Li Wei: The content, characteristics and impact of US and Western economic sanctions against Russia under the Russian-Ukrainian conflict

Li Wei: The content, characteristics and impact of US and Western economic sanctions against Russia under the Russian-Ukrainian conflict

Author: Li Wei is a professor at the School of International Relations at Chinese University and a researcher at the National Academy of Development and Strategic Studies

Source: Institute for International and Strategic Studies, Peking University

WeChat platform editor: Zhou Yue

This article is 3800 words long and is recommended for 7 minutes

The content, characteristics and impact of economic sanctions imposed by the United States and the West on Russia under the Russian-Ukrainian conflict

Li Wei

Professor, School of International Relations, Chinese Min University, and researcher at the National Academy of Development and Strategic Studies

On February 24, 2022, Russia launched a "special military operation" against Ukraine, and the war between the two sides has continued to this day, the largest military conflict in the international community since the 2003 Iraq war. After the outbreak of the Russian-Ukrainian conflict, the United States, together with the Western world, imposed unprecedented economic sanctions on Russia, and its impact will be extremely far-reaching. As a key case for observing the "toolbox" of foreign economic sanctions between the United States and the West, its characteristics and effectiveness deserve in-depth analysis and judgment.

First, the main content of the economic sanctions imposed by the United States and the West on Russia

Up to now, the United States and the West have introduced very intensive economic sanctions against Russia, and the speed of their introduction, the breadth of coverage, and the strength of their implementation are unique after the Cold War. Sanctions are dominated by financial strikes, including freezing assets, cutting off access to financing and blocking financial transactions, complemented by high-tech trade controls and suspension of major projects, as well as cutting off the flow of people.

Of all the financial sanctions, two of the most high-profile ones have had a global impact on the Russian economy: First, the Group of Seven agreed to remove some Russian banks from swift's vital information transmission system. On 2 March, SWIFT announced that it would disconnect seven Russian banks and their subsidiaries and three Belarusian banks and their subsidiaries from the SWIFT system. This excludes Russia's largest bank, the Federal Savings Bank, and the Gas Industry Bank, the third largest bank closely linked to the energy sector. It can be seen that while the West is deterring Russia, it intends to leave a "back door" for energy trade.

The second is to restrict the Use of Russia's Central Bank's foreign exchange reserves of more than $600 billion. At present, the United States, Japan, the United Kingdom and other countries have announced restrictive measures on Russia's use of foreign exchange reserves. According to The Economist's calculations, the current sanctions already involve 70% of Russia's foreign exchange reserves, which makes it impossible for the Russian central bank to provide the necessary liquidity support to the market. The impact of the above two financial sanctions has far exceeded market expectations, just like a huge shock wave hit the Russian financial market, Russia's stock market, foreign exchange market have plummeted, the ruble depreciated by 40% in the week after Russia launched military action, and international rating agencies have also downgraded Russia's sovereign credit rating.

In terms of trade sanctions, the United States and the West have also used unprecedented export control measures. Sensitive commodities in the defense, aerospace and maritime fields, including semiconductors, computers, telecommunications equipment, lasers, sensors, etc., are included in the export control lists of the United States and Europe and other countries to Russia, which will substantially threaten Russia's access to many high-tech products and technologies. In addition, the Biden administration also announced an energy embargo on Russian oil, gas and coal on March 8; although the EU did not immediately "follow", the European Commission has said that it hopes to reduce Russian gas imports by 2/3 by the end of 2022 and stop buying fossil fuels from Russia by 2030. At present, there are many rounds of negotiations and games within the EU around the "extent to impose energy trade sanctions on Russia".

The swift suspension of the Nord Stream-2 gas pipeline project is another major sanction. As one of the eu members that relies heavily on Russia's energy, Germany is a major supporter of the project. However, the day after Putin announced on February 21 that he recognized the two Oblasts as "independent states", Germany immediately announced that "the Nord Stream-2 project will not be approved and certified for the time being.". Subsequently, the United States also announced sanctions against the company responsible for building and operating Nord Stream-2 and its executives. After the sanctions were imposed, the company has also fired all its employees.

