Ukraine has sanctioned Russia as hard as the U.S. and Europe, but that has not stopped Russians from increasing its military production, bombing cities, and putting up fierce resistance to the Ukrainian counteroffensive. With the counterattacks this summer failing to roll back Russia or bring about talk of a ceasefire, the only other toll to take on Russia (besides the dangers of sea-borne and aerial drone attacks into Russian territory) is on the economic front.
Could Ukraine win an economic sanctions war?
Earlier talk of Russians having to dig into “dishwashers and refrigerators” to get microchips to build missiles was a blip in time and since remedied. Russian sanctions get a B- grade. For the think tankers in the West, U.S., Europe and Ukrainian sanctions performance “needs improvement”.
Politically speaking, Western and Ukraine sanctions have not isolated Russia from other emerging markets, including China, Africa, the Middle East, and big democracies like India and Brazil. Sanctions have not crushed the economy but forced Russia to do whatever it takes to circumvent them.
Last month, the International Monetary Fund forecast Russian GDP to grow 1.5% this year, and 1.3% next year. That is up from -2.1% in 2022, according to the IMF’s July edition of their World Economic Outlook.
If correct, Russia’s economy grows more than all of Europe’s. Germany’s economy this year is negative.
If correct, Russian GDP growth is comparable to the U.S. in 2023 and 2024.
Reuter’s Breaking Views columnist Pierre Briancon said in February that the IMF’s numbers “are too rosy to be true.” Maybe he’s right. Maybe the Russians are playing games with the West on this one. The U.S. is no longer invested in Russia anyway. To the Street, it doesn’t matter.
Russia’s ruble, though, is weak. The ruble trades at around 93 to $1. It has never been so weak, barring last year’s spike in March when the ruble touched 130 to $1. Russia’s not too worried about it.
As the White House asks for another $24 billion for Ukraine at the same time some 55% of those polled by CNN say enough is enough, Russia has dug in. Ukraine fatigue is settling in.
Ukraine needs to rely more on economic sanctions against Russia, and to do so effectively, it needs to coordinate those sanctions with the U.S. and Europe.
Andriy Yermak, a Ukrainian filmmaker turned chief of the Office of the President, said stronger sanctions cooperation with partners is required to stifle the Russian war effort.
“New sanctions restrictions are required, as well as effective implementation and control,” Yermak told Interfax Ukraine, a newswire, in mid-July. “We provide partners with recommendations on what restrictions can be imposed and what controls can be strengthened. And we call on countries of the Global South to join this process,” he said, adding, We will see new steps from our partners soon.”
Ukrainians are asking more from the West on this, but the main problem is that the sanctions list, its formation and sanctions implementation process are not fully transparent. This makes it increasingly hard to convince Washington and Brussels to follow Kyiv’s sanctions, as it often means sanctioning entities or individuals without clear evidence, from Washington’s perspective.
Ukraine is known for being rife with corruption, and sources in Washington who work on current sanctions but could not be quoted on the record due to the sensitivity of the subject said that the U.S. does not want Kyiv to sanction companies due to internal political disputes or as the result of corruption.
Although not related to sanctions policy, The New York Times reported on Aug. 11 that President Volodymyr Zelensky fired 24 military recruitment chiefs that were allegedly involved in a bribery scheme to get people out of military service. This is a normal day in Ukraine.
Vladislav Vlasyuk, sanctions advisor to Yermak, told me that sanctions policy in Ukraine has not been misused to benefit any individuals.
“We need bold(er) actions against entities in other countries helping Russia circumvent sanctions,” he says. The West does not seem to be on board with that yet, and it could be because Washington and Brussels are treading carefully on what to sanction based on Ukraine’s recommendations. This is a stumbling block.
Ukraine wants other countries on board, too. But it is unlikely the BRICS will join Western sanctions in any meaningful way.
Some of Ukraine’s sanctions are adopted based on secret documents of the Security Service of Ukraine (SSU). These papers cannot be transferred to the partnering countries because the transfer of confidential SSU documents to other states is prohibited by law. The U.S., U.K., and Europe do not have a clear view of the reasons behind those sanctions.
To make matters more messy, some top staff from the SSU fell under suspicion of cooperation with Russian intelligence at the beginning of the war last year. The head of the SSU was fired, as a result. The U.S. sanctioned members of the government, and former members, too, but it is unclear if all the accused were equally sanctioned from Kyiv, Washington and Europe.
Ukrainian and European media have reported on allegations of the SSU’s misuse of sanctions policy, too. This hurts the chances of Ukrainian sanctions getting picked up by Washington.
Ukraine is also blaming third countries for helping Russia avoid sanctions. This definitely puts the U.S. and Europe in a bind.
