"Moscow Is Doing Far Better than
Expected"
How Well Are Sanctions Against Russia Working?
The European Union spent months preparing
comprehensive sanctions against Russia in the event of an invasion of Ukraine.
The measures are deeper than anything else ever passed in Brussels, but are
they working?
By Michael Sauga
01.07.2022, 18.30 Uhr
The chief
strategist for Europe’s economic war against Russia isn't much interested in
military posturing. His uniform: gray sneakers and a blue business suit. His
command center: a nondescript office on the 13th floor of the European
Commission’s headquarters in Brussels with a conference table, houseplant and a
cluttered display cabinet.
And if you
ask him if he feels he’s the commander-in-chief in the EU conflict with Moscow,
you're likely to get a dismissive wave of the hand in response. "That’s
not how the EU works," he says. "My job is to probe and then work out
compromises."
Björn
Seibert is one of those people in Brussels whose name is known by few but whose
influence is enormous. The head of European Commission President Ursula von der
Leyen’s cabinet has been coordinating European sanctions packages against
Moscow for seven months. He benefits from being a trained security and military
expert. As a young political scientist, he conducted research at the Army War
College in Pennsylvania. He later headed the executive staff of the German
Defense Ministry.
Will the
West’s punitive actions go far enough to deprive Moscow’s war machine of its
economic base? At what point will they start hurting Putin? "You can see
some things right away," the longtime Von der Leyen confidant says,
matter-of-factly. "A lot of it doesn’t show up for weeks, months or even
years."
What is
certain is that the policy of boycotts and embargoes has profoundly changed the
union itself. The EU has adopted six sanctions packages since the Kremlin began
rolling its tanks.
It has
frozen the assets of more than 1,100 aids of Russian President Vladimir Putin
and 30 oligarchs. Most Russian banks have been cut off from Europe’s financial
markets. Coal from Siberia may no longer be imported, and jet engines or
truffle butter can no longer be exported to Moscow or St. Petersburg. Nearly a
hundred billion euros worth of trade goods are blocked in what officials at the
European Commission now openly call the "militarization of export
controls."
What had
once been envisioned as an economic community is transforming itself into a
security alliance and is vigorously expanding its influence over the member
states. In the course of its sanctions, the EU has enacted dozens of new laws,
increased its staff and created a task force to track and confiscate Russian
financial assets. "The Commission has cleverly used the situation to
secure further powers for itself," says one EU diplomat in Brussels.
Former U.S.
Secretary of State Henry Kissinger once famously complained that Europe has no
telephone number. But that’s a lament the White House would be unlikely to
repeat today. When it comes to sanctions, the Americans first call the EU
authorities in Brussels and only after that the individual nation-state
governments in Berlin or Paris.
That’s also
how things are supposed to work for future conflicts, including the
confrontation with China. If the economic warriors in Washington and Brussels
have their way, the Ukraine war will create the blueprint for the economic
equivalent of NATO to deter aggressive autocrats.
The idea
was born last November, when CIA Director Bill Burns made a surprise visit to
Brussels. The intelligence chief had just come from Moscow, where he had
solidified his belief that Putin was planning a large-scale invasion of Ukraine
and that Kyiv would be a focus. A NATO military response was out of the
question, so Western capitals agreed they would have to respond to the invasion
with a hefty package of joint economic sanctions.
Because the
United States had already scaled back its economic interactions with Russia
following the 2014 Crimea occupation, Europe had to join in on the sanctions if
Putin was going to be fazed in any way. Brussels, in turn, feared that the
United States could unilaterally impose sanctions and, as in other cases,
extend them to EU companies, without giving the Europeans any say in the
matter.
The Kremlin Was Prepared
That had to
be prevented. Seibert sat down with senior officials from his directorate
generals for trade, finance and energy. The most important basis for their
discussion were long lists of trade flows of thousands of goods, where and how
they are produced and how they could be replaced if needed. The panel used
those lists to make decisions on how to "impose high costs on Russia"
and "minimize undesirable consequences for its own citizens and
businesses."
Experts
with the same goal met in Washington, led by Deputy Secretary of State Wendy
Sherman and Deputy National Security Adviser Daleep Singh, a former Goldman
Sachs banker who had already worked on international financial policy in the
Obama administration. U.S. officials had thick files on their desks tracing how
sanctions had worked against Iran, against Russia in 2014 and against the
Chinese telecom company Huawei.