In addition to the above three aspects of sanctions, other sanctions such as the ban on human travel and the closure of airspace have also been continuously introduced. The European Union imposed a travel ban on 351 members of the lower house of the Russian Duma, and Russian President Vladimir Putin, Foreign Minister Lavrov and other senior government officials were also included in the sanctions list.

Overall, in the past ten days or so, major Western countries have formed a joint front of economic sanctions against Russia. So far, the United States and the European Union have announced seven and four rounds of economic sanctions against Russia, respectively. The United Kingdom and Canada have also imposed severe sanctions on Russia such as asset freezes and export controls. Japan, South Korea and Australia in the Asia-Pacific region also showed positive performance, announcing 3-5 rounds of sanctions against Russia. Among them, Japan and South Korea have imposed export controls on products in the fields of semiconductors, information and communications, and some Japanese and South Korean companies have suspended the supply of all commodities to Russia, including chips, smart phones, and household appliances.

In addition to the above countries, countries such as Switzerland and Singapore that have long been biased toward neutrality have also joined the ranks of sanctions under the constraint of morality and values. However, some small countries have clearly expressed their positions against sanctions, such as Mexico, Serbia, Turkey, etc., and emerging economies such as Brazil and India are currently neutral.

Second, the new characteristics of the sanctions imposed by the United States and the West on Russia

Compared with several rounds of sanctions imposed by the United States and the West on Russia after the Crimean crisis in 2014, this economic sanction has shown the following new characteristics: First, the economic sanctions cover a wide range. As the world's eleventh largest economy, Russia is the largest target of comprehensive sanctions in the history of US-EU sanctions. This is different from previous sanctions against Myanmar, Venezuela, North Korea, and Iran. The targets of this sanction against Russia, both in terms of number and scope, have increased significantly compared with 2014, and many major Financial Institutions, Business Entities and Political Dignitaries in Russia have been involved. The second round of EU sanctions involved 70 percent of Russian banks and key state-owned enterprises, and the U.S. Treasury Department's List of Specially Designated Nationals (SDN) included 138 entities in Russia and its operations. This is almost a comprehensive encirclement of Russia without leaving a dead end.

Second, the intensity of economic sanctions has increased dramatically. This time, the United States and Western countries have used SWIFT, a sanctioning tool known as "financial nuclear weapons"; not only that, the United States has not hesitated to damage its own financial credibility and announced restrictions on the use of Russian foreign exchange reserves. The United States and the West have resolutely launched these super-strong sanctions, on the one hand, stemming from Russia's warning to the United States and Europe to "turn a deaf ear and act willfully"; on the other hand, it also reflects that the United States and the West want to "kill" Russia this time. In addition, the overcoming of differences within the EU countries and the collective support for the suspension of the Nord Stream-2 line mean that the EU will be determined to find another way out on energy issues, which will also greatly change the map of European energy geopolitics.

Third, economic sanctions emphasize precision. Although the scope and intensity of this sanction are far beyond history, the United States and Western countries have placed more emphasis on the pertinence and accuracy of sanctions, leaving a certain space for exemption from relevant sanctions. In this sanctions practice, the United States has issued more than a dozen exemptions to Russia involving humanitarian and medical assistance, reflecting Biden's intention to reverse the "abuse" of sanctions during the Trump era and deliberately avoid harming innocents and self-interest. At the same time, the United States and Western countries are also very strict in their expression of the use of SWIFT sanctions, emphasizing the imposition of sanctions against "some" Russian banks in the joint statement, highlighting the control of "precision sanctions".

Fourth, Western sanctions are unprecedentedly united. In this sanctions operation, the Western world has shown extraordinary cohesion; in particular, the EU has reversed the previous state of "non-resolution", demonstrated strong diplomatic determination on the issue of sanctions, and made significant interest sacrifices, which is in stark contrast to the EU's indecisive attitude in 2014. In addition, Japan has also changed its tepid attitude towards Sanctions against Russia in 2014, and the Kishida Fumio government has been very active, becoming an important supporter of the United States and Europe in the use of SWIFT tools, and Japan is also one of the first countries to advocate and take action to sanction Belarus.

