While the EU-US-led financial and trade measures initially seemed impressive, they failed to have the crippling economic effect that the West was hoping for. To leverage the full potential of sanctions, participants must overcome their coordination problems and impose targeted export embargoes.
CAMBRIDGE – The legendary Prussian field marshal Helmuth von Moltke the Elder famously remarked that no battle plan survives first contact with the enemy. The implication was that commanders who win wars are not necessarily those with the best initial plans, but those who quickly adapt to new information and to conditions on the ground.
The Ukrainian military’s brilliant counteroffensive, which has forced Russian troops to retreat in eastern and southern Ukraine, is a case in point. A less brilliant example is the West’s effort to use trade and financial sanctions to crimp Russia’s ability to wage war. Here, things have not gone according to plan, and now it is clear that the strategy must be adjusted. To this end, we have identified several steps that would make the Western sanctions regime more effective.
That regime’s opening salvo looked impressive. Immediately after the invasion, the United States, the European Union, and their allies froze the bulk of Russia’s international reserves, excluded most of its banks from the SWIFT international payment system, and banned the sale of many goods to Russia (including aircraft parts and crucial weapons systems). They also clumsily tried to curtail Russia’s ability to fund itself through oil and gas exports: the US imposed an immediate oil embargo, while the EU announced it would ban most Russian oil imports within 6-8 months.
In addition, hundreds of foreign companies announced that they were exiting the Russian market. But while initial forecasts anticipated a double-digit GDP contraction and a ruble collapse, that did not happen. The International Monetary Fund expects Russian GDP to decline by 3.4% this year, while the ruble has increased by roughly 20% relative to pre-war levels.
This does not mean that EU-US-led sanctions have not significantly affected Russian President Vladimir Putin’s war-making power. But they certainly have been less effective than the US and European governments had hoped. What went wrong, and what could be done to achieve greater impact?
Financial sanctions aim to leverage the power of the US and its allies over international finance. They are particularly effective when used against countries that run current-account deficits. By preventing those countries from funding themselves, financial sanctions cause a macroeconomic shock that typically leads to a collapse in imports, output, and the local currency.
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But financial sanctions are far less effective against countries that, like Russia, run current-account surpluses, because these countries can afford to pay for imports with their earnings from exports. While financial sanctions reduce economic efficiency and affect the ability to fund large, complex projects, these effects apply to future growth, not current output.
The effectiveness of trade sanctions also depends on the context in which they are imposed. In particular, their success depends on each party’s ability to redirect its exports or imports. Sanctioning exports to Russia is not the same as banning imports from Russia in terms of costs and benefits.
Before the war, the EU was almost as dependent on imports of Russian energy as Russia was on selling its oil and gas to the EU, resulting in a de facto bilateral monopoly. But while state-oil giant Rosneft has a dominant position on the Russian side, the EU has many energy-importing firms across 27 member states. Thus, whereas Russia can act, the EU can only struggle to get its act together. By contrast, before the war, Russia sourced 40% of its imports from the EU, while the Russian market represented 4% of European exports.
The numbers look even more favorable to the anti-Putin coalition if you consider that the US and the EU – together with the remaining G7 members, Taiwan, South Korea, and Australia – dominate many industries, including aircraft, machinery, and medical instruments. For 30% of the products imported by Russia, the coalition’s share of the Russian market exceeded 70% before the war. This enables the US and its allies to restrict Russia’s access to critical supplies, which, according to internal Russian documents, may have devastating economic effects in the years to come.
But current sanctions do not leverage the full potential of restricting exports to Russia. Because these sanctions are biased toward capital goods, they affect production only gradually, as existing Russian equipment depreciates and requires replacement. As such, they do not have the immediate effect on production that disrupting key intermediate inputs would have. Given the urgency of the war effort, we must identify and disrupt imports that Russia needs right now.
The members of the anti-Putin coalition also seem to have serious coordination problems. As of mid-October, the EU had banned the export of about 37% of all European-made products to Russia, according to data from the Global Trade Alert. These products account for 45% of the EU’s pre-war exports to Russia. But almost half the products the EU banned are not subject to US export restrictions, and vice versa, enabling Russia to substitute between coalition suppliers.
In a recent paper, we developed a framework for assessing the effectiveness of current export restrictions, synthesizing our insights into a single criterion that allows prioritizing bans on exports to Russia of narrowly defined products. Our bottom line is simple: sanctions on exports to Russia are in general very effective, leading to a percentage loss of GDP that is about 100 times larger for Russia than for the sanctioning countries.
If sanctions were based on our criterion and better coordinated across coalition members, the costs incurred by Russia would increase by roughly 60% with no extra cost for the sanctioning countries. Moreover, there is significant scope for increasing Russia’s losses by restricting more products.
The Ukraine war is being fought both on the battlefield and on the economic front, with millions making sacrifices to protect the country and its democracy. We must support them by ensuring that trade sanctions are as effective as they can be.
