Sanctions against Russia - spectacle of illusionists

Enlarge image

House in Kiev destroyed by Russian rocket attack:

Russia is continuing its war of aggression - and is unaffected by Western sanctions

Photo: Emilio Morenatti / dpa

"Serious consequences" of an attack on Ukraine should deter Russia from starting a war.

"Tough sanctions" are now the West's answer because the deterrent didn't work.

But perhaps Viktor Tatarintsev, the Russian ambassador to Sweden, was right when he told the Aftonbladet newspaper: "Excuse my language, but we don't give a shit about all your sanctions."

There is no clearer way of summarizing how the West's strategy of influencing the course of events by threatening sanctions failed.

This shouldn't come as a surprise to anyone, because all the factors that make sanctions a successful instrument do not apply to this conflict.

When viewed soberly, a few hypotheses can be formulated that make sanctions promising:

· The sanctioned country is rather small.

· The world community is as united as possible when it comes to sanctions.

· The sanctioned country has no significant importance in individual markets.

· The damage to the sanctioning states is not too great.

· The sanctioned country has no time to prepare for the sanctions.

In the specific case of Russia, we have to admit that

.

Russia is not Iran or North Korea

Western media never tires of emphasizing how unimportant Russia is for the world economy.

Despite the country's size, well-educated population and vast natural resources, Russia's economy ranks only 11th in the world.

While the United States was the world's largest economy with a gross domestic product (GDP) of $20.9 trillion in 2020, Russia's nominal GDP was only $1.5 trillion.

This puts Russia behind much smaller countries like the UK, France, Italy and South Korea.

In terms of GDP per capita, Russia is on par with China at just over $10,000, but behind Romania and far behind Germany (45,000) and of course the USA (63,000).

Even before Russia attacked Ukraine, all forecasts assumed that China would be well ahead of Russia in just a few years.

This means that the Russian Federation is playing far below its potential, but it is still not a small country.

If sanctions can clearly damage North Korea and Iran, it is not so easy in the case of Russia.

This can also be seen in the effect of the sanctions imposed after the occupation of Crimea.

The Russian economy has indeed stagnated for a number of years, but this is more likely to be due to the significant drop in crude oil prices at the same time than to the consequences of the sanctions.

Conversely, they promoted an unexpected development in Russia.

Domestic production of milk, fruit and vegetables has increased significantly.

Russia is not alone

Although the Western world is united in imposing sanctions and this unity is prominently and loudly emphasized, we have to admit that Russia is by no means isolated.

Some countries don't participate.

I'm not thinking of Syria, Venezuela and Iran, which have officially stated that they are on the Russian side, but above all of heavyweight China.

Officially reluctant, it is safe to assume that China will be more than willing to fill any gaps left by Western sanctions.

The country is technologically world class in many areas anyway.

I recall the US sanctions against Huawei, which are ultimately intended to slow down China's technological advance.

It's hard to imagine that Russia could do worse with Chinese help and technology than with Western technology in its attempt to modernize the country.

Even if it does, the surge in demand from Russia should continue to promote China's development.

As if that weren't enough, the apparent alliance between Russia and China will evolve into increasingly serious competition for the West over time, a process the sanctions are encouraging.

Russia dominates important markets

Russia's importance in the oil and gas market is well known.

It is the

No wonder exports of these fossil fuels are not on the sanctions list.

The Western world cannot afford another price shock and would even increase Russia's revenues.

But Russia is also at the forefront in other areas.

It is the second largest exporter of aluminum and the third largest of steel.

Russia is the largest exporter of wheat and a major supplier of barley and corn.

The occupation of Ukraine will further strengthen the crucial position in grain.

Ukraine accounts for 12 percent of world grain exports and 16 percent of world corn exports.

90 percent of EU imports of rapeseed oil come from Ukraine.

If the West were to impose sanctions on agricultural exports or if Russia were to restrict exports itself in resistance to sanctions, the result would be sharply rising food prices and social unrest in large parts of the world.

I remember the Arab Spring, which was caused less by the desire for democracy and more by protests against excessive food prices.

I would remind anyone who thinks this is an unrealistic scenario that Russia stopped exports of fertilizers for an initial period of six months at the end of November 2021.

This exacerbated the rise in prices on the world markets, which had already occurred due to higher energy prices.

Even more important is Russia's position in raw materials for important products.

Example titanium.

The world's largest titanium producer, VSMPO-AVISMA, based in the "Titanium Valley" in western Siberia, is Boeing's main supplier and cannot simply be replaced.

US warplanes and missiles depend on delivery from Russia.

Another example: neon gas.

Around 90 percent of the supply of neon used for chip lithography in the USA comes from Ukraine.

If the delivery fails to materialize, the bottleneck in semiconductors will increase significantly.

It was already evident in 2018 that sanctions against an important market participant would impact the world markets.

At that time, the USA had imposed sanctions on the aluminum producer Rusal, which led to a significant price increase and ultimately to the sanctions being lifted.

The insight: Russia has a variety of areas in which to react with counter-sanctions in which the damage to its own economy is small, but the damage to the global economy is considerable.