Fifth, the subjects of sanctions are highly diversified. In addition to the state, the vast number of multinational corporations, civic groups, and certain important international organizations with important influence also participated in the sanctions against Russia, which were rare in previous sanctions. On the one hand, these non-state actors hope to avoid secondary economic sanctions as much as possible in the face of the sanctions "tsunami"; on the other hand, they are under the influence of moral and value principles to maintain their image and reputation by "taking sides".

In the face of such a fierce economic "shell", Russia's domestic economy is facing an unprecedented "big test".

Third, the effectiveness of the US and Western sanctions against Russia is geometric

For the United States and the West, the strategic goal of the sanctions is to force Russia to bear huge economic costs, severely punish its military actions, and even hope to completely drag down the Russian economy. But in the short term, Russia is still likely to withstand the pressure of sanctions. On the one hand, Russia has long planned for this large-scale economic sanction and has a certain anti-sanction experience. Since 2014, Russia has done something about establishing a payment and settlement system and diversifying its foreign exchange reserves. By increasing its holdings of gold, RMB assets and reduced holdings of DOLLAR assets, Russia intends to hedge against the potential risk of freezing foreign exchange reserves. By the end of 2021, Russia's gold holdings were about 2300 tons, accounting for about 21% of its foreign exchange reserves, while US dollar assets have dropped to about 20%; not only that, Russia began to increase its holdings of RMB assets in 2016, and the proportion of RMB foreign exchange reserves reached 12.8% in early 2021, and its foreign exchange reserve currency composition has gradually diversified.

In addition, Russia also has two major "killer weapons" in energy and food, and can threaten the stability of the world energy market and the food market to a certain extent. Russia is the world's second-largest oil producer, a major producer of many key metal minerals, and the largest exporter of wheat. Although the United States has announced sanctions on Russian energy exports, the European Union has not made a similar decision. According to statistics from the International Energy Agency (IEA), in 2021, the EU will import 155 billion cubic meters of natural gas from Russia, accounting for about 45% of EU gas imports and nearly 40% of its total gas consumption; in the oil sector, EU oil imports from Russia will account for about 25% of total crude oil purchases in 2020. Therefore, whether the EU can include Russian energy exports in the scope of sanctions is largely related to the success or failure of economic sanctions against Russia. Not only that, but there are several important economies in the world that have not danced with the United States and the West, which also leaves a breathing space for Russia.

However, if the Russian-Ukrainian conflict cannot be resolved for a long time, and the financial sanctions and technical controls on Russia by the United States and the Western world continue for a long time, it will have a "catastrophic" impact on the Russian economy. On the one hand, the blockade of Russia in the fields of defense, aviation, semiconductors and other cutting-edge technologies by the United States and the West will further weaken Russia's small remaining industrial base. Due to the long-term self-isolation, There is a considerable gap between Russia's technological level in many fields and that of the United States and the West, especially in the field of information and communication industry, Russia has lagged behind significantly. Multilateral export controls imposed by the United States and allies on Russia's key technologies will inevitably further erode the foundations of Russia's industrial development. And near-"devastating" financial sanctions will further exacerbate the isolation of the Russian economy. On the other hand, modern warfare is largely a competition for financial capabilities, and Ukraine has shown a tenacious will to resist in the face of a steady stream of military aid and economic blood transfusions from the United States and the West. If the Russian-Ukrainian conflict becomes protracted and gelatinized, it will make Russia have to deal with huge battlefield expenditures while dealing with economic sanctions, and in the long run, Russia's already long-term weak economy will be worse, and even endanger Russia's internal political stability.

In short, the impact of U.S. and Western economic sanctions on Russia is more concentrated in the long term. The length of the Russian-Ukrainian conflict and the strategic determination of the United States and Europe to sanction Russia are important variables that need to be considered in the effectiveness of the sanctions against Russia. But in any case, at least for now, this fierce "economic war" against Russia has witnessed the integration of forces in the United States and the Western world and the reshaping of the global leadership of the United States, which not only casts a thick shadow on Russia's future economic development, but also stirs up changes in the current global geopolitical and economic pattern. At the same time, it also vividly shows the tools of economic power held by the United States and the West, and is an important case of our deduction and judgment of the attack and defense of great powers under modern conditions.

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*Disclaimer: This article only represents the personal views of the author and does not represent the position of this official account

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