Can Sanctions Punish Russia Enough to Stop the Ukraine War?

In response to Russia’s invasion of UkraineEconomic sanctions have been imposed by the G7, 50 countries and other organizations Russia. There are two main types: financial and real. Real sanctions are restrictions on Russia’s trade and the cancellation of its status as most-favored nation. Financial sanctions are a ban on Russian assets being held abroad and prevent cross-border settlement of funds.

Although not a part of sanctions per se, Western companies’ withdrawal from Russia triggered by sanctions has had a real impact. Due to the dire economic outlook under sanctions, substantial outflows of skilled capital have also occurred in Russia.

Real sanctions are tangible because economic prosperity is dependent on real variables like consumption and employment. But since any trade — domestic or international — benefits both the seller and the buyer, trade restrictions are a double-edged sword that harms the sanctioners’ welfare as well. This tends to moderate and slow the latter’s actions. Some countries’ refusal to trade with Russia also creates opportunities for others to trade on favourable terms. This opportunistic behavior has given Russia breathing room.

As for financial sanctions, the asset freeze affects the wealth of Russian senior officials and oligarchs as well as the Russian central bank’s foreign reserves. This is very easy to put in, since it has minimal cost for the sanctioners and clear damage to the sanctionees. Yet its impact on Russia’s domestic economy is minimal.

The sanctions on Russia’s fund settlement exclude Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network and ban them from accessing the settlement in hard currencies. They would be effective if they hindered real economic activities — especially trade. However, there are many loopholes.

Initial plans for the SWIFT exclusion were to make it a “freedom” ‘financial nuclear weapon’ — this was a grossly overblown assessment. SWIFT can be used to send international funds transfers as a message application. Even though it can be annoying to exclude, there are other methods of communication that can be used for cross-border fund transfer instructions.

You can circumvent financial sanctions that prohibit access to major financial centers. For example, if Russia’s trading partners accept payments in renminbi, which Chinese exporters and importers will certainly do, Russia can continue to trade.

Sanctions were designed to cause enough economic damage to Russia to make it impossible to carry out military operations. Clear economic damage has been done: Russia’s GDP in 2022 is expected to shrink by 3.4 percent. However, the damage is much less than originally thought. President Vladimir Putin’s approval rating continues to be very high, demonstrating that sanctions have not had a strong enough impact on the public to shake their support.

However, this does not mean that sanctions are ineffective. They will likely play a greater role in the future.

It all starts with the principle of that ‘changing the status quo by force’ It is unacceptable, and the only way to end the conflict is for Ukraine regain all of its territories. Russia will be completely devastated if the war ends in this manner.

Although this would be a positive outcome from a justice perspective, it is highly unlikely that Putin and his hardline allies would allow it to occur, especially after Russia annexes the Ukrainian territories. Russia faces a grave risk of losing complete control of its weapons and military tactics. This could make the conflict worse and escalate into a war. The global community must find a way for Russia to lose the war before it does. This could even mean that Ukraine has to compromise.

It is crucial to differentiate between the peace accord and the end of war. A truce allows the West to continue sanctions. While their short-term impact has not been as expected, it is clear that sanctions will have a severe effect on Russia’s economy over the medium and long term. With the withdrawal of Western firms, Russia’s industrial technology has gone backwards substantially. Russia’s growth potential has been hampered by the loss of valuable human capital.

Russians might realize that unless they have a leader who is able to come to terms and accept the West, there is no way forward. This could result in a change of regime in Russia, and allow for the negotiation of an end to the war that is compatible with international justice.

An important caveat to this strategy is how Russia’s allies and neutral countries behave under a truce. They will continue to support Russia economically in any way they can, whether it is willingly or not. Just look to the example of North Korea, where a highly autocratic regime has long survived in the face of international sanctions, due in no small part to China’s acceptance of its reign.

To avoid creating a ‘Big North Korea’ out of Russia, it is essential that the West continues diplomatic efforts to mobilise support from neutral countries and, if possible, convert Russia’s allies to the side that opposes military solutions to international disputes.

Masahiko Takeda is a Senior Fellow in the Australia–Japan Research Centre at the Crawford School of Public Policy, The Australian National University.

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