The Biden administration, in extraordinary and swift cooperation with allies over a three-day period, doubled down on its vow to impose “severe penaltiesagainst Russia for its military aggression against Ukraine.
On February 26, 2022, the United States and Europe agreed to cut off some Russian banks from the SWIFT messaging system, which is used to carry out billions of dollars of transactions every day, an option so devastating that it has been called “the nuclear option” of sanction. They also sworn to prevent Russia to access part of its foreign exchange reserves, which makes it more difficult to compensate for the effects of the sanctions.
Two days earlier, the White House had announced a multi-faceted set of sanctions which cuts off major Russian banks and corporations from Western funding and imposes direct financial costs on many key allies of Russian President Vladimir Putin. This also restricted Russia’s access to the semiconductor products and technologies it needs to support its industrial sector and military capabilities. Western governments have also sought to personally punish Putin by separate penalties for personal property held abroad.
As experts in the effectiveness of sanctionswe believe that the combination of these measures constitutes an unprecedented global attack on a national economy – in this case, Russia – whose negative impact will increase hour by hour.
Powerful new sanctions
In its February 24 sanctions package, the United States, its European allies and other countries that support it frozen assets of the largest Russian banks and several of the the richest and most powerful oligarchs in the country and imposed other financial sanctions on them.
These measures cover almost 80% of all Russian financial assets, whether the The US Treasury Department called “the basic infrastructure of the Russian financial system”, blocking Sberbank, VTB Bank and other Russian banks access credit and foreign exchange markets and hamper the ability of public and private entities to raise capital.
By imposing high costs on these financial companies as well as Putin’s main allieslike Aleksandr Bortnikov, head of the Russian Federal Security Service, and his son, Denis Bortnikov, who chairs the board of VTB, the sanctions should undermine the the investment and development that drives the Russian economy.
The sanctions also include export controls that prohibit companies and countries from exporting technology equipment to Russia with components using microchips made or designed in the United States.
From the United States continues to dominate in manufacturing the types of high-end semiconductors needed for cutting-edge technologies, this provides significant leverage. the target of export controls defense, aerospace and navy sectors and will cut off Russia’s access to vital technology, likely leading to the atrophy of key sectors of its industrial base.
While Russia imports most of its semiconductors from China, these are the type of low end chips used to operate washing machines, for example – not to operate a guided missile. Russia relies on American semiconductor components for many of its most important technological applications.
“Massive runs on the banks”
And after intense pressure from Ukrainian President Volodymyr Zelenskyy and others, the The United States and the European Union have agreed on February 26 to cut off some Russian banks from SWIFT, which stands for the Society for Global Interbank Financial Telecommunications and connects thousands of financial institutions around the world. This is all the more notable as certain countries, in particular Germany and Italy, had previously opposed at this stage.
When Iran was first cut off from SWIFT in 2012, he lost half of its oil export earnings and 30% of its foreign trade.
The United States and its allies also announced on February 26 that they would block the access of the Russian central bank to some of its more than US$600 billion in foreign currency reserves. Elina Ribakova, deputy chief economist at the Institute of International Finance, said that this measure would have a dramatic effect on the Russian economy and banking system and lead to “massive bank runs”, a massive sell-off of rubles and “perhaps a total collapse of the Russian financial system”.
All in all, these sanctions – if maintained – are expected to have a devastating effect on the Russian economy, as well as reduce its strategic capabilities by harming the powerful energy sector and military industrial enterprises, which are the bulwarks of the Putin regime. .
What makes sanctions stick and sting
We studied the effectiveness past sanctions in terms of economic impact and achievement of their political objectives.
We have found that two conditions are necessary for sanctions to be effective, at least in terms of their economic impact: they must be multilateral, that is, they must involve a broad coalition of governments, and they must be implemented by countries with extensive trade relations. with the target plan.
In addition, countries closely linked to the target must accept the risks and costs that result from their actions.
This is why the participation of a growing number of like-minded nations – including the United Kingdom, Germany, France and other European states which have a much higher trading volume with Russia than the United States – is so crucial to the success of these sanctions.
This unity and this collective economic weight explain why the The Russian stock market took a nosedive and the ruble fell to one record low against the dollar after Russia launched its invasion and the new sanctions appeared. As a result, Russian billionaires lost about $71 billion on February 24, and Standard & Poor’s and Fitch Ratings reduced the the country’s credit rating to “junk” status.
Because the sanctions are designed multilaterally and implemented in close coordination with allies in Europe, Japan, Australia and other countries around the world, our research suggests they will have a significant impact on Russia. Previous estimates have suggested Aggressive sanctions like the ones being launched now could reduce Russia’s annual gross domestic product by 3-5% or more.
Coverage of costs related to the imposition of sanctions
Discussions continue and pressure may mount to take further tougher action in response to the Russian onslaught, especially if its army is found guilty of commit war crimes.
Other measures on the table include more direct sanctions based on oil, natural gas and aluminum. But they also have would have more immediate negative consequences for Europe, another endurance test for the economic battle with Russia.
In this case, the impact of the very strong sanctions imposed hurt russia now and will increase significantly in the coming months. As long as the countries imposing the sanctions, and the businesses and citizens who will also bear some of the costs, are willing to accept them, they will likely succeed in punishing Putin for his aggression against Ukraine.
This article has been updated to include new SWIFT and central bank sanctions.