Ukraine?

Volkov argued this is unlikely, noting that many respondents in Levada focus groups echoed Putin’s assertion that even if Moscow had never sent troops into Ukraine, the West would have found a different pretext to sanction Russia.

“People already have a certain picture of the world, and so what’s happening now is merely confirming these existing preconceptions,” he said.

Few in Moscow expect the Russian economy to rebound quickly from Western sanctions.

According to a study released by the Russian Central Bank on March 10, Russia’s GDP is projected to decrease by more than 8% in 2022 while inflation is expected to exceed 20%.

A similarly gloomy assessment was offered by the Center of Macroeconomic Analysis and Short-term Forecasting, an influential Moscow-based think tank, which calculated that Russians could see their real disposable incomes decline by as much as 7% by the end of this year.

Ivan Tkachev, economics editor at the RBK business newspaper, told this page that Russia was facing its most serious economic crisis since the collapse of the Soviet Union in 1991.

He explained that Russia was able to recover fairly quickly from previous crises since the external shocks responsible for them (instability in foreign markets, drop in energy prices, etc.) eventually subsided.

This time, by contrast, the main cause of the economic downturn (Western sanctions) is unlikely to subside anytime soon.

Further complicating matters for Moscow is the fact that the Russian economy had been experiencing weak growth even before the present crisis.

However, Tkachev also emphasized that although Western sanctions would undoubtedly impose significant pain on the Russian economy, they would not be enough to completely break or isolate it.

“Russia is not North Korea or even Iran,” he said.

“It is a much larger economy and it is much more integrated into the overall global economy.

The West cannot cannot fully cut off some currency injections because Russia is too integrated to the global energy and mineral trade.”

One way Moscow is likely to attempt to ease the burden of Western sanctions is by drawing even closer to Beijing.

China has been Russia’s largest trading partner since 2010 and the total turnover between the two countries reached a record high of $146.88 billion last year.

In addition to economic ties, Russia and China have over the past decade also strengthened their military cooperation by conducting regular joint military exercises.

During his visit to Beijing last month for the Winter Olympics, Putin and Chinese President Xi Jinping signed a joint statement in which they declared a “no limits” partnership and criticized U.S. security blocs in Europe and Asia.

Since the Kremlin’s decision to send Russian troops into Ukraine, China has repeatedly refused to join the U.S. and Europe in sanctioning Moscow and publicly stated that it still views Russia as its “most important strategic partner.”

During a meeting with Chinese business people in Moscow on March 19, China’s Ambassador to Russia, Zhang Hanhui, urged them to “fill the void” created in the Russian market by Western sanctions and the mass exodus of multinational corporations.

There are already some signs of that happening.

Following Visa and Mastercard’s announcement earlier this month that they would halt their operations in Russia, several leading Russian banks said that they would begin issuing cards with China’s UnionPay network.

In response to U.S. and European sanctions restricting Russia’s access to dollars and euros, Russian investors have begun flocking to the Chinese yuan.

On the technology front, meanwhile, the sale of Chinese smartphone brands in Russia doubled during the first two weeks of March.

Yet it is far from clear on how much China will be willing to put its own economic interests at risk to help Russia ease the burden of Western sanctions.

Just days after Russian troops moved into Ukraine, two major Chinese state-sponsored banks, the Asian Infrastructure Investment Bank and the New Development Bank, announced they would suspend all activities related to Russia.

Earlier this month, an official at Russia’s Federal Air Transport Agency told reporters that China had refused to send aircraft parts to Russia.

Artyom Lukin, a professor at the Far Eastern Federal University, admitted that while China would not be able to fully backfill the gap left by the West,

it could help ease the burden on Russia by serving as an alternative source for goods such as cars, electronics, and industrial equipment.

“Russia will suffer a big blow from sanctions, but if China does not turn its back on us, we will be able to avoid economic collapse,” he said.

Lukin predicted that it would take at least several years for Russia to fully reorient its economy from the West to China.

In order to facilitate greater trade flows between Russia and China, Moscow will first have to expand its network of railroads, sea ports, pipelines, and airports in the border regions of the Russian Far East.

Lukin admitted that such a massive infrastructure construction project would come with a hefty price tag,

but he suggested the Kremlin could entice Chinese investors to help fund it by offering them ownership shares and significant discounts of Russian commodities.

The fact that Beijing has its own significant geopolitical tensions with Washington is another factor that could work in Russia’s favor.

“For China, the land border with Russia is a safer route for natural resources since maritime imports could potentially be intercepted by U.S. naval ships in a crisis situation,” Lukin said.

“So it makes sense from an economic and geostrategic point of view.”

That brings us back to the central question: Could Western sanctions eventually cause enough economic damage and foment enough public discontent to force Putin to withdraw Russian troops from Ukraine?

Maybe. But they could just as well have the opposite effect, especially if they remain indefinitely.

Author Dmitri Simes Jr. is a reporter based in Moscow, who writes on Russian politics, history, and society. His reporting on Russia has appeared in the Financial Times, South China Morning Post, World Politics Review, RealClear Defense, and The National Interest, among other outlets.