It has been a little over six months since Russia invaded Ukraine. On the battlefield, a war of attrition rages across a thousand-mile front of death and destruction. Beyond that, another battle is being waged: an economic conflict of a ferocity and magnitude not seen since the 1940s and in which Western countries are trying to paralyze the Russian economy (which has an annual GDP of 1.8 trillion dollars) with a new arsenal of sanctions. The effectiveness of such an embargo is key to the outcome of the Ukraine war. However, it will also prove highly revealing of the ability of liberal democracies to project power globally in the second half of the 2020s and beyond, including against China. Worryingly, the sanctions war is not going as well as expected so far.
Since February, the United States, Europe and their allies have agreed to unprecedented rounds of bans affecting thousands of Russian companies and individuals. Half of Russia's $580 billion of foreign exchange reserves are frozen, and most of its big banks are cut off from the global payment system. The United States no longer buys Russian oil, and the European embargo will take full effect in February. Russian companies are prohibited from buying inputs, from motors to microprocessors. Oligarchs and officials face travel bans and asset freezes. The US task force KleptoCapture has seized a superyacht containing what could be a Fabergé egg.
In addition to satisfying Western public opinion, these measures have strategic objectives. In the short term, at least initially, the objective was to trigger a liquidity and balance of payments crisis in Russia that would make it difficult to finance the war in Ukraine and thus alter the Kremlin's incentives. In the long term, the intention is to harm Russia's productive capacity and technological sophistication in such a way that, if he aspired to invade another country, Vladimir Putin would have fewer resources. An ultimate goal is to deter others from starting a war.
Behind these ambitious goals lies a new doctrine of Western power. The unipolar moment of the 1990s, when the supremacy of the United States was incontestable, is long gone; and, since the wars in Iraq and Afghanistan, the West's appetite for the use of military force has diminished. Sanctions seemed to offer an answer by allowing the West to exert its power through control of the financial and technological networks that lie at the heart of the 21st century economy. Over the last twenty years they have been deployed to punish human rights violations, isolate Iran and Venezuela, and rein in companies like Huawei. Now, the embargo on Russia takes sanctions to a new level insofar as it seeks to paralyze the eleventh-largest economy in the world, one of the largest exporters of energy, cereals and other raw materials.
What are the results? In three to five years' time, the isolation of Western markets will wreak havoc on Russia. By 2025, a fifth of civil aircraft could be stranded on the ground due to lack of spare parts. Telecommunications network upgrades are lagging, and consumers will not have access to Western brands. Crony capitalism will increase as the state and tycoons take over Western assets, from car factories to McDonald's outlets. Russia is losing some of its most talented citizens, who recoil from the reality of dictatorship and the prospect of their country becoming China's gas station.
The problem is that the coup de grâce has not materialized. Russia's GDP will shrink, the FIM calculates, by 6% in 2022, a much smaller percentage than the 15% drop that many expected in March or the collapse of Venezuela. Energy sales this year will generate a current account surplus of 265 billion dollars, the second largest in the world after China. After a contraction, the Russian financial system has stabilized; and the country is finding new suppliers for some imports, including China. Meanwhile, in Europe, the energy crisis may trigger a recession. In late August, natural gas prices rose another 20% due to reduced supplies from Russia.
The fact is that the weapon of sanctions has flaws. One of them is the time lag. Blocking access to technology monopolized by the West takes years to kick in, and autocracies are good at absorbing the initial blow of an embargo because they can marshal resources. In addition, retaliation must be taken into account. As much as the GDP of the West is much higher than Russia's, there is no way to make Putin's control over gas disappear. The biggest flaw is that total or partial embargoes are not applied by more than 100 countries, which represent 40% of world GDP. Oil from the Urals flows to Asia. Dubai is brimming with Russian money, and you can fly to Moscow seven times a day with Emirates and other airlines. A globalized economy is well suited to shocks and opportunities; above all, because most countries do not want to impose Western policy.
Therefore, any illusion that sanctions offer the West a cheap and asymmetrical way to deal with China, an even greater autocracy, must be discarded. To deter or punish an invasion of Taiwan, the West could confiscate China's trillions of dollars of reserves and isolate its banks. However, as in the case of Russia, the Chinese economy is unlikely to collapse. And the Beijing government could retaliate; for example, depriving the West of electronics, batteries, and pharmaceuticals, leaving Walmart shelves empty, and causing chaos. Since more countries depend on China than on the United States as a major trading partner, enforcing a global embargo would be even more difficult with that country than with Russia.
The lesson to be learned from Ukraine and Russia is that confronting aggressive autocracies requires action on several fronts. Hard power is essential. Democracies must reduce exposure to their adversaries' chokepoints. Sanctions play a vital role, but the West must not let them proliferate. The more countries fear Western sanctions tomorrow, the less willing they will be to impose embargoes on others today.
The good news is that, 180 days after the invasion, democracies are adapting to the new reality. Heavy weapons are entering Ukraine, NATO is tightening Europe's borders with Russia, and Europe is securing new gas sources and accelerating the shift to clean energy. The United States is reducing its reliance on Chinese technology and urging Taiwan to improve its military defenses. The problem is that autocracies, and not least Xi Jinping's China, are studying the sanctions war against Russia and are eager to learn the same lessons. Ukraine marks a new era in the conflicts of the 21st century, an era in which military, technological and financial elements are intertwined. However, this is not a time when the West can claim pre-eminence. No one can counter aggression with dollars and semiconductors alone.
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Translation: Juan Gabriel López Guix
