The war in Ukraine is in its fifth month. After a few initial setbacks, due to underestimations of Ukrainian morale, the accuracy of Western signals intelligence, and Putin’s desire to minimize casualties, it seems that Russia is en route to achieving its objectives.
There’s no point discussing why Russia is winning. Russia is a larger country with a considerable industrial base. Ukraine lost about 30% of its manufacturing capacity in 2020, relative to 2010. By 2016 its GDP was at 60% of its 1990 level. It sold 100,000 new cars in 2020, compared to 1.63 million in Russia.
While Russia is not a technological superpower and is not an O-Ring dense economy, it does produce 10% of the world’s power turbines, 40% of the commercial NPPs under construction. It has the foundations of a self-contained tech ecosystem, replicating almost everything you can find in Silicon Valley (or Shenzhen), which no other European country, not even Germany, possesses.
The article will look at the impact of Western sanctions against Russia, its repercussions on the global economy and Russia’s strategy to mitigate the medium and long term impacts of sanctions aimed at crippling its economy.
Sanctions as a tool
Using sanctions as a coercive tool is nothing new. In 1919 US President Woodrow Wilson remarked that sanctions were “something more tremendous than war” and that the outcome of it was
“absolute isolation… that brings a nation to its senses just as suffocation removes from the individual all inclinations to fight… Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. It is a terrible remedy. It does not cost a life outside of the nation boycotted, but it brings a pressure upon that nation which, in my judgment, no modern nation could resist.”
These are remarkably similar to EU’s objectives when it imposed sanctions against Russia in February 2022. They were specifically aimed at crippling Kremlin’s ability to finance the war, imposing clear economic and political costs on Russia’s political elite and diminishing its economic base.
G7 countries and a few of their allies believed that imposing sanctions against Russia could be done without serious pain to themselves and that most countries across the world would fall behind and follow the sanctions regime.
However, imposing sanctions on a major economy like Russia is not easy. A number of powerful nations are willing to purchase any amount of oil and gas it can produce, and given that the German economic model depends on cheap Russian energy and that economic growth in Europe depends on Germany, it is not a little delusional to expect that imposing sanctions on Russia can be done without serious pain for the developed world.
Even during the Cold War Germany received supplies of oil and gas from Moscow. Germany has been able to produce high quality goods, at competitive prices, because of cheap Russian oil. Naturally enough, German industrialists are concerned about the costs of Russian sanctions.
About 30 percent of Germany’s primary energy input comes from Russia. The Institut der deutschen Wirtschaft, a private research center based in Cologne, has claimed that stopping Russian gas supplies would involve “incalculable risks”, rebutting the idea that shortages and inflation can be managed.
The impact of sanctions on Germany is already visible with the country recording a trade deficit in May 2022, the first in three decades. Exports in May fell 0.5 percent from April, while imports rose 2.7 percent, leaving a gap of USD 1 billion.
Economists had earlier warned of the seriousness of the overall economic situation if Russia decided to cut off its deliveries of gas. As if on cue, on 25 July Russia announced that it would “cut by half the flow through its pipeline to Germany to just 20 percent of capacity.” The move comes on the verge of an EU emergency meeting on natural gas consumption.
In the past decade Europe sought to diversify its sources of energy. There was a rapid transition to renewables. It seemed likely then that Europe would have weaned itself from Russian energy in a decade or so.
This would have suited the Russians as well, who had been increasingly focusing on Asia, where the demand for energy, especially gas, had been soaring. Russia currently sells around 200 billion cubic metres (bcm) each year to Europe and with existing infrastructure, Russia could deliver 80 bcm to Asia, inclusive of both pipeline gas and liquefied natural gas. Chinese demand in 2021 was roughly 367 bcm and is growing rapidly. In a business-as-usual scenario Russia could have pivoted to the East while the Western markets attempted to wean itself from Russian oil.
It would appear that the much-heralded separation between Moscow and the rest of Europe is on its way. Russia is in a better position to bear the pain of the divorce. It has lower living standards, plus the State can mobilize the desire of its people to ensure the country’s sovereignty , thus avoiding another era of humiliation. It is unlikely that the West can weather a similar storm on their front.
Only Slovakia and Austria have enough gas in storage to last the coming winter, while the rest of Europe has to rely on imports to last through the winter. Can European leaders deal with political and economic consequences of energy rationing during a cold winter?
Overcoming tech starvation
Western attempts at punishing Russia have, therefore, utterly failed on the economic front. The country is making more money than it ever did. The only real problem it faces now is its inability to access much needed technology abroad.
Russia imports significant amounts of equipment and components from Japan and Germany and industries that depend on these components have been heavily hit. The industrial figures for June showed that the Russian automotive industry, which imports about 60% of its inputs, had all but collapsed.
The lack of access to technology will hamper the Russian economy in the coming years, unless China and India step in. Given that China has become a leading player in the global technology landscape it is unlikely that it would do anything that would jeopardize its licensing agreements with Western companies.
In other words, unless Russia used its enormous reserves to develop local industries, a process that could take decades, or try to access technology through the black market, its economy will lose competitiveness as the years go by.
An alternative system
How would Russia deal with this prospect? One way of doing so, and it seems like this is the preferred option of the Kremlin, is to build better integrate with other emerging market economies.
The seizure of Russian money worth over USD 300 billion by European banks and Russia’s expulsion from SWIFT would have left a bad impression on many countries, whose assets were parked in Western banks and were dependent on banking networks. The weaponization of the dollar and trade has hence undermined the trust many countries had in the international financial system.
Russia can use its good relations with Asian, African, and Latin American nations to build a parallel network, where it can do business with nations that have rising populations, markets, and consumption levels, in the hope that tech companies will do business with this bloc.
On a balance of scales, it is likely that Western sanctions on Russia will bolster the G20. The G20 Bali summit is expected to take place in November. This would mark Putin’s first major appearance in the world stage, following the Ukrainian crisis. The summit may show the world that emerging markets are no longer a place merely to make money and extract talent and resources, but rather constitute a serious geo-political bloc.
Rathindra Kuruwita is a journalist and a researcher from Colombo, Sri Lanka. He holds a MSc in Strategic Studies from the S. Rajaratnam School of International Studies, NTU, Singapore. He was also a fellow at Daniel K. Inouye Asia-Pacific Center for Security Studies, USA, and a participant of the International Visitor Leadership Program (IVLP) conducted by the U.S. Department of State. He writes on security and international relations to several publications and has written extensively on the Sri Lanka-China relationship.
Factum is an Asia-focused think tank on International Relations, Tech Cooperation and Strategic Communications based in Sri Lanka accessible via www.factum.lk