If there is anything upon which the Western consensus has agreed in recent months, it is that the Russian government is evil and must be stopped. America’s preferred way of arresting Russian efforts has been the use of economic sanctions against Russian President Vladimir Putin, the oligarchs aligned with him, and the Russian economy in general.
These actions resonate in an emotionally charged public debate as both sensible and the least we can do. Americans and Europeans are outraged by the atrocities of the invasion, yet most do not want to send their own troops into battle. But we mustn’t fool ourselves. Imposing economic sanctions, like the blockades and embargoes that accompany them, is every bit as much an act of war as a cross-border invasion would be. True, it comes without as much blood in the streets. But we should remember, too, that sanctions simply aren’t going to work—in neither economic nor political terms.
What’s worse, they are going to backfire on the sanctions-imposing nations of the West.
We can think of sanctions as the modern form of banishment. In premodern times, banishment was a powerful political tool used to punish opponents, miscreants, and heterodox dissenters. Shakespeare’s Romeo sees banishment from his fair city of Verona, and his beloved Juliet, as a fate worse than death:
Ha, banishment? Be merciful, say “death”;
For exile hath more terror in his look,
Much more than death. Do not say “banishment”!
…
There is no world without Verona walls,
But purgatory, torture, hell itself. Hence “banished” is banish’d from the world,
And world’s exile is death; then “banished”
Is death misterm’d. Calling death “banished,”
Thou cut’st my head off with a golden axe,
And smilest upon the stroke that murders me.
Shakespeare portrayed banishment as a dangerous double-edged sword, as his political saga Richard II also illustrates. King Richard exiled his cousin and political adversary Henry Bolingbroke, only to see Bolingbroke later return with an army and supportive nobles to successfully overthrow Richard’s kingdom and claim the throne for himself.
Modern sanctions similarly attempt to banish a rogue country, and its leadership, from the global village of the West by cutting off access to finances, trade, and the international interconnectivity upon which modern society presumably depends. The narrative is simple and clean, and plays well as a media soundbite.
Its logic is flawed, however, and begins with a false assumption. The assumption is that the target country feels like a member of a club—is part of the family or community—from which it is to be exiled, and will pay nearly any price to regain its good standing. In other words, sanctions work better against a straying ally than against an adversary that has already hardened its resolve and affirmed its enmity. The main impact of the sanctions imposed by the West on Russia following its invasion of the Crimea in 2014 was an increase in Putin’s popularity and Russian nationalism generally. They also hurt Western exporters more than the Russian economy. Why Western leadership doesn’t appreciate this recent lesson is befuddling.
What Do Sanctions Hope to Achieve?
The stated goals of the current round of sanctions include getting Russia out of Ukraine and potentially even toppling Putin’s government. That this second objective has been spoken out loud by the West’s leaders is foolish and likely only serves to stiffen Putin’s determination.
Sanctions may sound good in theory, but do they work in the real world? History suggests they do not.
The U.S. State Department says that sanctions are “adopted to counter threats to national security posed by particular activities and countries.” Yet it is hard to see how Russia’s invasion of Ukraine directly or indirectly impacts U.S. national security. The Biden Administration and U.S. congressional leadership have talked in vague terms about the threat to global democracy and the danger of imperialism, but have failed to demonstrate how the fate of America is intertwined with Ukraine’s. They have also mentioned the need to protect the sovereignty of Ukraine’s borders, a claim that rings exceptionally hollow considering how they have abandoned America’s own borders. The State Department also says that they maintain and enforce sanctions “to maximize their economic impact on our targets and minimize the damage to U.S. economic interests.”
This goal will fail miserably. As an economic tool, sanctions are ineffective, and mostly resound to the imposing countries whose own economies, and industrial manufacturing concerns in particular, suffer. As I write in Why America Matters:
Iran has been under various forms of economic sanctions for most of the 40 years since the seizure of the U.S. embassy by Islamic revolutionary forces in 1979. President Reagan, as well as every successive U.S. administration, believed that economic pressure and diplomatic isolation would be enough to break the will of Iran and, eventually, bring about regime change. These expectations have proven unrealistic.
