Sat. Nov 26th, 2022

•Harsh Sanctions Could Make the Country a Bigger, Badder North Korea

By Maxim Mironov

After Russian President Vladimir Putin annexed Crimea in 2014, the United States and its allies imposed a raft of relatively mild sanctions on Russia. These measures sent the ruble tumbling and dented Russian GDP growth, but the Kremlin’s propagandists downplayed the damage and, over time, the economy stabilized. So when Western countries announced a much tougher suite of sanctions in response to Putin’s latest assault on Ukraine, many Russians shrugged, convinced that their economy could withstand any level of Western sanctions.

They couldn’t be more wrong. The punitive measures that the United States and its allies have put in place since the invasion began could be catastrophic for ordinary Russians, as could the steps that many Western companies have taken to sever their ties to Russia and pull their businesses from the country. But the vast majority of Russians, even educated ones, have little idea of what is coming. Shortages of basic goods, mass unemployment, and even travel restrictions intended to stem the flight of human capital could soon become facts of life. If Western countries continue to tighten the economic screws on the Russian economy as a whole, instead of targeting specific figures in the regime with more tailored sanctions, they will risk turning Russia into something like a larger, more unstable, and more dangerous North Korea.

SOLD OUT

In a matter of days after Putin’s invasion, the West has largely reversed three decades’ worth of economic integration with Russia. Washington and its allies have barred Russia’s central bank from transacting in dollars, effectively frozen most of its foreign currency reserves, and slapped punishing sanctions on Russia’s most important financial institutions. They have removed seven Russian banks from SWIFT, the interbank messaging system that serves as the backbone of the global financial system, and restricted transactions with many major Russian state-owned enterprises. And on March 8, less than two weeks after the invasion began, U.S. President Joe Biden announced a ban on all Russian oil and natural gas imports to the United States.

Waiting in line for the ATM in Saint Petersburg, Russia, February 2022Anton Vaganov / Reuters

As a result of these and other measures, Russians will soon face shortages of basic products—not just luxury goods such as iPhones and iPads, the import of which is now banned, but also more ordinary goods and commodities such as clothes, cars, household appliances, and food. IKEA and H&M have announced that they are withdrawing from the Russian market. Toyota, Honda, Mercedes-Benz, and Volkswagen have stopped exporting vehicles to Russia and closed their local production plants. And McDonald’s, Coca-Cola, PepsiCo, and other Western food companies have suspended business in Russia. Russia imports almost 40 percent of the seeds that sustain its agricultural industry—and almost 90 percent of the seeds used to grow certain staples, such as potatoes. Russian farmers will find alternatives over the long run, but in the short term, many basic food products will disappear from Russian shelves and the prices for them will skyrocket.

Russia is highly dependent on international trade. But even companies that still wish to transact with Russia will soon have trouble moving goods to and from the country. Maersk, one of the world’s largest shipping container operators, has announced that it will halt shipments to Russia. Even if another company is willing to make up the shortfall, likely at exorbitant prices, it is unclear how Russian firms could pay for its services. The country’s export earnings will fall significantly because consumers in the West are refusing to buy Russian goods. Gazprom, the country’s main exporter of gas, is now unable to raise money in the United States, making it unclear how the company will receive foreign exchange earnings because it must use a significant portion of its revenue to repay its debts. And even non-sanctioned Russian oil companies are struggling to find buyers for their oil.

Western sanctions risk turning Russia into something like a larger, more unstable, and more dangerous North Korea.

Russia’s central bank has $650 billion in foreign exchange reserves, but Washington and Brussels have already frozen more than half of those funds. The Kremlin also has reserves in gold, but it is unclear how it could make use of these stockpiles. Few foreign banks will want to buy them from Russia’s central bank for fear of triggering sanctions and incurring huge fines. Russia has built up its domestic manufacturing base in recent years. But Russian factories that produce cars, airplanes, and household appliances all use imported components. As a result, entire industries could shut down in the coming months, precipitating not just shortages of goods but mass unemployment, a collapse of the tax base, and an inability to pay salaries to state employees. Already, Russia’s largest automobile producer has had to temporarily halt production because of shortages of imported components.

Even air travel will grind to a halt in Russia. Almost all Russian commercial aircraft are imported, and EU and U.S. sanctions now bar Western companies from supplying spare parts. Huge numbers of airplanes will have to be decommissioned as a result. Even the Internet as Russians know it will be shut down. The Kremlin has blocked access to Facebook and Twitter. It has threatened to shut down YouTube and could decide to block informational websites such as Wikipedia. In short, Russia will soon be one of the most isolated countries on earth.

It is not just what Moscow is trying to keep out that should scare Russians; it is what Moscow is trying to keep in. Everyone who can get out of the country will do so. In recent days, I have received messages from friends and strangers alike seeking advice on how to emigrate. The government understands this, which is why it has introduced a raft of measures designed to retain skilled information and technology professionals, including a three-year tax holiday and heavily subsidized mortgages and loans. But such measures won’t work. Skilled professionals are already racing for the exits. Soon, therefore, the Russian government will probably introduce exit visas for certain categories of workers or close the country altogether. Those who are nostalgic for the Soviet Union will finally learn what it was really like.

FROM ENEMIES TO ALLIES

Russians are not the only ones who are unprepared for what is about to happen. The Western countries that have imposed these sanctions have not fully thought through their likely consequences. Measures that make life miserable for ordinary Russians might have the opposite of their intended effect: they might rally the public behind Putin. Over the last 20 years, the Russian leader has built a powerful propaganda machine—one that has been working overtime since the Ukrainian invasion began. Right now, about half of Russians support the war. (Among them, initially, was my mother-in-law. She has a university degree but believed Putin’s claim that Ukraine and NATO had attacked Russia and that Russia was just defending itself. It took some time for my wife to convince her that Putin had attacked Ukraine and not the other way around.)

Last week, Putin signed a new law that makes publishing “fake news” punishable by 15 years in prison. Needless to say, all factual reporting on the war in Ukraine is considered fake news. Even the word “war” is prohibited; Russians must call the conflict in Ukraine a “special military operation.” With fewer alternative sources of information to compete with, the Kremlin’s propagandists will grow even more powerful. Many Russians will come to believe that Russia is fighting a holy war against the West and NATO, and that Western sanctions are designed to make ordinary Russians suffer. They will believe, as Russian Foreign Minister Sergey Lavrov put it last week, that sanctions are a “tax on independence.”

The United States and its allies should therefore rethink their sanctions strategy. Instead of making enemies of the Russian people by strangling the Russian economy, Western countries should make allies of them in a more targeted attempt to squeeze Russia’s leaders. Washington and Brussels should relax some of their most sweeping punitive measures, such as those that prevent ordinary Russians from accessing their own money, obtaining basic necessities, and traveling to Western countries. Instead, they should target only Russian oligarchs and high-ranking officials, confiscating their assets abroad and closing borders to them and their family members. The United States and Europe have done this to an extent, but they should go much further, sanctioning all senior government officials and employees of state-owned companies as well as their families. If it continues to target all Russians with crippling sanctions, the West will impoverish and immiserate Russia—and possibly bolster Putin.

MAXIM MIRONOV is Associate Professor of Finance at IE Business School and a former Investment Director at Promsvyazcapital in Moscow.

Credit | Foreign Affairs

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