No economic ‘knockout’ yet from West’s sanctions on Russia

WASHINGTON (AP) — One month into the invasion of Ukraine, President Joe Biden stood in the courtyard of a grand Polish castle and laid out the punishing economic costs that the U.S. and its allies were inflicting on Vladimir Putin’s Russia, declaring that the ruble is almost immediately “reduced to rubble.”

Russia is now the world’s most heavily sanctioned country, according to U.S. officials. The ruble did in fact take a temporary dive and has been slipping again in recent months. But as the war nears its one-year mark, it’s clear the sanctions didn’t pack the instantaneous punch that many had hoped.

The ruble trades around the same 75-per-dollar rate seen in the weeks before the war, though Russia is using capital controls to prop up the currency. And while Russia’s economy did shrink 2.2% in 2022, that was far short of predictions of 15% or more that Biden administration officials had showcased. This year, its economy is projected to outperform the U.K.’s, growing 0.3% while the U.K. faces a 0.6% contraction, according to the International Monetary Fund.

The West’s export controls and financial sanctions appear, instead, to be gradually eroding Russia’s industrial capacity, even as its oil and other energy exports last year enabled it to keep funding a catastrophic war.

Large American multinationals like McDonald’s and General Electric fled the country, and some of the country’s richest citizens are forbidden from traveling to the U.S. But if Muscovites can’t get a latte at Starbucks, there’s an imitation waiting for them at the knockoff Stars Coffee as Russia has adapted.

U.S. Treasury Deputy Secretary Wally Adeyemo stressed in an interview that the Western sanctions are only one “tool as part of a larger strategy” and that the U.S. continues to adjust its sanctions to outmaneuver Russia’s own shifts in strategy.

“You look at the exodus, the brain drain from Russia,” Adeyemo said. “The Russian economy is far smaller, far more closed and will look more like Venezuela, North Korea and Iran than like a major G-7 economy.”

Still, a December Congressional Research Service report drew an underwhelming conclusion from all the economic parrying, stating that “the sanctions have created challenges for Russia but to date, have not delivered the economic ‘knockout’ that many predicted.”

A closer look at what’s been done so far and what lies ahead:

WHAT’S BEEN SANCTIONED, BY WHOM AND WHY?

Biden last year called the West’s sanctions “a new kind of economic statecraft with the power to inflict damage that rivals military might.”

The sanctions, imposed largely through executive orders, are meant to punish Russia and block its access to the international financial systems and bank accounts that it needs to finance its war effort. Export controls also limit its access to computer chips and other products needed to equip a modern military.

Simultaneously, the U.S. and its allies devoted billions to provide Ukraine with weapons, munitions and other military aid and direct financial assistance.

More than 30 countries, including the U.S., EU nations, the United Kingdom, Canada, Australia, Japan and others — representing more than half the world’s economy — are part of the unprecedented effort. They’ve imposed price caps on Russian oil and diesel, frozen Russian Central Bank funds and restricted access to SWIFT, the dominant system for global financial transactions.

Beyond targeting key institutions and economic sectors, the West has directly sanctioned roughly 2,000 Russian firms, government officials, oligarchs and their families. The sanctions are depriving them of access to their American bank accounts and financial markets, preventing them from doing business with Americans and traveling to the U.S, and more.

Unlike the countrywide sanctions on Iran and North Korea, the restrictions placed on Russia target specific industry sectors, firms and individuals. This approach was designed to keep Russian oil and natural gas flowing, in order to limit disruptions to the wider global economy. But energy exports also enabled Russia to replenish its finances and stave off a sharp decline.

An industrialized country of its size — the 11th largest economy in the world in 2021 — has never faced such financial pressure. Daniel Fried, a former assistant secretary of state for European and Eurasian affairs, said that “policy making of this kind is always a shot in dark.”

“You’re looking for hits on the Russian economy, it doesn’t happen overnight,” Fried said, noting that military aid was far more important as Ukrainian troops have performed better in repelling Russian attacks than U.S. and European officials expected.

DIFFERENCES EMERGE

While there has largely been unity among Western governments on the necessity to punish Russia, there have been differences in the lengths to which countries are willing to go.

European and Asian countries are more dependent on Russian oil and natural gas than was the U.S. That made a ban on Russian exports hard for the alliance and forced compromises that took months to forge.

Ultimately, the countries in December settled on a $60 price cap, which some critics said came too late and was too high to significantly hurt Russia.

Experts and administration officials have said putting greater downward pressure on the sale of oil and other energy products from Russia would make sanctions more effective.

To Marshall Billingslea, assistant Treasury secretary for terrorist financing in the Trump administration, the sanctions were far from bulletproof and easy for the Kremlin to elude.

“Russia has shot holes through the administration’s sanctions,” Billingslea said.

Tom Firestone, a sanctions attorney, said more time is needed for the sanctions to take their course.

“Anyone who expects massive sanctions on Monday, and on Tuesday the Russian regime would fall is not reasonable,” Firestone said. “It’s a large economy that has large reserves. It has a large variety of trading partners. What we’re seeing and what the government is saying is they’re on track and it’s seriously curtailed Russia’s ability to operate.”

Russia is also seeking deeper ties with countries that have refused to join the sanctions effort. Its exports to Brazil, China, India and Turkey have increased by at least 50% since the war started compared with the previous year, according to the Congressional Research Service.

HOW RUSSIA HAS BEEN IMPACTED

“Russia is a different country today than it was just a year ago,” says Adeyemo, “and they’ve given up almost 30 years of progress in terms of their economic policy in the course of one year.”

But on a day-to-day consumer level, it’s a mixed picture.

Shopping centers have a lot of shuttered shops, but Russian entrepreneurs are helping fill the gaps. One Russian startup has created a reasonably convincing analogue of McDonald’s.

Some sectors have suffered greatly from sanctions and the departure of foreign companies.

Russia’s automobile sector, for example, has taken a particular hit. A market analysis from the Association of European Businesses, representing European companies in Russia, said sales of new cars in January were 63% lower than a year earlier.

Still, Russia continues to export some lumber, aluminum and other goods to the U.S., based on the need for the products in America.

Russian goods imported to the U.S. totaled $14.5 billion in 2022. That’s less than 1% of all U.S. imports and about half the $30 billion imported from Russia in 2021.

The Justice Department last year formed a task force to target the ill-gotten proceeds of Russian oligarchs, whom the U.S. sees as enabling Moscow’s war against Ukraine.

As part of that effort, the department has seized two luxury yachts — in Fiji and Spain — alleged to belong to oligarchs. Prosecutors have also brought criminal charges against oligarchs accused of sanctions violations, including Oleg Deripaska, an aluminum magnate and close Putin associate. Deripaska remains at large.

WHAT COMES NEXT

The U.S. government is not finished by any means. Biden, in Poland on Tuesday, promised “we’re going to announce more sanctions this week together with our partners.”

The Treasury Department is expected to impose another large round of sanctions on Russia with a likely focus in 2023 on logistics and manufacturing firms.

Daniel Pickard, a sanctions attorney, said it’s a safe bet that sanctions “will continue to be used with greater frequency with this administration and other administrations. It allows the president to take action without having to consult Congress and can be adjusted with regard to changing events on the ground.”

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Associated Press writers Aamer Madhani and Eric Tucker in Washington and Martha Mendoza in Santa Cruz, California, contributed to this report