Kyiv says emerging and frontier market companies are involved in trafficking components for weapons to Russia. The most active are in Armenia, Georgia, Turkey and Kazakhstan, I was told, but this is difficult to verify. It is believed that those four countries have players selling restricted tech components to Russia – such as semiconductors. This isn’t necessarily a black market operation.
Washington’s friends in Europe are also involved.
Industrial equipment used to manufacture ballistic missiles remains unsanctioned. German companies like Walter manufacture a machine that can still be exported to Russia. Some people in Ukraine have been trying to convince the U.S. to impose more export restrictions on products used by defense contractors, but this would impact allied nation companies.
“Numerous companies in the U.S. and Europe produce components used in Russian missiles, and none of these companies have been sanctioned or fined,” says Pavlo Verkhniatskyi, a member of the Yermak-McFaul Expert Group. Zelensky launched the group with Russia hawk and former U.S. Ambassador to Russia Michael McFaul to coordinate the sanctions regimes of Ukraine with that of the West.
“We can chase down dozens and hundreds of shell companies used to circumvent sanctions. But it is the manufacturer who knows who they are selling to, even if there are intermediaries,” Verkhniatskyi tells me. “If they don’t know where their product is going, they should not be dealing in things that they cannot control as some of those products go into missiles that can carry nuclear warheads,” he says. “You have machines and spare parts from the EU still finding their way to Russian military plants despite sanctions.”
Verkhniatskyi also recommends “smart sanctions” against influential Russian businessmen. He mentioned Forbes-listed billionaire Vladimir Lisin. Lisin is mainly known as a steel magnate, but he also owns a prominent commodities trader and a logistics company, all relatively common for steel companies. Ukraine has sanctioned him, but Washington, London and Brussels have not.
“They are the financial blood system of the Kremlin’s war,” he said. “Sanctions pressure on them should be increased. The confiscation of a few yachts sounds nice, but the financial flows into their businesses should be targeted,” he said.
No one in Kyiv will tell the Western press sanctions are not working, even though some people in Kyiv think this.
The number of sanctions adopted by Ukraine has now exceeded 10,000 individuals and entities, with expectations of more to come.
Some prized Russian assets have been completely taken over by Ukraine. Alpha Bank, one of Russia’s biggest private banks, has been nationalized in Ukraine. Forbes-listed billionaire Mikhail Fridman, born in Ukraine but living in London, was the founder of that bank. It’s lost. Recently, some Russian general had all of his Ukrainian commercial real estate taken over.
As for new sanctions, Vlasyuk said the U.S. and Europe should sanction state owned Russian nuclear power company Rosatom. He said the West should impose further energy sanctions, though this would increase fuel prices when inflation has slowed.
“We have sanctioned over 1,600 individuals and entities since the start of the invasion, including banks with global assets worth £1 trillion ($1.3 trillion) and over £20 billion ($25.9 billion) worth of UK-Russia trade,” British Ambassador to the U.S., Karen Pierce, said in a written statement on July 19 during the inaugural U.S.-U.K. strategic sanctions dialogue. She said sanctions will remain “a key tool of foreign policy” in going after Russia.
The EU said it will extend its sanctions until January 2024.
No one has been hit with sanctions as hard as Russia.
Systemically important Russian banks have been cut off from the global SWIFT banking system; their central bank has over $300 billion in assets frozen overseas; Europe has greatly limited (they once called it a ban) imports of Russian oil and gas; and over 1,000 Western companies have left Russia, including U.S. investment banks. American investors are no longer allowed to invest in Russia.
Russian government spending on defense, and import replacement, have helped the economy survive sanctions thus far. None of this has slowed the war.
Can sanctions get tough enough to signal to the market that the end is near?
“The sanctions front cannot be exhausted,” says Verkhniatskyi. “It’s a constant and consistent process of identifying and tracking those making this war more affordable for the aggressor. It needs to be improved upon. Imagine how massive the sanctions would be if more countries were involved? It would accelerate the fall of the criminal Russian regime and stop this war,” Verkhniatskyi says.
However, without more transparency and legality in the Ukraine sanctions process, Kyiv cannot expect the West to accept its sanctions lists.
A straightforward and legitimate appeal process must also be put in place to bring the rule of law into the sanctions’ regime. This would ensure that no foreign companies are wrongly sanctioned and enhance the credibility of Yermak’s sanctions team in the eyes of European and American partners. Currently, this is one of the main differences between the Ukrainian and the Western sanctions regimes, which depicts Ukraine in a negative light, raising suspicions of corruption inside the country, including how sanctions are handed out, something Vlasyuk says is going as smoothly as one would imagine a non-perfect system to run.
Lastly, if Ukraine needs to rely on the BRICS, or other countries like Kazakhstan and Turkey, to get tough on Russia, too, they will probably be disappointed in the end. In many ways, barring secondary sanctions on emerging market countries (think China) by the West, we may have hit peak Russia sanctions.