What hurts Russia hurts us at least as much

Western politicians emphasize that the planned sanctions will not put too much strain on their own population.

So did US President Biden, who immediately emphasized that this would not increase gasoline prices any further.

Which brings us to the next problem: the sanctions that would hit Russia would weigh heavily on the West and the global economy.

Let's go through the options:

·

Germany's dependence on Russian gas needs no further explanation.

But Russia is also of paramount importance in the global markets for fossil fuels.

One can certainly try to urge OPEC to provide more production and also to revive fracking in the USA.

That would take time - as will getting gas from Azerbaijan and Qatar in the future.

Even considering the

fully utilized, that would only correspond to a fifth of the Russian delivery volume.

According to Qatar, it could only divert 10 to 15 percent of production to Europe.

Apart from these upheavals, the inevitable consequence would be a global price increase.

This would increase inflation and probably plunge the world economy into recession via the purchasing power effect.

Seen in this way, the calculation by the Kiel Institute for the World Economy from this week is quite theoretical, according to which a refusal to import natural gas would cause Russia's gross domestic product (GDP) to collapse by 2.9 percent.

Roughly speaking, the country can do without the income for two years without getting into financial difficulties.

Hardly conceivable that the West would hold out for two years.

Exclusion

: The messaging network is used by 11,000 banks in 200 countries for cross-border payments.

While the USA quickly signaled that they could imagine taking this step, Germany hesitated until this weekend to give its approval.

No wonder, since the gas bill still has to be paid.

But now the western allies have decided to exclude some Russian banks from Swift.

Nevertheless, there are some aspects that make the SWIFT exclusion a problematic tool.

Russia had time to prepare for this scenario.

Russian banks and foreign partners could use alternative instruments such as telex and e-mail, as well as the Russian system SPFS.

It's not as good as SWIFT, but it works.

For the USA, too, the scenario is not as simple as one might think.

China has also developed its own system.

Admittedly, the average daily transaction volume is a fraction of what is handled via SWIFT, but it is growing rapidly.

Should other countries – and there are plenty of them with strained relations with the USA – join the Chinese system, America's financial dominance is threatened.

The instrument quickly becomes dull and the price could ultimately be high for the West.

In the short term, an instrument that hits Russia but does not affect it fundamentally.

Perspective the end of US dominance in the financial system?

·

The West could bring about an export ban on semiconductors.

Apart from the fact that experience has shown that there are always bypass routes, Russia could not only switch to Chinese supplies, but also stop exporting raw materials essential for the production of semiconductors as a countermeasure, as already described.

So it's no wonder that the West's sanctions are only scratching the surface.

Individual banks are subject to sanctions.

Individuals are restricted in their power to dispose of financial resources and in their freedom to travel.

Not all pleasant, but also not so painful that it could cause a change of course in Moscow.

This highlights a long-standing dilemma in the use of economic sanctions: while cheap and effective when targeted against weak states, larger states can retaliate.

Eight years of preparation

This is all the more true when a country has enough time to prepare.

We have observed some aspects of preparation in the case of Russia in recent months, such as the refusal to supply additional gas to fill up European storage facilities or the ban on fertilizer exports.

This also includes setting up an alternative to SWIFT.

But Russia's preparations go much further.

The country has reduced its dependence on government oil revenues

The fiscal break-even cost of a barrel of oil fell to $52 last year, compared to $115 before Crimea was invaded in 2014. The national debt is the sixth-lowest in the world at 18 percent of GDP.

Until recently, the country had a budget and foreign trade surplus, which is why it is not dependent on foreign investors.

On the contrary: around 10 billion dollars flowed into the state fund every month, the assets of which amounted to 185.9 billion US dollars in the summer of 2021 - a good twelve percent of Russian GDP.

The Russian Federation has foreign exchange reserves of $635 billion, the fifth highest in the world.

Above all, the country has significantly expanded its gold reserves and reduced the US dollar share.

To hedge against sanctions, the central bank shifted its balances away from American banks and American dollars: the proportion of international reserves held on American territory has fallen from 30 percent in 2013 to just 7 percent.

It has more of its total reserves in gold (24 percent) than in dollars (22 percent)

Companies have lowered their debt burden

The corporate sector has also paid off debt.

Since 2014, non-financial corporations have reduced debt to foreign creditors by 25 percent.

Banks reduced their debt by 65 percent.

It is therefore easy to finance future loans domestically.

In short, the country has prepared thoroughly and there is no point in exerting so much pressure on Russia in the short or medium term that it feels compelled to change its policy.

It remains to be seen whether the sanctions and the accelerated move away from Russian energy imports will really weaken the country in the long term.

After all, in China there is a partner who is very willing to secure access to Russian resources and is becoming increasingly competitive as a technology supplier.

What remains is disillusionment: Didn't Western politicians know that they were fooled if they believed that sanctions would achieve something?

Or was the whole thing nothing more than a spectacle from the start, aimed more at your own public than at your opponent, just to distract from your own failures in recent years?

Daniel Stelter is a member of manager-magazin.de's opinion makers.

However, this column does not necessarily reflect the opinion of the editors of manager magazin.