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In a recent TV interview I have given the Swiss channel Tele Z, I had a chance to discuss with my host Claudia Steinmann the implications of sanctions for the Russian and western economies. We also talked about whether or not China is going to benefit from the situation. In this post, I follow up on my interview and elaborate a little more on whether sanctions will work or not. In the next post, I plan to write a little more on how I see the role of China.

Will sanctions work, then? I think, it is important to answer that question at three levels: macroeconomic, political, military-strategic. And at the three levels the respective answer is “yes”, “it depends” and “probably not”. But then there is another level — bear with me….

  • Take the macroeconomic level first. Sanctions are already having a devastating effect on the Russian economy. The bulk of foreign currency reserves has been seized, the ruble has tumbled, domestic inflation is soaring, trade has collapsed, production come to a standstill in many parts of the economy. This is hurting the regime, but it is hurting the average Russian even more. While “oligarchs” have been targeted by the seizure of their overseas assets, the overall effect of the sanctions is clearly much smaller for oligarchs than for the average Russian household. Oligarchs are people with international networks and globally diversified asset portfolios, including access to countries that do not implement any sanctions (the yachts are starting to show up in Turkey already…). Such asset shifting is not really an option for the average Russian, though. Hence, if anything the West should work harder on actually implementing and extending the sanctions on the oligarchs. Actually seizing their assets would be a start, implementation in many countries (including Switzerland, Germany…) is patchy at best so far.
  • Consider next the political impact of sanctions, in particular on how sanctions change the likelihood of regime change. Here the outlook is more mixed. One political rationale behind the sanctions is to foment unrest in the wider population, erode support amonh privileged civil servants and the military and/or trigger a coup of by the inner circle of power. While one can always hope, I wouldn’t count on that coup. And the fallout of the sanctions on the wider population also gives Putin’s propaganda a way to blame their suffering on the alleged unfair treatment of Russia by the West. We have seen similarly crippling sanctions in Iran, for example. The regime there is still in power…
  • The third level at which sanctions were meant to work is military-strategic. The idea is to to deprive the regime of assets and future hard-currency revenue, so it can no longer finance its war. Clearly, the sanctions make it harder for Putin to buy Western technology. They make it harder to sustain the economy and muster political support. All true. But Russia does not need hard currency to import raw materials and commodities to fight a war as other countries would have to. Russia is a natural-resource super power. Russia has a formidable military-industrial complex. Keeping that war machine running does not require foreign currency. Instead, as time goes by, the machine will be financed in the way long wars are always financed: by monetization, using the printing press. De facto state-controlled arms producers will just accept freshly printed paper.
    So, yes German, Italian, Swiss payments for Gas have helped Russia acquire assets, infrastructure and technology for its war in the past. If Europe continues to buy gas, and oil it certainly helps ease the economic cost for Putin to sustain his war. Would stop buying that energy from Russia accelerate the decline of the Russian economy? Sure. Does Putin care? No, I don’t think so. Because it won’t be able to stop the war machine as such. And that’s all that counts for him.

So, are sanctions all in vain then? Short of direct military intervention–which NATO has rightly ruled out–they were the harshest option and I think they were still the right thing to do. That doesn’t mean they will succeed in the ways they were argued to operate, though.

But there may be much better reason for sanctions after all: some analysts have recently suggested that seized Russian assets could ultimately be used to finance reparations or a Marshall plan for Ukraine after the war. In my opinion, they could already be used while the war lasts—to provide finance for a much more determined support of Ukraine, including a more determined supply of arms, thus making it considerably cheaper and more sustainable for the West to uphold this support.