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The sanctions against Russia are working

HR/VP Blog - Many ask whether the sanctions against Russia are effective. I would like to explain in this blog post why the clear answer is yes. Already the sanctions that the EU and like-minded partners have adopted are hitting Vladimir Putin and his accomplices hard - and their effects on the Russian economy will increase further. We need strategic patience until Russia stops its aggression and Ukraine can recover its sovereignty in full. 

Putin

 

 

Since Russia brutally invaded Ukraine, the EU has adopted six packages of sanctions against Moscow – and we are about to finalise a “maintenance and alignment” package to clarify a number of provisions to strengthen legal certainty for operators and align the EU's sanctions with those of our allies and partners of the G7. Our measures already now target nearly 1,200 individuals and almost 100 entities in Russia as well as a significant number of sectors of the Russian economy. These sanctions were adopted in close coordination with the G7 members, and the fact that over forty other countries, including traditionally neutral countries, have also adopted them or taken similar measures enhances their effectiveness.

 

Sanctions require strategic patience because it may take a long time for them to have the desired effect.

 

Now, as the war drags on and the costs of energy rises, people in Europe and elsewhere ask whether these sanctions are working and/or whether the side effects are too great. Without underestimating different problems that could occur, including attempts made to bypass them, sanctions remain an important instrument of political action. But for sure we need to use them in a well targeted manner, and, above all, they require strategic patience because it may take a long time for them to have the desired effect.

One of the main sanctions adopted is to stop buying 90% of EU oil supplies from Russia by the end of 2022, depriving Moscow of corresponding revenues. Yes, Russia is able to sell its oil to other markets, however this benefit is limited by the fact that Russia is forced to give high discounts on each barrel (Russian oil is sold at around $ 30 less than the global average). In addition, and this is perhaps the most important point, this gradual oil embargo and the scaling back of the import of gas, liberates Europe from its energy dependence on Russia. We have discussed this issue at the EU level for years, but now we are implementing it.

 

Cutting our structural energy dependence on Russia matters a lot because this dependence has been an obstacle to developing a strong European policy towards Moscow’s aggressive actions.

 

Cutting our structural energy dependence on Russia matters a lot because this dependence has been an obstacle to developing a strong European policy towards Moscow’s aggressive actions. This dependence probably played an important role in Putin's initial calculations in Ukraine. He may have believed that the EU would never sanction Russia seriously because it was too dependent on energy. This is one of his most important blunders when launching this war.

Of course, this rapid detoxification from Russian energy involves significant costs for a number of countries and sectors that we will have to face. However, it is the price to pay to defend our democracies and international law. We have to handle these consequences by reinforcing our internal solidarity and that is what we are doing. By breaking its energy dependence, in line with its climate ambition, the EU is learning that interdependence is not always a neutral instrument that is beneficial to all or a mean to guarantee peaceful international relations. The Ukraine war confirmed that interdependence can be used as a weapon. 

 

This rapid detoxification from Russian energy involves significant costs for a number of countries and sectors that we will have to face. However, it is the price to pay to defend our democracies and international law.

 

Are the sanctions really hurting the Russian economy? Some observers have argued they are not very effective because the exchange rate of the Russian currency is very high. But this interpretation is dubious. The exchange rate of the Rouble simply reflects the fact that Russia has a massive imbalance between the high volume of oil and gas exports and the parallel collapse of imports that has followed the sanctions. This trade surplus is not a sign of good economic health, especially for an economy like Russia. While exporting unprocessed raw materials, Russia must import many high-value products that it does not manufacture. For advanced technology products, Russia depends on Europe for more than 45%, the United States for 21% and China for only 11%. Russia may of course try to limit the effects of sanctions by substituting imports through domestic products. This was done, not without success, in the agricultural sector after the 2014 sanctions. However, for high-tech products, import substitution is much more difficult to achieve.

 

Russia will try to substitute imports through domestic products. This was done, not without success, in the agricultural sector after the 2014 sanctions. However, for high-tech products, it is much more difficult to achieve.

 

Sanctions on semiconductors imports for instance have a direct impact on Russian companies that produce consumer electronics, computers, airplanes, cars, or military equipment. In this field, which is obviously crucial in the war in Ukraine, sanctions limit Russia's capacity to produce precision missiles. On the ground, the Russian army is not making much use of this type of precision-guided missiles, not out of moderation, but out of necessity, as it does not have enough of them. In addition, the Russian air force has underperformed in Ukraine, also because it lacks precision-guided munitions.

The automotive sector is another sector that is very much feeling the effects of the sanctions. Almost all foreign manufacturers have decided to withdraw from Russia and production was last May down by 97% compared with 2021. In addition, the few cars that Russian manufacturers still produce will not have airbags or automatic gearboxes.

