US Sanctions against Russia: More (Self-)Harm than Good

By Michael Knezevic

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Sanctions are becoming a staple instrument of foreign policy in the West. In turn, states, corporations and individuals around the world are adapting to minimise their vulnerability. Former US President Donald Trump’s administration saw a marked increase in the number of entities and individuals added to sanctions lists, with China, Russia, Iran and Venezuela among those targeted. However, this increased incidence appears to be more of a policy trend than an idiosyncratic tactic, with President Joe Biden already sanctioning officials from China, Russia and Myanmar within four months of coming to office.

This could – and in part already has – lead to larger powers, such as China and Russia, decoupling themselves from US-dominated financial and technological infrastructure. Key global players are increasingly opting for local currencies, commodities and crypto-payments instead of dollar transactions, dollar-denominated debt and the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network in order to reduce their exposure. As the US’ economic leverage suffers, so too will the impact of its sanctions. Instead, America will have to find a new middle-ground between typically futile diplomatic pressure and controversial military force to make its voice heard overseas.

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Sanctions and Their Impact Over Time

Historically, sanctions came in the form of state-wide embargoes against smaller states such as Cuba. Such indiscriminate targets would cause reputational and moral blowback as stories of food and medicine shortages demonstrate the impact on innocent civilians. The US Patriot Act, which came into force after the 9/11 terrorist attacks, introduced vastly more effective measures by targeting terrorist financing, through the restriction of access to US financial infrastructure and instruments. Since then, secondary sanctions have placed liability on those doing business with primary targets while the US, Britain and the EU’s Magnitsky Acts have allowed individuals involved with corruption or human rights violations to be targeted directly. The Magnitsky Sanctions get their name from a Russian lawyer who died in prison after alleging government corruption.

Nowadays, as with diplomatic expulsions, sanctions often result in retaliatory measures such as counter-sanctions, litigation and ‘blocking statutes’ – legislation which prohibits domestic companies from complying with foreign sanctions. The increasingly complex lattice of economic measures, affecting a range of entities and individuals through various tools and mechanisms, has brought with it a stricter regulatory environment. Where commercially viable, third-party sanctions-busters also create workarounds through shell companies and falsified trade documents. Such practices undermine the economic effect of the measures while failing to address the geopolitical escalations inherent to sanctions.

Russia’s ‘Fiscal Fortress’

One example of how the changing role of sanctions affects nations is Russia. The Kremlin’s defence budget of US$44.6 billion – the second largest in the world – and its nine foreign military bases are dwarfed by America’s US$588 billion budget and bases in 35 countries. The stark contrast between Russia and NATO’s military might should call into question the prevailing Western narrative of Russian aggression.

In fact, Moscow’s long-term economic strategy suggests that it has essentially been engineering a defensively-minded ‘fiscal fortress’ over the last 13 years. President Vladimir Putin’s tenure at the head of an authoritarian regime has allowed him to carry out a long-term strategy where his counterparts are constrained by term limits and the need to define themselves in opposition to their rivals’ agendas.

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In his 2007 Munich Security Conference speech, Putin cited the NATO military build-up along Russian’s western border, while warning against a unipolar world centred around the US. Since then, he has sought to modernise the army sufficiently so that it may serve as a deterrent, while restructuring the state’s finances to reduce its exposure to economic sanctions.

Financial policies have included building hard currency and gold reserves, decreasing external debt – particularly dollar-denominated debt – to just 20% of GDP, and achieving agricultural self-sufficiency. So much so, that net grain importer Russia has since become the world’s largest exporter. Transactions with China and Turkey have seen a shift away from dollars in preference for the local roubles, yuan and lira. The Kremlin also pre-emptively designed its own alternative MIR payment system in the event that it is expelled from the SWIFT network, which spans over 200 countries and territories. In April 2021, the US floated the idea of a SWIFT ban, however, most analysts believe this threat is insincere as it is typically a last resort, as seen in the case of Iran.

Moreover, a ‘de-offshorisation’ drive since 2014 seeks to bring back companies registered abroad amid the turbulent post-Soviet business environment and return tax revenues which are often re-routed to havens such as the Cayman Islands and the British Virgin Islands. The corporate re-domiciliation and re-patriation of assets and data storage serves to minimise exposure to foreign sanctions through two ‘Special Administrative Areas’ – offshore jurisdictions within Russian territory.

However, the cost of such financial and military stockpiling has been reflected in lacklustre economic growth and real incomes which declined 3.5% in 2020. Having reached a certain level of fiscal comfort, there will likely be a period of much-needed investment into the Russian economy and society from any surplus funds, predominantly facilitated by high oil prices. Regardless, the isolationist nature of self-sufficiency does not bode well for growth; the IMF forecasts that Russia’s economic growth will struggle to exceed 2% in the coming years. In this way, even newer targeted sanction regimes could adversely impact the society at large by discouraging globalisation and the growth which it fosters.

The EU’s Softer Stance

As the world’s largest exporter of natural gas and second-largest oil exporter, Russia’s importance as an energy supplier often precludes other countries from applying sanctions beyond symbolic admonishments. The European Union is dependent on Russian energy, responsible for 39% of the bloc’s total gas imports in 2017 and approximately 30% of its oil supply. While the US has sanctioned the offshore Nord Stream 2 gas pipeline project, which is due to double transit capacity for Russian gas into Europe, over alleged energy security concerns, Berlin and others in Europe remain in favour of the project.

Similarly, the EU has proved unwilling to adopt or enforce blunt US sanctions against Iran, instead devising an Instex (an instrument for support of trade exchanges) barter mechanism to deliver humanitarian supplies and lay the groundwork for broader economic engagement with the besieged Islamic Republic. Though failing to achieve significant uptake, such counter-sanction instruments from allied nations will likely proliferate and accelerate the global shift towards de-dollarisation.

Outlook

The likelihood of continuing Kremlin crackdowns against the allies of jailed opposition figure and anti-corruption activist Alexei Navalny as well as heightened media repression in the run-up to September’s parliamentary elections, suggests that further sanctions from the West are a strong possibility. What US policymakers must understand is that sanctions en masse rarely deliver a significant blow to the individuals operating adverse regimes. They do, however, harm the public’s livelihood and dilute America’s own long-term economic influence. Seemingly unjust or indiscriminate measures are invariably met with creative solutions by businesspeople and politicians alike, and these workarounds almost always contribute to de-dollarisation and a shift away from the prevailing US-centric world order. When it comes to sanctions, sometimes, less is more.