Sanctions will hurt Russia, but they won’t deter Putin

Russia’s leaders and the country’s press have steadfastly pooh-poohed the Biden administration’s statements that President Vladimir Putin has already decided to attack Ukraine, and earlier poked fun at predictions that the attack would occur on Feb. 16 and at statements that Putin had given his commanders the green light. The reality is that no one knows for certain whether or when Russian will launch a large-scale invasion of Ukraine and, if it does, what the campaign would look like. 

This much is certain: Russia has as many as 180,000 troops and National Guard personnel arrayed around Ukraine, enough to launch a massive, combined arms assault from multiple directions if it so chooses and has deployed some to two breakaway regions in eastern Ukraine. Few, if any, military experts expect that the $2.5 billion in weaponry the United States has provided Ukraine will enable it to put up much of a resistance if Putin’s decision to order his troops into the two Russian-backed enclaves in eastern Ukraine presages an ever bigger military gambit.

President Biden has made it clear that while he’ll defend a NATO state that comes under Russian attack, no American troops would be sent to fight and die for Ukraine. No reasonable person with any influence on U.S. foreign policy has argued that he should take that extra step and risk sparking a war with the world’s other nuclear superpower.

That leaves sanctions as the only response. The president has warned Russia that it would face sanctions from the West the likes of which it has never before experienced — much tougher than the ones imposed in 2014, after Russia annexed the Ukrainian province of Crimea and provided arms and soldiers to midwife two separatist enclaves that now occupy about a third of Ukraine’s Donetsk and Lugansk provinces, which adjoin Russia and constitute the Donbas.

With French President Emmanuel Macron — whose feverish recent attempts to avert war through a diplomatic solution involving a Biden-Putin summit have come to naught — calling for “targeted” economic penalties against Russia by the European Union, and German Chancellor Olaf Scholz having frozen the certification of the Nord Stream 2 gas pipeline, the sanctions machine is in motion.

Much seems to be expected of sanctions — indeed, too much. If Putin orders a larger invasion, it’s a safe bet that he and his National Security Council have anticipated severe economic penalties from the West and deemed the steep price as something worth paying to achieve their objectives — which remain unclear — in Ukraine.

The evidence shows that sanctions historically haven’t been particularly effective in preventing states from pursuing an objective to which they attach a high value. The results of the sanctions applied on North Korea to persuade it to ditch its nuclear weapons and ballistic missile program are a recent case in point. 

Not only does Russia have many more economic resources to weather sanctions than North Korea, but since 2014 it has taken steps to reduce their bite.

Russia’s foreign exchange reserves now total $630 billion — the world’s fourth largest. The share of Russian bonds held by foreigners has fallen from nearly 35 percent two years ago to 21 percent today. Russia’s external public debt at the end of 2021 was $478 billion. Now, that’s not chump change, but as a percentage of Russian GDP it’s just shy of 14 percent — among the lowest in the world (some estimates are higher, but not by much). When Putin became president in 2000, the proportion was 62 percent.   

According to a Congressional Research Service (CRS) report, Russia also has reduced its dependence on the U.S. dollar. Between 2013 and 2020, the share accounted for by dollar-denominated assets in the Russian Central Bank’s reserve holdings fell by 50 percent. In mid-2021, the Putin government announced that the dollar, which accounted for one-third of the country’s $186 billion Sovereign Wealth Fund, would be replaced. And Moscow has moved to reduce steeply the use of the dollar in settling trade accounts with co-members of the Eurasian Economic Union (Armenia, Belarus, Kazakhstan and Kyrgyzstan) and its fellow BRIC (Brazil, India, China and South Africa) countries.

Russia’s energy sector surely will be hit by Western sanctions — and that will be a big blow. Energy sales account for about 60 percent of Russia’s exports and 36 percent of its budget revenues. The dependence on oil and gas is both a blessing and a curse for Russia: When prices soar, it reaps megabucks; when they plunge, the ill effects course through the economy as a whole because Russia, a petro-state, lacks a highly diverse roster of exports. Yet, crude oil prices are now above $90 a barrel, and if they stay at that level, Russia will rake in an extra $65 billion this year; and, of course, war in Ukraine could push oil prices even higher.

A Russian attack on Ukraine that extends beyond the Donbas statelets could well deal a death blow to the Nord Stream 2 pipeline, which would have increased Russian gas sales to Europe by a third. And sanctions that sever Russia from the international financial system would make it difficult to collect the proceeds from natural gas exports to Europe. But Europe, which depends on Russia for 40 percent of its gas consumption, also would be hard hit. Try as it might, filling the gap — Russian exports total 168 billion cubic meters in 2020 — by turning to its other significant suppliers (Norway, Algeria, and Azerbaijan) will prove impossible in the short run. Russia certainly will lose a valuable source of revenue, but Europe will suffer, too. 

The deeper and wider the sanctions the West imposes on Russia, the more likely ordinary Russians will be to pay a steep price — not a good way to earn goodwill among them. Moreover, Europe’s economy will be hurt far more than that of the United States, considering that European trade with Russia ($282 billion in 2021) substantially exceeds that of the U.S. and Russia ($36 billion in 2021).

None of this means that sanctions won’t inflict damage on Russia’s economy; they will. But don’t count on them to deter Putin if he has decided that a major attack on Ukraine will serve an important national security purpose. And don’t expect that he’ll relinquish whatever territory he gains at Ukraine’s expense because sanctions inflict pain on the Russian economy that the West assumes will prove unbearable.

Rajan Menon is the director of the Grand Strategy Program at Defense Priorities and senior research fellow at the Saltzman Institute of War and Peace Studies at Columbia University. Follow him on Twitter @rajan_menon_.