While sanctions have been effective in isolating Iran and reducing the economy to rubble, they have permanently embittered Iranian leaders and citizens against the U.S. Iranian resolve has hardened to resist what they believe is America’s objective: to destabilize the regime and destroy the country. More than anything, sanctions and military strikes have emboldened the radicals’ anti-American stance, which allowed them to win support from moderates within the country.
In other words, decades of sanctions against Iran have done little to change the political situation and, in fact, have made it worse, by pitting Iran and its proxies against American interests around the world. The authoritarian regimes of communist Cuba and pseudo-socialist Venezuela have similarly managed to survive for decades in the face of economic isolation from the United States.
Go back further in 20th-century history and the illustrations are legion. The U.S.-U.K. weapons embargo against the apartheid government did little more than motivate South Africa to develop its own eventually thriving and export-driven arms industry. The Allies’ attempts to embargo Nazi Germany similarly forced it to develop its own highly successful war-materials and hydrocarbon industries. These moves also pressured Adolf Hitler, against the judgment of his general staff, to seek to conquer what is now modern Ukraine to capture the Caucasus oil fields and its agriculture. It would prove that only an all-encompassing military confrontation would work to defeat Nazism.
Later, Western economic sanctions against the Soviet Union—including President Jimmy Carter’s grain embargo following the invasion of Afghanistan, which mostly hurt American farmers—similarly failed in any meaningful sense if measured over less than a half century. Even the lessons of colonial America’s successful overcoming of British blockades before and during the Revolutionary War seem to have been forgotten.
These are inconvenient facts. Perhaps this is the reason that sanctions apologists fall back on the argument that sanctions are not an economic tool as much as a political tool drawn from the public-facing side of diplomacy. In other words, we must prove to our adversary, to ourselves, and to the world at large just how outraged we are by Russia’s actions, and the best way to prove this is with sanctions, even though they mostly hurt our own commercial enterprises and economies. Surely, we can’t “trade with the enemy,” so the best way to avoid this is to . . . shoot ourselves in the foot to prove just how serious we are. Are you following this logic?
Sanctions haven’t worked in modern history. So why does our leadership continue to insist that this time will be different?
Support of sanctions as the primary tool of “limited” war is not a particularly partisan position. Politicians and government officials across the spectrum, including some senior officials from the former Trump Administration, seem to believe—without much evidence other than that they are featured in the foreign policy playbook—that sanctions will work to bring down the Putin regime.
Instead, sanctions against Russia are going to substantially hurt American and Western interests by putting their food and energy security at risk, and by undermining the U.S. dominated global financial system. Here are a few examples of how this is already happening.
Global Financial Flows
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the global payment network that enables international financial flows and cross-border trade transactions. SWIFT processes some 45 million payment instructions per day, most of which are in U.S. dollars, for more than 11,000 financial institutions in over 200 countries and jurisdictions. SWIFT is the lifeblood of cross-border financial transactions, for example by allowing importers to pay producers in other countries securely, quickly, and easily for the goods they receive. SWIFT does not take any financial risk. It does not hold funds for customers, and it does not clear or settle transactions. It is simply a messaging service with standards that banks have agreed upon. Thus, it should be the most neutral of all neutral institutions, like the air we breathe or the sun that shines “upon the righteous and the wicked alike.”
Yet, bowing to relentless pressure from the United States as part of its Global War on Terror, SWIFT—a Belgian cooperative organization—began in the mid-2000s to provide U.S. government intelligence agencies with its customers’ private information and data regarding SWIFT transactions, even when those transactions did not touch U.S. borders. When the EU eventually pushed back on facets of this program under its stricter privacy laws, the NSA continued to hoover the data using other means of surveillance. As part of this effort, SWIFT began to heed requests from the U.S. government to sever bank customers and even countries. SWIFT, in effect, has become an extension of the Western governments’ security alliance, a reality that is unpalatable to two-thirds of the world, notably including China and Russia.