 

The Russian oil industry will suffer

Russia as the world’s second largest oil producer is still earning large sums from selling its oil worldwide, notably to Asian customers and this helps it to keep financing the war. But over time, the Russian oil industry will suffer not only from the departure of foreign operators but also from its increasing difficulty in accessing sophisticated technologies such as horizontal drilling. In fact, the capacity of Russia to put new wells in production will be limited, which will lead to a drop in production. Finally, there is the airline industry, which plays a very important role in such a vast country. Around 700 of Russia's 1,100 civilian aircraft are of foreign origin. Russia will have to sacrifice a large part of its fleet, to find spare parts, so that the remaining aircrafts can fly. Even the Russian-produced aircrafts are dependent on technologies and material from western countries. As Alexander Morozov, the head of the research department of Bank of Russia recently wrote: ”The restrictions will lead to decreases in technological and engineering sophistication and in labour productivity in the sanctioned industries. Industries that rely on the most advanced foreign technologies and those with highly digitalized business processes risk being hit harder than others”. 

The list could go on with other important factors: the loss of access to financial markets; the disconnection of Russia with the major global research networks such as CERN for example; the massive brain drain of Russian elites with thousands of highly qualified professionals having left the country. The effects of such moves are not immediately visible. However, the scientific, economic and technological isolation of Russia is a major loss for the country in the medium term.

 

The scientific, economic and technological isolation of Russia is a major loss for the country in the medium term. 

 

Moscow may claim that its relations with many countries remain intact.  However, in reality, sanctions against Russia are also hurting its trade with non-sanctioning countries like China. The alternative offered by China to the Russian economy remains indeed limited. Although Beijing seems to want to make ideological gestures by siding with Moscow; refusing to condemn its invasion; or taking up the Russian narrative on the threat of NATO, it is overall rather careful regarding helping Russia circumvent the sanctions. While its imports from Russia have risen (mainly through greater energy imports), Chinese exports to Russia have decreased in proportions that are comparable to those of Western countries. Even if it does not admit it publicly, China is probably worried that this war could strengthen the position of the United States not only in Europe but also in Asia, with the strong involvement of countries such as Japan and South Korea in responding to Russia’s aggression. This is not exactly what China is aiming at. 

As a result, the latest Russian figures released by Bank of Russia show that transactions through the Russian payment system are down 7.2% in June compared to the first quarter of 2022. This is a real-time indicator of the important slowdown in the Russian economy. Of course the biggest question of all is this: will the sanctions and the real effects they have, lead Putin changing his strategic calculations and if so when? Here we need to be cautious and recognise that his actions have always been disconnected from economic considerations. Putin believes in the magical power of political voluntarism. However, this cannot last forever. Hence Europe must show strategic patience. The war will be long and the test of strength will last. We have no other choice. Allowing Russia to prevail would mean allowing it to destroy our democracies and the very basis of the international rules-based world order.

 

Europe must show strategic patience. The war will be long and the test of strength will last. Allowing Russia to prevail would mean allowing it to destroy our democracies and the very basis of the international rules-based world order. 

 

Even if sanctions do not change the Russian trajectory in the short-term, that does not mean they are useless for they do affect sheer amount of resources it has to wage its war. Without sanctions, Russia would ‘have its cake and eat it’, as the expression goes. With sanctions, it will be forced to “choose between butter and guns” locking Putin in a vice that is gradually tightening.

Finally, let me raise here as well the issue of the alleged or real impact of our sanctions on third countries, particularly African countries, which depend on Russian and Ukrainian wheat and fertilisers. Here it is very clear where responsibility lies for the food crisis. Our sanctions do not target Russian wheat or fertiliser exports. And it is until now Russia’s aggression and its blockade of the Black Sea that is preventing Ukraine from exporting its wheat. We hope however that the negotiations led by the Secretary General of the United Nations will enable this issue to be resolved quickly. I have informed my African counterparts that we are ready to assist them with any difficulties they may encounter related with our sanctions while urging them not to be fooled by the Russian authorities' lies and disinformation regarding this subject.

 

I have informed my African counterparts that we are ready to assist them with any difficulties they may encounter related with our sanctions while urging them not to be fooled by the Russian authorities' lies and disinformation regarding this subject.

 

There is a “battle of narratives” going on internationally over who is responsible global food and energy crisis as was clear at the last G20 Foreign Ministers’ Meeting. But the real answer is to bring an end to the war and this can only be achieved by Russia's withdrawal from Ukraine. I keep reminding all our international partners that respect for the territorial integrity of states and the non-use of force are not Western or European principles. They are the basis of all international law and Russia is blithely trampling on them. To accept such a violation would open the door to the law of the jungle on a global scale. 

 

Europe must become a real power

The war in Ukraine makes clear that, contrary to what many thought rather naively just a few years ago, economic interdependence does not automatically guarantee peaceful international relations. This is why Europe must become a real power, as I have been calling for since the beginning of my mandate. Faced with the invasion of Ukraine, we have moved from debates to concrete actions, showing that, when provoked, Europe can respond. Since we do not want to go to war with Russia, economic sanctions and the support of Ukraine are at the core of this response. And our sanctions are beginning to have an effect and will do so even more in the months to come.

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