But another
thing also emerged from the intelligence analyses that Washington shared more
freely than ever before with its allies: The Kremlin had apparently been
preparing for the confrontation for a long time. Months earlier, Moscow’s
energy companies had begun reducing the flow of natural gas to Europe, leaving
storage facilities only fractionally full. Forecasts showed that the reserves
wouldn’t suffice in the event of a cold winter.
Putin’s war
chest was in good shape. His central bank head, Elvira Nabiullina, had begun
stashing profits from Russia’s lucrative oil and gas operations in Western
banks and central banks early on. The accounts held more than $300 billion, and
the Russians assumed it was secure. After all, reserves held by monetary
authorities have only been interfered with in extremely rare circumstances.
But the
architects of Western sanctions weren't terribly interested in precedent.
Various analyses made clear where the West was strong and the Russians weak: in
finance, dominated as it is by the U.S. dollar, and in the technology sector,
which is largely controlled by American computer and software corporations.
These are the areas that sanctions were to target.
As 2021
gave way to 2022, Singh and Seibert often spoke on the phone several times a
day; and twice a week, the teams of experts in Washington and Brussels
connected using a surveillance-proof video line. By the end of January, weeks
before Putin’s invasion, they had laid out the broad outlines of their
sanctions regime, which could be adapted to five different war scenarios. The
greater Putin’s escalation, the principle went, the harsher the response should
be.
At the same
time, the planners needed the OK from EU member states, so Seibert brought
their Brussels ambassadors into the loop in a series of secret group meetings
in January and February. He always assembled the rounds in such a way that
there were enough representatives from Eastern Europe to promote a decisive
course against Putin.
The
sanctions themselves were much less controversial than the question of the
conditions under which they should be applied. Most diplomats considered the
scenario of a major invasion as described by intelligence reports to be a
bluff. If the invasion was limited to the Donbas region, officials considered
an even milder response to be a possibility.
The West Had To Move Quickly
Once Putin
directed huge numbers of his troops to march on Kyiv, sanctions planners in
Brussels and Washington "only had to press the play button," as they
put it. Under the shock of Russia’s all-out assault, all remaining concerns
were brushed aside and the sanctions packages were pushed through in record
time. As one EU diplomat recalls: "First day: announcement. Second day:
discussion. Third day: adoption."
According
to von der Leyen, the most extensive and severe sanctions in the history of the
EU followed. At the same time, they served as a prelude to an economic war to
which an old military adage applied: "No plan survives first contact with
the enemy." Working out the sanctions packages would prove to be the
easier part of the exercise. Maintaining them would be much more difficult.
For
example, Brussels and Washington had agreed to exclude Russia’s oil, gas and
coal exports from sanctions for the time being. Parts of the EU were too
dependent on fuel supplies from Moscow.
But the
understanding didn’t last long. Almost as soon as the first package had passed,
Canadian Prime Minister Justin Trudeau announced a national oil embargo – to
the delight of the strong Ukrainian immigrant community in his country and to
the chagrin of those allies who don’t have energy reserves as extensive as
those held by Canada.
U.S.
President Joe Biden became the first to join the boycott, and Commission
President von der Leyen also spoke out in favor. But it was an overly hasty
commitment, as it soon turned out, because her officials had only developed
rudimentary alternatives for EU countries such as Slovakia, the Czech Republic
and Hungary, which obtain their fuel from Russia via pipelines. The consequence
was a bitter dispute among member states that delayed the launch of the sixth
sanctions package by several weeks.
The West
also had to launch its attack against the Russian central bank faster than
planned. In late February, government headquarters in Europe and the U.S. began
receiving indications that the Kremlin had begun withdrawing assets from
Western banks and monetary authorities.
They had to
move quick to shut down the Russian reserves. No one grasped that more quickly
than Italian Prime Minister Mario Draghi, who vehemently promoted the plan,
especially in conversations with the reluctant U.S. Treasury Secretary Janet
Yellen.
Planners Also Made Mistakes
In the
early morning of Feb. 28, two hours before banks opened, the West moved to
freeze Russian assets worth hundreds of billions of dollars. Although the
reserves in Japan initially remained untouched because the sanctions decisions
had not arrived there expeditiously due to the time difference, the seizure of
Moscow’s central bank was probably the West’s most effective blow to date. "Nobody
saw that coming," Russian Foreign Minister Sergei Lavrov later lamented to
Moscow students. "It was just theft."
