No economic ‘knockout’ from sanctions on Russia

WASHINGTON — One month into the invasion of Ukraine, President Joe Biden stood in the courtyard of a grand Polish castle and laid out the punishing economic costs that the U.S. and its allies were inflicting on Vladimir Putin’s Russia, declaring that the ruble is almost immediately “reduced to rubble.”

Russia is now the world’s most heavily sanctioned country, according to U.S. officials. The ruble did in fact take a temporary dive and has been slipping again in recent months. But as the war neared its one-year mark, it’s clear the sanctions didn’t pack the instantaneous punch that many had hoped.

The ruble trades around the same 75-per-dollar rate seen in the weeks before the war, though Russia is using capital controls to prop up the currency. And while Russia’s economy did shrink 2.2% in 2022, that was far short of predictions of 15% or more that Biden administration officials had showcased. This year, its economy is projected to outperform the U.K.’s, growing 0.3%, while the U.K. faces a 0.6% contraction, according to the International Monetary Fund.

The West’s export controls and financial sanctions appear, instead, to be gradually eroding Russia’s industrial capacity, even as its oil and other energy exports last year enabled it to keep funding a catastrophic war.

Large American multinationals like McDonald’s and General Electric fled the country, and some of the country’s richest citizens are forbidden from traveling to the U.S. But if Muscovites can’t get a latte at Starbucks, there’s an imitation waiting for them at the knockoff Stars Coffee as Russia has adapted.

U.S. Treasury Deputy Secretary Wally Adeyemo stressed in an interview the Western sanctions are only one “tool as part of a larger strategy” and the U.S. continues to adjust its sanctions to outmaneuver Russia’s shifts in strategy.

“You look at the exodus, the brain drain from Russia,” Adeyemo said. “The Russian economy is far smaller, far more closed and will look more like Venezuela, North Korea and Iran than like a major G-7 economy.”

Still, a December Congressional Research Service report drew an underwhelming conclusion from all the economic parrying, stating “the sanctions have created challenges for Russia but to date, have not delivered the economic ‘knockout’ that many predicted.”

A closer look at what has been done so far and what lies ahead:

What has been sanctioned and why?

Biden last year called the West’s sanctions “a new kind of economic statecraft with the power to inflict damage that rivals military might.”

The sanctions, imposed largely through executive orders, are meant to punish Russia and block its access to the international financial systems and bank accounts it needs to finance its war effort. Export controls also limit its access to computer chips and other products needed to equip a modern military.

Simultaneously, the U.S. and its allies devoted billions to provide Ukraine with weapons, munitions and other military aid and direct financial assistance.

More than 30 countries, including the U.S., EU nations, the United Kingdom, Canada, Australia, Japan and others — representing more than half the world’s economy — are part of the unprecedented effort. They’ve imposed price caps on Russian oil and diesel, frozen Russian Central Bank funds and restricted access to SWIFT, the dominant system for global financial transactions.

Beyond targeting key institutions and economic sectors, the West has directly sanctioned roughly 2,000 Russian firms, government officials, oligarchs and their families. The sanctions are depriving them of access to their American bank accounts and financial markets, preventing them from doing business with Americans and traveling to the U.S., and more.

Unlike the countrywide sanctions on Iran and North Korea, the restrictions placed on Russia target specific industry sectors, firms and individuals. This approach was designed to keep Russian oil and natural gas flowing, in order to limit disruptions to the wider global economy. But energy exports also enabled Russia to replenish its finances and stave off a sharp decline.

What comes next?

The U.S. government is not finished.

The Treasury Department is expected to impose another large round of sanctions on Russia with a likely focus in 2023 on logistics and manufacturing firms.

Daniel Pickard, a sanctions attorney, said it’s a safe bet sanctions “will continue to be used with greater frequency with this administration and other administrations.”