Are Economic Sanctions Against Russia Working?

Opinions about the effectiveness of sanctions on Russia vary. Some experts say that they are damaging the economy, and others counter by pointing to the lack of consequences in the political arena. Understanding the purpose of the sanctions can help you develop an informed opinion about whether or not they are working.

Considering the Causes

Russia’s annexation of Crimea, its occupation of Ukraine and the downing of Malaysian Airlines flight MH 17 motivated the United States and the European Union to take action. Leading a world effort in 2014 to discourage the country’s aggressive behavior in Ukraine gathered the support of many other countries. Participants condoning the restrictions include Canada, Switzerland, Australia, Japan, Norway, Iceland, Albania, Liechtenstein, Montenegro, Albania, Moldova and Ukraine.

Examining the Sanctions

Targeting Russia’s financial sector primarily, the 2014 sanctions also affect the country’s defense and oil industries. According to the European Union Institute for Security Studies, seven sanctions1 influence the Russian economy.

Preventing the export of energy equipment to Russia’s Arctic and deep-water exploration projects imposes painful restrictions. The punishment deters the delivery of energy-related services as well, often impacting the search for shale oil. Suspending the availability of preferential economic development loans from the European Bank for Reconstruction and Development impedes the country’s ability to access funds. Further impacts occur from these five additional sanctions.

• Bonds, Equity and Brokering Services
A ban on trading equity or bonds that have a maturity period greater than 30 days affects some of the country’s state-controlled banks, including Gazprombank and Sberbank. The sanctions impact Rosneft, a major energy company, as well as three Russian defense companies.

• Arms
A two-way ban prevents the sale or purchase of weapons.

• Banking
Five major, state-owned banks cannot accept loans, and countries make sure to comply with the terms of the ban. CNBC reported that Russia’s plan to sell off state assets generated interest by Credit Suisse2 in providing advice on privatization “as long as the deals do not violate sanctions.” The report confirms that Western banks have concerns about providing advice on privatization that may violate terms of the sanctions.

• Weapons Production
Russia cannot export civilian industrial goods that may have the potential to produce weapons.

• Individuals and Companies
The violation of Kiev’s territorial integrity creates a freeze on the assets and a ban on visas for 132 people and 28 companies.

Calculating Economic Effects

Russia suffers from Western sanctions, particularly in the economic sector. Since the month following their inception, the Russian ruble has diminished in value by nearly half. Economic growth, according to Newsweek, fell to 0.6 percent. Capital flight out of Russia doubled to more than $150 billion, and the gross domestic product shrunk by 1.4 percent.

Financial isolation may create many of the adverse economic conditions that Russia experiences, but it does not account for all of them. At the same time that the sanctions limit the economy, a steep drop in the price of oil contributes to the cumulative effect. As a major exporter of natural gas, petroleum products and crude oil, Russia depends on them for as much as 75 percent of total export revenues.

Considering Political Effects

While the West’s rationale for imposing sanctions includes the concept that economic pressure can make President Putin withdraw from Ukraine, current events do not emphatically support it.

The results that the West hopes to achieve through sanctions depend partially on the weakening of popular support for Putin’s policies. Maintaining an expensive military presence in Ukraine in the face of rising inflation and falling incomes may create a burden that is too much to bear, but evidence of it does not seem apparent. While the effects of sanctions on the economy may seem obvious with constraints on trade, a weakened ruble and bans on financial investments, their impact on Russian aggression lacks such clarity. For more information on these and related topics, visit PersonalMoneyStore.com today.

  1. seven sanctions
  2. Credit Suisse