In the same spirit, SWIFT has become a partisan in the Russia-Ukraine conflict, a decision which will return in spades of coal upon its own head as its non-aligned customers go elsewhere. Following coordinated sanctions “decisions taken by the European Union, in consultation with the United Kingdom, Canada and the United States,” SWIFT has cut off 10 Russian and Belarussian financial institutions from accessing the network in hopes of dealing a devastating blow to Russia. And it might have been if Russia not not been prepared for the move.
Since at least 2014, when sanctions were levied following Russia’s invasion of the Crimea, however, Russia has been working to sanction-proof its economy for a future round of conflict with the West. These efforts have been successful, at least in part. Russia has developed a domestic and regional alternative to SWIFT, and has been an active partner with China in developing China’s Cross-Border Interbank Payment System, a much larger Yuan-based alternative to SWIFT, with around 1,300 member banks across more than 100 countries globally.
The implications of this shift extends well beyond SWIFT to all western financial institutions and to the dominance of the U.S. dollar. Over the long-run, weaponizing financial payment systems will serve to undermine USD monetary hegemony and the dollar’s reserve currency status. Aside from developing competing payment networks, China’s and Russia’s development of CBDCs (central bank-issued digital currencies) will further enable these nations to migrate away from the dollar.
The Ruble Against All
Before the invasion, one U.S. dollar could buy 75 Russian rubles. In the weeks immediately following the invasion and the initial announcement of sanctions, the ruble fell to over 130 per dollar. The economic pressure of the West at first seemed to be working. But today, just three months later, the dollar only buys 64 rubles. So the ruble has actually appreciated against the dollar. What happened?
In the interim, Russia announced that it would back the ruble with gold and other commodities. The value of the ruble will be supported by the value of underlying hard assets held by the central bank, whereas the U.S. dollar and the euro are backed only by the “faith and credit” of the issuing governments, whose inflationary policies are coming into greater and greater disrepute. This move gave a credibility to the ruble that other currencies lack. If successfully implemented, it will be the closest thing the world has seen to “hard money” in over a century.
By taking this step, which has been under consideration for a long time, Putin effectively is calling the bluff on the entire house of cards of the Keynes-inspired fiat monetary system that has held the reins of Western economies for much of the past century. Without going into detail, economist John Maynard Keynes, as high priest of a new economic order, gave his blessing for governments to run permanent deficits and accumulate massive debt, all of which was made possible by abandoning the gold standard. Now the relationship between the ideas of Keynesian economics and the Western governments is like that between drug dealer and junkie. They needed what the Keynesian alchemists were offering, and in increasingly potent forms. But, as with all addictions, indulging has consequences.
In addition to his role as pillager of Ukraine, Putin may well be destined to kill off the current global fiat monetary system. He has exposed a weakness of the fiat monetary regime as only the banished—those with no remaining stake in the kingdom—can afford to do. This is further enabled by the fact that Russia has the commodities and natural resource wealth (including as the world’s second-largest gold producer behind China) to back up the commitment.
Oil Embargoes, Or How to Shoot Yourself in the Foot
At the end of May, EU leaders agreed on an embargo of Russian crude oil. This is expected to eliminate 90 percent of Russian imports into the region by year end. For background, Russia is the world’s third-largest producer of oil, behind Saudi Arabia and the United States. It is also the largest exporter of aggregate oil products to world markets, the majority of which (60 percent) goes to Europe.
The EU’s embargoes of Russian oil products not only will be ineffective, they will backfire. The embargoes will squeeze global supply and raise prices, but only for sanctions-complying countries. Non-sanctioning countries benefit either by paying less and buying more from Russia, or continuing to buy the same amount at the unaffected free market price, while the United States and Europe pay more than the market price, and more than China and others, as a result of diminished freely tradable global supply.
Europe will suffer most, while Russia will manage to maneuver out of the trap on reasonable terms. Putin, who has seen this day coming for a while, will call in some favors. China, which previously absorbed 20 percent of Russian oil exports, will take up the slack, as will India and most of the non-aligned world in Asia, Africa, and Latin America. They will do this by reducing their purchases from the United States, from Norway, and from other countries not as important to their strategic interests relative to Russia.
