Since 2014 Russia-Western relations have been entangled: the crisis began with Vladimir Putin’s decision to annex Crimea in March 2014, despite the Budapest Memorandum guaranteeing the territorial integrity of Ukraine. Putin’s action demanded a response: since military action was off the table, in a situation where “doing nothing” was not an option, economic sanctions were the tool of choice; the EU’s economic sanctions come into force at the beginning of August 2014, with the Council Regulation (EU) No 833/2014 of 31 July 2014. These sanctions were then extended until 31 July 2016, then EU’s Member States decided to link the lifting of the economic sanctions with the full implementation of the Minsk agreements: a package of measures including a ceasefire, withdrawal of weapons from the front line and a constitutional reform in Ukraine granting self-government to certain areas of Donbas and restoring control of the State border to Ukraine. The EU imposed different types of restrictive measures: diplomatic measures, individual restrictive measures like asset freezes and travel restrictions for persons and companies, restrictions on economic relations with Crimea and Sevastopol and with the non-government-controlled areas of Donetsk and Luhansk, economic sanctions and restrictions on economic cooperation. However, the most important sanctions tool by far has been prohibiting long-term financing for large State-owned companies in the banking sector including Sberbank, VTB and VEB (Russia’s State-owned development finance institution) and energy sector, namely oil giant Rosneft and Transneft. The reach of United States sanctions goes much further: according to the 2014 Ukraine Freedom Support Act, U.S. can impose secondary sanctions to foreign entities that violate American sanctions against Russia, this means that every company or individual around the world risks heavy sanctions if it doesn’t comply with U.S. sanctions.
Inevitably, Russia responded with its own counter-sanctions: on August 6, 2014, the Russian government banned imports of foodstuffs and raw materials from countries that had introduced sanctions against Russia; these counter-sanctions have become part of the general import policies of the country, such policies reduced foreign competition and allowed further Russian growth in the following years.
From the point of view of economic theory, economic sanctions are aimed at creating additional difficulties for the functioning of the financial and economic system with the goal to achieve certain political objectives; in particular, the sanctions imposed to Russia were intended to accomplish three goals: first of all, to avoid military escalation, in second place to encourage Russia to agree a political settlement, and lastly to condemn violation of international law.
Before trying to analyze how the sanctions suffered by Russia during 2014-2015 influenced its economy, it is necessary to understand the Russian economy framework before the invasion of Crimea. Russia’s position in global economy can be defined using five key points: first, Russia was the world 6th biggest economy, and no large economy was ever been subject to significant sanctions (except Italy for the invasion of Abyssinia, in 1935-1936, when the League of Nations imposed sanctions on the export of coal and oil products in order to stop the Italian imperialistic war against Ethiopia, and Japan, after the occupation of northern Indochina in 1941, when the U.S. sanctioned this country with an embargo on oil and gasoline exports). Second, Russia’s trade dependence, still today, is limited: in fact Russian goods are fundamental to the global market, especially the energy market; this makes an oil and gas export embargo on Russia unthinkable. Third, as a major power Russia could not be isolated: even if United States and Europe maintained a strong sanction position, Russia could always turn its commercial relations elsewhere, toward China for example. Fourth, Russia has always been in a position where is able to respond to any sanctions, with counter-sanctions, but neither Russia nor the West can afford to interrupt trade relations, it would be an intrinsically self-damaging move. Lastly, the fifth feature saw a significant part of Russia’s economic elite more tied to the global financial system than the country as a whole.
Now that Russian position in the economic sphere is clear, we can consider the direct and indirect economic effects that sanctions have generated.
Considering the short period, we can affirm that the economic sanctions against Russia were successful: in accordance with the analysis of an American political scientists, Katrine Stroner-Weissins, December 2015, “there is good evidence of the sanctions efficiency, Russia’s economy is suffering from the low world prices for the oil, EU and US sanctions inhibits investments and the availability of imported goods: the Russian economy is in recession, and the budget deficit will reach 3% in 2016”. As well as direct effects, the indirect effect of sanctions against Russia should be considered: the persistent geopolitical tension and the potential for new sanctions coming from the West were viewed by investors as an important source of additional economic risk, so the attractiveness of the Russian economy for foreign and non-foreign investors has been significantly reduced. Those indirect effects have multiple components: reduced borrowings for all the issuers, a decreased inflow of foreign investments and increased outflow of Russian capital.
Since the beginning of the crisis the aim of the sanctions was the imposition of severe consequences on Russia for its actions and to thwart Russian abilities to continue this aggressive policy against Ukraine; but sanctions have failed to achieve this goal and less than two months ago, the world witnessed a new Russian attack against Ukraine. Since the collapse of the Soviet Union, NATO moved hundreds of miles closer to Moscow, Putin has always described NATO’s expansion menacing, and the prospect of Ukraine joining it a major threat; in February President Zelensky formally expressed the Ukraine’s intention to join NATO. Russia has long opposed Ukraine’s connections to Western establishments, in specie the North Atlantic Treaty Organization, so Zelensky’s request caused multiple Russian actions that led to the Russian invasion of Ukraine on February 24, 2022: Moscow, on February 21, 2022 recognizes the Donetsk People’s Republic and Luhansk People’s Republic in Eastern Ukraine as independent States and a massing of Russian troops at Ukraine’s border with the excuse of training exercise. As a result of Russian invasion, many Western powers, especially European Union, have imposed sanctions on Russia in attempt to deter the Kremlin’s action. Since February 2022, the EU has imposed five packages of sanctions against Russia, including targeted restrictive measures, economic sanctions and diplomatic measures; all these five packages of sanctions derive from the cyclical amendment of two basic acts: Decision 2014/512/CFSP and Regulation No 833/2014.
