scorecardresearch

Western sanctions against Russia are no deterrent; Europe will suffer as much

Western analysts say the measures will be crippling in the longer term, but they forget Russia now gains access to resources and the market of Ukraine. 

vladimir putin joe biden
U.S. President Joe Biden and Russia's President Vladimir Putin arrive for the U.S.-Russia summit at Villa La Grange in Geneva, Switzerland June 16, 2021. (Photo source: Reuters)

By Joseph P Chacko

The US,  Europe, and Japan have imposed severe sanctions on Russia, but it is currently only punitive. As a deterrent, the sanctions are entirely ineffective. Russian President Putin doesn’t care what the economic impact is of this invasion and is not going to stop him from doing what he’s planning on doing. Western analysts say the measures will be crippling in the longer term, but they forget Russia now gains access to resources and the market of Ukraine.

The US and its allies have to be seen as punishing Putin for his ‘bad behaviour’, and if they are not going to participate in shooting matches in Ukraine, they need to punish him somehow. Economic levers are all the allies have, and the U.S. has even less. 

The sanctions

As soon as Russia recognised the breakaway republics DPR and LDR, the US grandly announced small incremental sanctions based on the little leverage it had on Russia. After the invasion, US President Joe Biden rolled out a set of measures he said would “impose a severe cost on the Russian economy, both immediately and over time.”

This time, he sanctioned the state owned Sberbank and VTB Bank. Sberbank maintains around one-third of total Russian bank assets, and sanctions block US dollar transactions going forward. VTB Bank holds about 16 percent of Russia’s bank assets and has been totally frozen by the US sanctions via “full blocking sanctions.” 

Otkritie, Novikom, and Sovcom, the three major financial institutions and about 90 financial institution subsidiaries worldwide, are connected to the sanctioned banks. As per the US Treasury, these financial institutions conduct daily foreign exchange transactions of 80 percent of the total USD46 billion in dollars. Western experts agree that the move could have very critical ‘systemic’ effects on Russia.

It also has ‘systemic’ effects on Europe as it depends on Russia for 35 percent of the Gas it consumes, without which its factories cannot produce goods economically compared to China and other Asian countries. Europe cannot pay for Russian Gas, using correspondent banks that use dollars in the middle of the transaction. Russia might turn off European Gas in the winter. But the EU claimed that it has all the Gas it wants for the winter if Russia turns off the supply.

The irony of the situation is seen from the information given by the Japanese, who say that the US has ‘requested’ Oil and Gas to be kept out of the sanctions.

However, the EU will see a flight of capital to the US, buy costlier LNG from the US and of course, the US will see more arms sales to Europe. 

The US is playing the ‘Tank and Gas’ game in Europe as Russia takes away Ukraine.

Not so SWIFT 

The US turning off the SWIFT international payment system and GPS has been a long standing fear of the countries worldwide. Now GPS has alternatives but not SWIFT. 

For a long time, the U.S. has floated the threat of removing Russia from the SWIFT grid, affecting its payments. Yesterday was D-Day, and the US faltered.  

“It is always an option, but right now that’s not the position that the rest of Europe wishes to take,” President Biden said on the SWIFT option not being exercised at this time.

How the US played Ukraine

The US propped the Ukrainians (one can argue it was vice versa, does it matter?) against Russia. First, the US sent the older stock of weapons for Ukraine to fight a modern Russian military. Then the US sent its massive Gas carrying ships to Europe, robbing the revenue of gas supplies from the Ukrainian gas pipelines. Then it refused the ‘heavy lifting’ after the Russian attack. And finally, it refused to exclude Russia from SWIFT. 

Ukrainian Foreign Minister Dmytro Kuleba wrote his frustration on Twitter, “I will not be diplomatic on this. Everyone who now doubts whether Russia should be banned from SWIFT has to understand that the blood of innocent Ukrainian men, women and children will be on their hands too. BAN RUSSIA FROM SWIFT.”

It is universally agreed that removing Russia from SWIFT will be the most crippling action against Russia.

Rest of the sanctions

The President of the European Commission (EC), Ursula von der Leyen, had promised economic and financial sanctions in the event of Russia’s “invasion” of Ukraine.

Yesterday, the EU leaders agreed to a sweeping second set of sanctions against Russia in an emergency. The EU statement on the sanctions covers the energy and transport sectors, the financial sector, dual-use goods with export controls, export financing, visa policy, and additional sanctions against Russian individuals.

Ursula says the sanctions would target 70 percent of the Russian banking market and key state owned companies, including defense. “Sanctions would also freeze Russian assets in Europe and block Moscow’s access to European financial markets,” said von der Leyen.

She said the Russian oil sector would not be able to upgrade its refineries. The Russian airlines will not receive aircraft and equipment. The visa restrictions are against diplomats and business people who will not have ‘privileged access to the EU’.

The EU’s first round of sanctions was against the Russian Banking system and Russian individuals. 

Japan is another economy that matters worldwide. After years of trying to mend relations with Russia, it imposed sanctions. Essentially, Japan has sanctioned Russian individuals and groups via asset freeze and suspension of visa issuance, asset freeze of Russian financial institutions, and regulated exports of semiconductors to Russian military-related organizations.

Effect on India – Russia trade

The US financial sanctions do not affect India – Russia arms trade. CAATSA can potentially affect Russian weapon supplies to India and has not been used yet. Although the Indian arms purchases contribute hugely to Russia’s arms exports but are minuscule compared to the contribution to the Russian GDP. Even the total Indian annual trade with Russia is under USD10 billion. 

Rosoboronexport, the Russian military export arm, has virtually abandoned the US currency. India pays Russia Rupees and sometimes in other currencies like Euro to avoid US sanctions. The Rupee – Rouble arrangement ensures that the Russian payments will be settled even in the event if Russia gets cut off from the SWIFT gateway. Russia has already called for an increase in trade with domestic currency mode and is likely to extend to all the trade. 

(The author is a publisher, columnist and author. He writes on defence and strategic affairs and occasionally other topics. He tweets @chackojoseph Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited).

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Most Read In Defence