Sanctions are losing their potency and have failed to crush the Russian economy
BEN MARLOWCHIEF CITY COMMENTATOR31 March 2022 • 5:52pm
Russia’s pledge to reduce military activity around Kyiv, as part of what it calls “de-escalation”, has rightly been met with scepticism in the West, though sadly not nearly enough.
The move has prompted talk at the highest levels about whether sanctions should be lifted if Russia retreats and commits to peace.
The possibility of sanctions removal was first raised by US Secretary of State, Antony Blinken, a fortnight ago, on the basis that Vladimir Putin agreed to an “irreversible” withdrawal from Ukraine.
Then in an interview with The Telegraph last weekend, Liz Truss said the West could relent if Moscow withdraws and commits to “no further aggression“.
This is naive in the extreme and suggests America, Europe and Britain have learnt nothing about Russia’s psychotic regime. Have they forgotten what two decades of appeasement achieved?
Putin played the West for fools right up until the invasion. Even now, Emmanuel Macron continues to pander to Russia’s warmongering leader with zero to show for nearly 20 phone conversations and a little tête-à-tête in Moscow.
Indeed, there is a strong argument for doing the exact opposite – instead of lifting sanctions, the international community should be preparing to hit the Kremlin with a new round of even more punishing measures, not least because the current ones are clearly losing their effectiveness.
The sanctions that were imposed on Russia at the end of February were unlike anything seen before in terms of speed, scale and western collaboration. But they certainly couldn’t be called exhaustive and the impact has clearly waned.
The Russian economy has not been crushed despite all the excitable predictions from analysts and commentators.
It suffered something akin to a financial heart attack and though a full recovery will take some time, it hasn’t proved fatal and there are signs it is already on the mend thanks to the decisive action of highly regarded central bank governor, Elvira Nabiullina.
The Russian stock market has reopened after a month-long deep freeze. Although the sell-off promptly continued, a temporary stop on equity sales by non-residents, along with a short-selling ban and a short trading window has helped avert a crash, there are obviously questions about how sustainable such interventionary measures are.
Indeed, a ban on foreign investors selling stocks comes to an end on April 1.
Russia’s banking system has stabilised. Measures such as capital controls and freezes on foreign exchange deposits have helped to prevent a run on the country’s banks.
Helped by a doubling of interest rates and a ban on residents transferring money out of Russia, the rouble has staged a strong rally.
After slumping as much as 33pc against the US dollar the day after Russia’s invasion, it is now close to pre-war levels of 85 to the dollar.
It might have been a nice soundbite but the rouble has not been “turned to rubble” as Joe Biden declared at last weekend’s speech in Poland.
Much of the recovery then is artificial but as long as oil and gas receipts continue to flood into the country, Russia can keep rebuilding its hard currency reserves and ultimately weather the storm.
“Self-sanctioning” in the shipping industry has been a resounding failure. Oil tankers continue to arrive in Russian ports.
Traffic in March has been only slightly lower than it was a year ago, and is higher than it was during the same month in 2016 and 2015, according to research from the Institute for International Finance.
Even when the discount on Russian crude is factored in, oil revenues are near record levels, the IIF says.
That’s not to say that sanctions have been toothless. Goldman Sachs is forecasting a 10pc downturn in Russia this year, while Barclays predicts a 12.4pc slump.
But while Barclays expects another 3.5pc decline in 2023, Goldman thinks growth will have returned already with GDP expanding by 2.4pc and has pencilled in a record current account surplus of $200bn by the end of the year.
The West needs to leap into action, pressing home its advantage with a new round of sanctions that completely devastate the Russian economy, starting with a full energy embargo. Without that, sanctions will ultimately fail.
Germany could withstand the shock, its own economic minister Robert Habeck has admitted that it would at least be able to make it through the summer with Russian supplies.
It is just too afraid to inflict further hardship on the German people, but if Lithuania and Poland are prepared to then why shouldn’t Europe’s biggest economy? They are even more dependent on the Kremlin’s oil and gas.
It may not come to that of course if Putin follows through with a threat to turn off the taps on Friday because the West refuses to meet Russian demands to pay for gas in roubles.
There also needs to be a widening of the ban on Russian banks using the SWIFT payments system. Just seven have been cut off from using it, and of the five biggest, Sberbank is the only one that has been shut out.
What else can be done? The US Deputy Treasury Secretary, Wally Adeyemo, has talked about additional export controls – some experts advocate for a full commodities ban or at least a broader raw materials embargo – and Volodymyr Zelensky has called for a trade and shipping blockade, something Adeyemo has refused to rule out.
There should also be punishment for western companies that continue to do business in Russia.
But as things stand, if the price Putin was meant to pay for his invasion was the crippling of Russia’s economy, then sanctions have undoubtedly failed.