Thursday, July 18, 2024
 
 

Russia sanctions remain a powerful tool to support Ukraine’s defense

Tough sanctions pressure and sustained military supply deliveries are critical tools the West must provide
US Embassy Rome
U.S. Military Assistance for Ukraine arriving by air

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Western leaders should not dismiss the two-year long sanctions campaign (as opposed to the 2014 Crimea sanctions) as unsuccessful simply because the Kremlin has reported strong GDP growth of 3.6 percent in 2023,  after declining 1.2 percent the year before. To deliver these results, Moscow has massively boosted government spending to support industrial production and augment the war effort, increased recruitment bonuses and payments to much of the labor force along with purchasing imported military supplies to fill gaps. Assuming that this kind of massive fiscal stimulus is sustainable in the medium term would be falling victim to Kremlin propaganda and to our own possibly misplaced expectations, knowing what we do about sanctions-driven pressure on Russia’s revenues from energy exports.

What did we expect?  A Russian default in six months? Did we dare to believe sanctions would produce a quick economic meltdown or change Moscow’s behavior if the situation on the battlefield was not seen as hopeless?

As an old “sanctioneer” in a previous life, this author understands that economic sanctions demand a dynamic approach from those charged with their implementation.  Any country under external sanctions will develop new trade routes and find fresh groups of partners to replace what has been lost. The surge in Russia’s energy sales to China is a case in point, with Chinese industrial products filling many supply gaps inside Russia.

Even so, Russia basically remains a well-stocked but technologically challenged fuel depot with an increasingly low-tech manufacturing base devoid of meaningful western investment. And thanks to the sanctions, it is losing more ground in terms of global competitiveness each day.  We can be sure of one thing; the Kremlin understands the long-term implications.

After two years of war, it is clear the West has escaped most elements of so-called “sanctions fatigue.” There are a number of reasons for this:  Good coordination among the G7 members and other allies, relatively light winters and a sputtering Chinese economy which kept global energy demand and prices manageable.

The fatigue is also lower than expected because the sanctions are not all encompassing; there are still many industries granted exceptions to the sanctions, and most Russian citizens still freely travel the globe as tourists and have found workarounds to initial Western efforts to block their payments systems while traveling.  For many Russian citizens, the good life continues despite the war.  This is essential to Putin’s retaining public support and Western leaders should carefully review the utility of continuing to allow easy access to Western countries for Russian travelers.

Russian LNG production facilities in Yamal. Photo: NOVATEK.RU

Sanctions-driven inflationary pressure in most Western economies remains a problem, and this is one area the Kremlin is constantly striving to convert into political changes or disruptions in a year filled with important Western elections. One can be sure Moscow supports any effort by almost any faction globally that will push the inflation barometer above western central bankers’ target of two percent.

For many, the question of so-called “secondary sanctions” is the elephant in the room. This term means that sanctions would be applied to companies or countries that support sanctions circumvention or host diverters.  Both the U.S. and EU have put more focus on this in recent sanctions packages, including those announced last week, but the approach remains focused and surgical – targeting specific companies. Any sanctioneer will tell you this approach is far too weak; there should be consequences for the political leadership in the countries that knowingly allow diversions to continue in support of Russia’s war effort.

At the very least, the idea of “naming and shaming” the most notorious sanctions weak spots like Turkey, China, Serbia, the UAE and even India (its oil trade is a special case) should be made a priority.  There also needs to be more pressure applied to banks financing trade diverters through third countries.  

Another avenue to approach sanctions violators would be to modify U.S. trade law in such a way so as to automatically link Most-Favored-Nation (MFN) trading status with sanctions compliance by legislation.  A mechanism of this type would provide countries with a positive incentive to comply with U.S. sanctions and clearly lay out the costs of violating important sanctions programs: lost access to the lucrative U.S. market.    

There are other options available to the West, especially now that military aid flows to Kyiv have become erratic. 

One attractive idea is to immediately begin the process of converting long-frozen Russian assets held in the West under sanctions into funds that would support Ukraine’s reconstruction, possibly cover its urgent humanitarian needs in real time or even be channeled to augment the country’s defense industrial sector so that Ukraine could manufacture more of its urgently required armaments and ammunition.  Why not use frozen Russian funds to rapidly lease or even build new arms production facilities (not only inside Ukraine) that would help put a stop to the Russian invasion? 

 

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CEO/Editor-in-Chief.  Former US diplomat with previous assignments in Eastern Europe, the UN, SE Asia, Greece, across the Balkans, as well as Washington DC.

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