Sanctions on Russia

This quick take is part of our Crisis Crossroads series, which highlights timely analysis by CSIS scholars on the evolving situation in Ukraine and its security, economic, energy, and humanitarian effects.

This piece is based on a previously published column.

War produces panic, which produces price spikes and shortages caused by supply chain disruptions and hoarding. We have experienced a good bit of that recently because of Covid, and we may well now have more as markets adjust to changed circumstances. While Russia represents only between 1 and 2 percent of the global economy, it is a significant supplier of some critical mentals like uranium and titanium and a major exporter of oil and gas to Europe. The latter, of course, creates opportunities for U.S. oil and gas producers as Western Europe accelerates its move away from dependence on Russia.

The biggest impact will come from the sanctions the United States and its allies are imposing. Sanctions have the best chance of achieving their goals when they are multilateral, which reduces possibilities for leakage in or out, but even then, they are often like putting a lobster into a pot of cold water and slowly turning up the heat, as opposed to dropping it into a pot of boiling water. Either way, the lobster dies, but the first way takes a lot longer, and so it usually is with sanctions.

That may not be true this time, however. Putin has made substantial efforts to insulate the Russian economy. Government reserves are up, and dollar reserves are significantly down. Russia is holding gold at record levels, but if its banks are removed from SWIFT and its assets held in Western institutions frozen, it will be increasingly difficult for the government to finance its activities. The sharp decline in the ruble’s value will also lead to panic buying and hoarding in Russia, which will undermine support for the war, although, in an increasingly authoritarian state, that may not make much of a difference. I assume they are stockpiling critical military materials. That means denying them critical items like semiconductors will eventually cripple a lot of their machinery, but not this week or this month.

Sanctions may also be tough on people outside Russia, particularly in Europe, if Putin decides to retaliate. Here in the United States, we should expect more cyber intrusions from Russian hackers, difficulties in acquiring a few key materials, and uncertainty in our financial sector as banks freeze assets and block transactions in an effort to comply. You know there will be a plant somewhere that will close because its business with Russia has been interrupted, and you know there will be a story in the media about it. But that illustrates another truth about sanctions—if you want them to bite the enemy, you must accept that they will bite us as well. The question, as always, is whether the juice is worth the squeeze. Right now, it seems that it is, and it has been heartening to see a growing number of companies so quickly taking the initiative to end their economic relations with Russia. That may not deter Putin, but it will have a lasting impact on the Russian economy.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).