Normally,
it takes several months for the EU to pass economic sanctions, but this time,
the punitive measures sometimes had to be implemented within a matter of hours.
So, it was hardly surprising that the planners also made mistakes. On one
occasion, they inadvertently blocked the export of ambulances, even though
health goods were exempt from sanctions. Then they made it difficult to
transport Russian titanium, which Airbus Group urgently needed for production.
Brussels later had to clarify that Russia could continue to supply the raw
material to Europe.
The Kremlin
seemed to be at a clear disadvantage in this economic war: Some 30 percent of
its exports go to the EU, but only 6 percent of European exports were destined
for Russia.
Still, the
Kremlin managed to cleverly counter some of the attacks. For example, Putin
undermined the ban on the supply of European and American technology goods, for
example, by legalizing the so-called parallel import of computers, smartphones
and car parts from third countries. To curb financial sanctions, its central
bank jacked up interest rates and required citizens and corporations to
exchange most of their foreign exchange earnings for rubles. This has even
pushed the currency’s exchange rate "above its level at the beginning of
the year," the European Commission recently noted.
Above all,
the Kremlin has benefited from rising world market prices for oil, gas and
coal, which the West fueled with its boycott threats. Even before the invasion,
Russia’s oil revenues had been increasing by around 1.4 billion euros a week,
according to the agency’s analysis. And that despite the fact that Moscow has
already had to "significantly curtail" the production of fuel, by 9
percent a month, according to the expert report.
Still, sanctions
planners in Brussels deny any failure. On the contrary, in their report, they
state that imposing immediate and high costs on the Kremlin has been extremely
effective. They note that Russia’s economic output is expected to slump by more
than 10 percent this year, and private investment by possibly more than 20
percent.
Because of
a lack of important spare parts, Russian weapons factories had to be closed,
automobile production has been severely affected and there has been a shortage
of tractors, engines and data storage devices from the West throughout the
country. The report notes that the measures implemented have diminished
Russia’s political and economic flexibility, reduced its industrial and
technological capabilities and triggered severe financial strains. In short,
the paper states, sanctions are working.
Four months
after the start of the Russian invasion, the economic conflict has become a war
of attrition, with an added element of psychological warfare. Even as the G-7,
at the recent summit in Germany, praised the West's "unprecedented
coordinated sanctions measures in response to Russia’s war of aggression,"
Putin’s propagandists on Moscow state television were predicting that rising
energy prices would drive large parts of Europe into poverty.
Gabriel
Felbermayr, head of the Austrian Institute for Economic Research in Vienna,
says there is no clear winner in the struggle so far. "Russia cannot
sustain being disconnected from the West technologically in the long run,"
he says. "At the same time, Moscow is doing far better than expected
because sanctions from Europe and the U.S. haven’t been consistent
enough."
The
measures against Russian banks, which were described as an "atomic
bomb" by the West, have hardly had any effect because of the numerous
loopholes, the economist says, critically. Moscow has been able to compensate
for the freezing of foreign exchange revenues by increasing energy revenues.
Meanwhile, Europe’s oil embargo isn’t slated to go into effect for several
months. Already, Moscow has begun selling a considerable share of its oil to
India, some of which then finds its way to the West despite the sanctions.
In the
Felbermayr's view, the fact that the EU and America have rejected the advice of
many experts to reduce Moscow's oil revenues by imposing joint import tariffs
is the greatest failure of the sanctions policy. If the EU had made that move,
it could have eliminated a significant part of Russia’s extra profits, he
argues. However, that also could have driven up gasoline and heating oil prices
even further, a development the West didn’t want to subject its
inflation-stressed citizens to.
Instead,
the idea is to enforce a maximum price for Russian oil that is below the level
of the global market price. The idea calls for Western insurance companies,
which dominate the market, to only continue providing coverage to those tankers
that transport oil under the desired conditions. But many experts doubt whether
enough countries will sign on to make the idea a success.
That’s why
Seibert, the Brussels sanctions planner, argues that there shouldn’t be sole
reliance on the economics. "The Kremlin needs to pay a heavy economic
price for its brutal attack," he says. "But other measures are also
needed, like arms deliveries. Only then will the pressure to end the war
increase."
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