With the Council Decision 2022/264 amending Decision 2014/512/CFSP concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine, the EU adopted the first package of sanctions, that arrived the day before the invasion; the Council agreed on a package of measures to respond to the decision by the Russian Federation to proceed with the recognition of the areas of Donetsk and Luhansk. This package includes target sanctions against members of the Russian State Duma, restrictions on economic relations with the Donetsk and Luhansk oblasts and restrictions on Russia’s access to the EU’s capital and financial market. The second package of sanctions was not long in coming: the day after the Russian attack, the EU issued new sanctions to respond to the unprovoked and unjustified military aggression against Ukraine; these measures cover the finance, energy, transport and technology fields, they also directly affect the President Vladimir Putin and Sergey Lavrov, Minister of Foreign Affairs of the Russian Federation. These individual sanctions have divided public opinion in two groups: those who argue that individual sanctions are a violation of human rights, and those who attest that this kind of sanctions are a very effective way to limit the violation of human rights and international law. In general, sanctions violate human rights when they damage individual personalities arbitrarily, so if the authorities are not transparent about the listing logic and process; also, sanctions can be considered a violation of human rights, when they are used as an instrument to punish political enemies or minority groups. In this specific case, it can be said that the EU’s sanctions have the specific goal to stop continuous violations of human rights, but also of the fundamental principles of international law: the principle of non-interference in the internal affairs and the prohibition of the use of force.
During the following weeks, the European Union has emanated other three packages of sanctions, the last one on April 8, 2022: the Council, amending Regulation No 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine, with Regulation 2022/576, has introduced the fifth package of sanctions; this one includes an embargo on coal and other solid fossil fuels coming from Russia, a ban on all Russian vessels from accessing EU ports, import of other goods such as wood, cement, seafood and liquor, export to Russia of jet fuel and other goods, and deposits to crypto-wallets.
Once again, the sanctions were not intended to destroy the economy of Vladimir Putin’s Federation, but only to create additional incentives to start peace negotiations; despite this, the immediate effects have been quite heavy: the sanctions coming from US, EU and Japan have frozen approximately 400 billion of dollars, including gold and foreign exchange reserves; the CBRF (Central Bank of Russian Federation) did not expect a freeze on reserves, on March 9 the situation collapsed and CBRF was forced to ban the sale of cash to the public. Also, the key rate was increased from 9.5% to 20%, in order to reduce the outflow of capital from the country and deposit from the bank; however, the increased rate of interest brought no profits. First of all, on the whole, the rate of deposit with the Russian banks decreased; secondly, with a key rate to 20%, also interest rates on loans soared grew to 30%, a lot of companies faced a sharp increase in interest cost per annum; these companies requested to be included in a support program and the federal government of Russia made promises that will represent a burden of Russian economy, already in the second half of the year. A severe decline in business activity remains the main risk for the Russian Federation, a reduction in oil and gas exports could cause the Russian economy to fall up to 15-20% in 2022, in fact Putin has no alternative routes to direct oil and gas flows; added to this is the fact that companies from the EU, the US and other countries do not want to work anymore with Russian societies, most of these societies will begin to lay off employees, concretizing the risk of mass unemployment in certain regions or cities.
The fierce financial sanctions unleashed on Russia are not only inflicting an economic disaster on the Russian Federation, but they are also menacing the global economy; the European countries are barely recovering from the economic impact of Covid-19 pandemic and now, a new financial crisis is going to cause higher rates of inflation and a supply chain disruption. Russia is not only the world’s biggest exporter of oil and gas, but is the major exporter of these goods to Europe, in fact less than two months after the Russian attack, gas in Europe is about six times more expensive than what it was during January, 2022. According to an ECB (European Central Bank) forecast, impact of Covid-19 and Russia-Ukraine conflict will have a very negative impact on euro area growth in 2022, in the coming months we have to aspect a very high level of inflation, before a period of decline; it is set to average 5.1% in 2022, 2.1% in 2023, and finally 1.9% in 2024.
The truth of the matter shows that, although the consequences of this crisis have had a fatal impact on Russia’s economy, the world is already suffering the effects of this situation: inflation is already ravaging most of the global economies, due to the sharp increase in oil, natural gas and food prices; experts have predicted an increased uncertainty, unpredictable stock swings, a decrement in in investment and economic growth impediments. With this prospect, it is fundamental for policymakers to find alternative ways to the Russian marketplace to get commodities like oil, natural gas, wheat, neon, titanium and palladium.