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CAMBRIDGE – The legendary Prussian field marshal Helmuth von Moltke the Elder famously remarked that no battle plan survives first contact with the enemy. The implication was that commanders who win wars are not necessarily those with the best initial plans, but those who quickly adapt to new information and to conditions on the ground.
The Ukrainian military’s brilliant counteroffensive, which has forced Russian troops to retreat in eastern and southern Ukraine, is a case in point. A less brilliant example is the West’s effort to use trade and financial sanctions to crimp Russia’s ability to wage war. Here, things have not gone according to plan, and now it is clear that the strategy must be adjusted. To this end, we have identified several steps that would make the Western sanctions regime more effective.
That regime’s opening salvo looked impressive. Immediately after the invasion, the United States, the European Union, and their allies froze the bulk of Russia’s international reserves, excluded most of its banks from the SWIFT international payment system, and banned the sale of many goods to Russia (including aircraft parts and crucial weapons systems). They also clumsily tried to curtail Russia’s ability to fund itself through oil and gas exports: the US imposed an immediate oil embargo, while the EU announced it would ban most Russian oil imports within 6-8 months.
In addition, hundreds of foreign companies announced that they were exiting the Russian market. But while initial forecasts anticipated a double-digit GDP contraction and a ruble collapse, that did not happen. The International Monetary Fund expects Russian GDP to decline by 3.4% this year, while the ruble has increased by roughly 20% relative to pre-war levels.
This does not mean that EU-US-led sanctions have not significantly affected Russian President Vladimir Putin’s war-making power. But they certainly have been less effective than the US and European governments had hoped. What went wrong, and what could be done to achieve greater impact?
Financial sanctions aim to leverage the power of the US and its allies over international finance. They are particularly effective when used against countries that run current-account deficits. By preventing those countries from funding themselves, financial sanctions cause a macroeconomic shock that typically leads to a collapse in imports, output, and the local currency.
Secure your copy of PS Quarterly: Age of Extremes
The newest issue of our magazine, PS Quarterly: Age of Extremes, is here. To gain digital access to all of the magazine’s content, and receive your print copy, subscribe to PS Premium now.
Subscribe Now
But financial sanctions are far less effective against countries that, like Russia, run current-account surpluses, because these countries can afford to pay for imports with their earnings from exports. While financial sanctions reduce economic efficiency and affect the ability to fund large, complex projects, these effects apply to future growth, not current output.
The effectiveness of trade sanctions also depends on the context in which they are imposed. In particular, their success depends on each party’s ability to redirect its exports or imports. Sanctioning exports to Russia is not the same as banning imports from Russia in terms of costs and benefits.
Before the war, the EU was almost as dependent on imports of Russian energy as Russia was on selling its oil and gas to the EU, resulting in a de facto bilateral monopoly. But while state-oil giant Rosneft has a dominant position on the Russian side, the EU has many energy-importing firms across 27 member states. Thus, whereas Russia can act, the EU can only struggle to get its act together. By contrast, before the war, Russia sourced 40% of its imports from the EU, while the Russian market represented 4% of European exports.
The numbers look even more favorable to the anti-Putin coalition if you consider that the US and the EU – together with the remaining G7 members, Taiwan, South Korea, and Australia – dominate many industries, including aircraft, machinery, and medical instruments. For 30% of the products imported by Russia, the coalition’s share of the Russian market exceeded 70% before the war. This enables the US and its allies to restrict Russia’s access to critical supplies, which, according to internal Russian documents, may have devastating economic effects in the years to come.
But current sanctions do not leverage the full potential of restricting exports to Russia. Because these sanctions are biased toward capital goods, they affect production only gradually, as existing Russian equipment depreciates and requires replacement. As such, they do not have the immediate effect on production that disrupting key intermediate inputs would have. Given the urgency of the war effort, we must identify and disrupt imports that Russia needs right now.
The members of the anti-Putin coalition also seem to have serious coordination problems. As of mid-October, the EU had banned the export of about 37% of all European-made products to Russia, according to data from the Global Trade Alert. These products account for 45% of the EU’s pre-war exports to Russia. But almost half the products the EU banned are not subject to US export restrictions, and vice versa, enabling Russia to substitute between coalition suppliers.
In a recent paper, we developed a framework for assessing the effectiveness of current export restrictions, synthesizing our insights into a single criterion that allows prioritizing bans on exports to Russia of narrowly defined products. Our bottom line is simple: sanctions on exports to Russia are in general very effective, leading to a percentage loss of GDP that is about 100 times larger for Russia than for the sanctioning countries.
If sanctions were based on our criterion and better coordinated across coalition members, the costs incurred by Russia would increase by roughly 60% with no extra cost for the sanctioning countries. Moreover, there is significant scope for increasing Russia’s losses by restricting more products.
The Ukraine war is being fought both on the battlefield and on the economic front, with millions making sacrifices to protect the country and its democracy. We must support them by ensuring that trade sanctions are as effective as they can be.