At the start of the Ukraine war, the West was quick to impose sanctions on Russia. The ruble crashed. Inflation jumped. The financial system teetered. Russia’s government was forced to jack up interest rates, slam on capital controls and slide toward the first default on its foreign debt since the Bolshevik Revolution. Meanwhile, hundreds of Western companies closed their Russian operations and skilled locals emigrated. The International Energy Agency projects that a quarter of Russia’s oil output will be switched off by May, because sanctions impede exports.
Anyone who thinks these blows are insignificant should listen to the Russian government. Its officials expect the economy to shrink by 10 to 15 percent this year, a stunning downgrade from the 3 percent growth expected before the invasion. The World Bank has a similar view, anticipating a contraction of 11 percent.
The danger now is that the West’s determination will flag at precisely the wrong moment. The longer the conflict grinds on, the more it becomes an endurance test. In a war of attrition, forcing Russia to recognize that it cannot sustain the economic cost of aggression must be part of the West’s strategy.
Why would the West back away from its successful sanctions barrage? First, because it is costly. Global inflation is up partly because Russia is a key supplier of commodities as varied as energy, grain and metals. In the United States, the energy and grocery sectors drove about three-quarters of the 1.2 percent jump in consumer prices between February and March. In the euro zone, where the links to Russia are far tighter, monthly inflation is twice as high. As inflation rises, central banks will have to raise interest rates. Naturally, politicians in the United States and Europe do not relish recessions.
The risk of prematurely backing off sanctions is all the greater because it is hard to read a wartime economy. Defeatists note that Russia’s financial system has stabilized, the ruble has recovered its value and the central bank has been able to undo part of its emergency interest-rate hike. But these developments were possible only because of Moscow’s draconian clampdown, which will itself penalize the country. Russian companies and individuals have been ordered to support the currency by switching money into rubles and not sending capital abroad. The World Bank projects Russian imports will collapse by 35 percent this year, implying a loss of access to industrial inputs and military parts as well as a harsh blow to living standards.
Another complication for the West is that sanctions need to be dynamic. Each restriction triggers a frantic Russian search for workarounds: new customers and suppliers for blacklisted goods, new banks to take the place of sanctioned ones that can no longer handle trade payments. To stay ahead of these evasions, the West has to keep piling on additional measures. In economic war, a failure to advance is tantamount to retreating.
So far the West has kept the pressure on. The United States and its allies have announced wave upon wave of fresh sanctions, each one commendably confusing. There are import bans, export bans and flight bans; central-bank restrictions, private-bank restrictions and investment restrictions; general sanctions, company-specific sanctions and individual sanctions. There are particular rules pertaining to luxuries and art; there is a supertax on Russian vodka and a British carve-out for the oligarch-owned Chelsea Football Club. For once, special-interest line items are a glorious thing. They disorient the adversary.
Part of the challenge for the West is keeping up the momentum. Political leaders, conscious of elections and anxious to protect jobs, should remember the asymmetry of sanctions. Yes, the annual U.S. inflation rate is at its highest level since 1981, and similar rates in the euro zone and Britain are equally unwelcome. But Russia’s annual inflation rate is almost double what the United States is encountering. In battle, you take casualties to inflict larger casualties on the other guy. Economic warfare is no different.
The next test for the West will involve Russia’s energy exports. The United States has already announced a ban — easy enough, since it didn’t get much of its energy supplies from Russia. But the European Union won’t stop buying Russian coal until August, and it proposes to wean itself off Russian oil and gas sometime in the vague future. Its energy imports are worth nearly $1 billion per day. They keep Vladimir Putin in the Kremlin.
Of course, Germany in particular fears that a ban on Russian energy imports would puncture its economy. But there are tricks short of an outright ban — a stiff tariff that discourages consumption and pressures Russia to discount prices would be a step in the right direction. Ultimately a ban is the right choice. Even if Germany has to experience a recession, its sacrifice will be nothing compared with the suffering in Ukraine, nor with the stresses in the front-line nations that are filling up with refugees.