The utilization of economic weapons during conflict has a lengthy history. The rise of globalization and global supply chains, however, has given these non-lethal weapons unprecedented power. We can look into the latest situation that the world is facing since 2022.
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In response to Russian President Vladimir Putin’s invasion of Ukraine in February 2022, the United States and its allies imposed a number of sanctions and other economic restrictions on Russia. One year later, however, the effectiveness of these measures provides crucial insights into their limitations. Sanctions and export controls have been effective at undermining Russia’s financial resources and industrial foundation, but have had little effect on the Kremlin’s strategic calculus.
What is economic warfare?
Economic warfare is the use of or threat to use economic means against a country to weaken its economy and, in turn, its political and military influence. Economic warfare also includes the use of economic means to compel an adversary to alter its policies or behavior, or to impede its capacity to maintain normal relations with other nations. Trade sanctions, boycotts, sanctions, tariff discrimination, the withholding of financial assets, the suspension of aid, the ban of investment and other capital flows, and expropriation are common economic warfare tactics.
The utilization of economic warfare against Russia
Sanctions aren’t a magic bullet, and Ukraine’s wins over Russia on the battlefield show that economic warfare can’t replace real war. In late 2021, U.S. President Joe Biden became apprehensive about a large-scale Russian invasion of Ukraine, prompting major sanctions against Russia. Initially, policymakers tried to discourage Putin from invading Ukraine with the prospect of sanctions, enhanced security assistance to Kiev, and diplomatic overtures to Moscow.
Western officials warned that an invasion would cause serious economic harm, unlike Russia’s 2014 invasion of Ukraine. But Putin was determined. He chose to invade, presumably calculating that the cost of punitive sanctions would be acceptable for the swift conquest of Ukrainian territory.
After Russia invaded, the US and its allies quickly imposed economic costs to show resolve and start depleting Russia’s financial reserves and military power. Within a week of Russian tanks crossing into Ukraine, the United States and its G-7 allies imposed severe sanctions on Russia’s central bank and several of the country’s largest commercial banks, oligarchs, political operatives, and military-industrial complex. In addition, the West imposed stringent export restrictions to deny Russia access to semiconductors and other essential high-tech goods.
The initial success
Initially, sanctions shook markets, causing the ruble to plummet and Russia to be compelled to double domestic interest rates to prevent capital flight. Last year, export controls caused difficulty for Russia to make guns and ammunition. As a result, Moscow had to buy from Iran and North Korea, and other measures of industrial production, such as the number of cars constructed had fell.
Economic warfare being ineffective lately
Isolating Russia from trade and financial interactions with the United States, Europe, and other advanced economies has harmed the Russian economy, but not as severely as might have been anticipated at first. The US ban on Russian oil prompted Brent crude to rise above $100 per barrel and the Russian rouble to fall sharply against the US dollar. However, the rouble did not decline as much as some may have anticipated.
By the end of 2022, it was clear that Russia had handled the first economic storm better than many Western officials and experts had thought. Russia’s economy shrank by more than 2% in 2022, which was a big change from 2021, when it grew by 5%, but it wasn’t nearly as bad as some initial predictions of a 10% or more drop in GDP.
What altered Russia’s economic fall limiting economic warfare?
Russia first profited from war. Before the war, oil and gas made up almost half of Russia’s budget. Because of the war and the geopolitical uncertainty, it caused, energy prices were high for most of 2022. This allowed Russia to increase its oil earnings by about 20%, which was a big buffer against the effects of Western sanctions.
Russia had prepared to avert Western sanctions. In 2018, Moscow increased its gold reserves and withdrew from the U.S. banking system. It created domestic interbank transfer and payment infrastructure that handled domestic and Russian-allied payments well. After losing commerce with the West, Russia strengthened links with China, India, and the Middle East. To mitigate the impact of sanctions, Russia implemented macroeconomic policies like capital controls and corporate bailouts.
Third, Russia has faced less “maximum pressure” economic warfare than Iran, North Korea, and Venezuela. Dozens of Russian institutions remain connected to the international banking system, facilitating trade without restrictions.
What’s next?
Sanctions will hurt Russia’s economy and industry in the long run. Long-term consequences will result from the loss of the approximately 500,000 Russians who have fled the country, a talent drain. Export controls will weaken Russia’s manufacturing sector. The G-7’s actions last month on the eve of war’s first anniversary would continue to hurt the economy by targeting evasion and bigger categories of commodities.
However, policymakers argue that Putin’s strategic calculation will be impacted more by wartime events than by sanctions and export controls.
According to Peter Harrell, former Senior Director for International Economics and Competitiveness on the White House National Security Council (NSC), Western politicians can utilize sanctions to achieve immediate aims and the G-7 should redouble efforts to provide Ukraine with Russia’s frozen assets and other resources.
The G-7 has announced that it would freeze Russian assets in its member states until Russia and Ukraine reach a diplomatic resolution and Russia “pays for the damage it has caused.”
“Western countries can also use the tariffs they have imposed on the Russian goods they continue to import as a source of support for Ukraine. Last month, for example, the United States hiked tariffs on aluminum imports from Russia to 200 percent. These tariffs force Russian exporters to offer lower prices and encourage Western importers to diversify to other suppliers’, he adds.
Sanctions can help, but they won’t change an adversary’s decision calculus overnight. In the context of the West’s broader policy towards Ukraine—a plan that has been extraordinarily successful in uniting the West, repelling much of Russia’s first violence, and eliminating Russia’s chances of winning Ukraine—a related lesson is also obvious.
However, it is uncertain whether these sanctions will have a significant impact on Russia, given that existing sanctions are ineffective. Time will tell which regulations will enhance the effectiveness of economic warfare and whether any regulations will be imposed!