This isn’t just a hypothetical; it’s already happening. In the months following the invasion, greater Asia has been absorbing around 1 million barrels a day from Russia, compared with well less than 100,000 in 2021. India has increased its Russian oil purchases by 25-fold. In May, Russian oil production had only fallen by 2.5 percent year over year, while exports grew by 13 percent. To try to keep the price from going too high, sanctioning countries will seek other options such as draining their strategic petroleum reserves, as the United States is aggressively doing now.
Gas is another story. Russian gas accounts for nearly half of Europe’s consumption, and even more in parts of Eastern Europe. Germany, Greece, Italy, and Hungary are particularly vulnerable. Gas is not included in this round of embargoes, and many European leaders have stated publicly that gas will not be included in future sanctions. So again, our leaders have signaled to Putin not to worry too much. The price of Russian gas is now higher than before the invasion, and winter will come in just a few short months.
Russia holds a trump card in its ability to cut off the supply of gas to Germany and to the rest of Europe. This move would be so costly to Russia that they will hesitate to use it other than as a last and desperate resort, but the risk hangs like a sword of Damocles over Europe’s head. Even as it stands, Europe will pay more for its energy, worsening a situation already fraught with peril.
So in summary, Russian oil and gas—the most important component of its national income—is going to do just fine. The United States loses, Europe loses, China and her allies win, and Russia somehow manages to come out fine, all else being equal. Any market-facing analyst or commentator can see this. So why are our government leaders blithely ignoring the facts?
Fueling Inflation and a Looming Food Crisis
Sanctions are going to stimulate already powerful inflationary forces and worsen recessionary pressures. Food and energy prices will continue to rise across the western world for the foreseeable future. Agricultural producers are sending increasingly ominous warnings about the looming food crisis, as both the war and natural disasters elsewhere are compounding the effects on global supply.
While there are (as of yet) no sanctions on Russian grain exports, cutting Russia off from SWIFT means that, as a practical matter, smaller developing nations will struggle to pay for grain and fertilizer imports from Russia. The head of the African Union recently warned that African nations are “very worried about the collateral impact of the disruptions caused by blocking the SWIFT payment system as a result of sanctions.”
For countries that rely on Russian food sources or agricultural inputs to feed their people, the sanctions punish them more than Russia, and are likely to worsen the global food shortage. This will lead to greater political and social instability, which in turn may lead to violence, civil unrest, and regional conflicts in which the United States and the West will be pressured to intervene and assist. Recall that the Arab Spring uprisings were also sparked by a food crisis.
A Cornered Rat Will Fight
Since economic sanctions will be ineffective, the West will ratchet up pressure elsewhere, as it is already doing by providing increasingly more potent armaments and weapons systems to the Ukrainian government and stirring up political dissent within Russia. The World Economic Forum acknowledges, “Moscow is convinced that the sanctions are aimed at replacing the existing Russian political regime and holding the country down.” Pushing Russia against a wall with no viable options for diplomatic off-ramps will surely backfire. As any household cat knows, a rat backed into a corner will fight for its life.
It’s not yet quite that desperate, however. Putin sees a means of escape, in the form of false friends, most of whom will benefit from the geopolitical shift. As I write in Why America Matters:
Russia has been working to sanction-proof its economy since at least 2014, and is ready and willing to live with economic sanctions to pursue its security objectives. In theory Russia could go it alone economically. The Stalinist Soviet Union managed to survive under autarky in the 1930s. Russia is a vast country with enormous natural resources sufficient to feed, fuel, clothe and house its people. It has the mineral wealth and technology needed to continue to support its military and security structure. But Russia won’t have to go it alone. China and her allies will fill the gap created by the loss of US and other Western markets and trading relationships.
The sanctions regime, in other words, is doomed to fail. Sanctions are a tool of a previous geopolitical world which no longer exists today. Our foreign policy establishment is once again fighting the last war, not the next one. Russia has learned the lesson and will not allow it to be repeated. The United States similarly needs to move away from reliance on sanctions, lest it finds the grenade it wishes to hurl at its adversary exploding in its own face. And all the while, China awaits the right moment of opportunity.