Putin’s billions: have sanctions backfired?

When Vladimir Putin sent his tanks into Ukraine on 24 February, he did so under the assumption that the West was too ruptured and disjointed to pull together a unified response. It was the first of many miscalculations. That same day, Boris Johnson promised ‘massive’ economic sanctions that would ‘hobble’ Russia’s economy to the point of shutdown. ‘Putin chose this war,’ said Joe Biden that evening, as the United States announced its own sanctions on Russia’s top banks. ‘Now he and his country will bear the consequences.’

The global economic response to Russia’s aggression has been stronger than anyone predicted. Russia’s most notorious oligarchs have had their assets seized and the country’s financial firms have been frozen out of international banking. Of the $600 billion war chest built by Putin – the fourth-highest central bank reserves of any country – more than a third has been frozen by sanctions. Asian democracies joined the economic fight, with Japan ending its historic neutrality. The world’s commercial might was mobilised as never before. But just over 100 days on from all this, it’s fair to ask: are these sanctions working?

Russia is struggling to export goods to Ukraine’s allies. But just as Putin calculated, Europe has found no viable alternative to his energy supplies, so it keeps on buying from the Kremlin. Russia’s finance ministry was expecting an additional $9.6 billion of income in April alone, thanks to energy price spikes. If these prices stay elevated, Putin is on track to make more money from oil and gas this year than last. At the moment, he’s raking in roughly $800 million per day – and spending much of it in Russia in order to stimulate the economy. If the aim of sanctions was to starve the Russian economy – and war machine – then it’s hard to call them a success.

When Biden pledged economic retaliation against Russia in February, he offered up a timeline of one month to see the effects of sanctions. When that month was up, he was forced to change his tune. ‘Sanctions never deter,’ the President said. ‘We will sustain what we’re doing not just next month, the following month, but for the remainder of this entire year. That’s what will stop him.’ In other words, prepare for a long economic game. The strategy is no longer financial shock and awe, but to chip away at the Kremlin’s coffers (and the pockets of the Russian people) in the hope that Putin surrenders.

The free world is competing between countries as to who can go further with their sanctions regimes. Britain has pushed through emergency legislation to ensure every sanction against a Russian oligarch brought in by the US or European Union is immediately adopted as UK policy, so the country described by Volodymyr Zelensky as ‘steadfast and courageous’ never falls behind.

But there are major economic powers that are still claiming to be neutral. China has had no qualms about buying Russian oil on the cheap, which is roughly $35 less expensive than Brent; its state-owned refineries have stocked up throughout the first half of the year. China’s independent refineries have started doing the same this month. India’s orders of Russian crude have spiked in the past two months, with the lower price point enticing Narendra Modi to break with what little solidarity he was showing to Ukraine at the start of the crisis.

It’s not just ‘neutral’ countries buying up Russia’s resources. ‘Rather a cold shower than Putin’s gas’ read German protesters’ placards back in February. Chancellor Olaf Scholz has quickly discovered that this is not just a slogan but the brutal choice that lies in front of him. Despite having pledged to suspend Nord Stream 2 – the now-completed gas pipeline running under the Baltics – Scholz is not convinced that his country is ready to tackle its addiction to Russian energy overnight. Even now, Berlin has been paying Russia $220 million a day for oil and gas supplies – more than a quarter of the Kremlin’s daily income from energy.

Some analysts are now beginning to argue that western sanctions have been ruined by this giant gas leak running through Germany and that it will allow Putin to finance his war for as long as it takes. The energy sanctions ushered in by the EU so far carefully exempt any serious crackdown on Russian gas coming into the bloc. ‘They pulled every sanction lever except the one that would really make a difference,’ laments one Tory MP. Around the cabinet table, more hawkish ministers are inclined to agree, unconvinced that sanctions can have much more of an effect until Germany decides to stop buying Russian gas.

The window of time for the West to use economic sanctions to cripple Russia’s war machine may have already closed. Had Europe moved faster with energy embargoes at the start of the conflict, the financial shock would have been pointed in Moscow’s direction. Instead, it moved at a snail’s pace while the gap between Russia’s exports and imports tripled to more than $100 billion in the first five months of this year.

Now Russia seems to be gradually reducing gas supplies to Europe in a bid to stop countries from stockpiling for the colder months, when Putin wants to be able to dangle the threat of turning off the pipes completely. Last week, Italy and Slovakia reported receiving less than half the usual volumes. With such significant cash reserves, Putin can afford to do this. And it’s leading to uncomfortable questions. What if sanctions, and the resulting windfall for Putin, mean that Europe may soon need Russian gas far more than the Kremlin needs European cash?

While nearly a billion dollars flow Putin’s way each day, the pain of implementing economic sanctions is having repercussions domestically. In Britain, energy bills are up 54 per cent, with the cost of filling up the average car at the petrol station now £100. The West is experiencing serious economic damage as a result of energy costs, without delivering a debilitating blow to Russia’s economy.

This is not to say economic sanctions have had no impact. Russia’s military is struggling to restock high-tech artillery, including the radar and tracking equipment it needs for attacks. While Russian forces still have access to large stocks of traditional weaponry, the Kremlin is estimated to have lost a third of the ground forces deployed to Ukraine, according to UK figures. This includes thousands of military vehicles that Putin will eventually struggle to resupply.

Where there’s a will, there is often a way, and it’s well established that Putin has been paying pretty pennies to Russian businessmen for years to smuggle certain technologies such as memory chips, necessary for military operations, through US export controls and into the Kremlin. But it’s getting trickier and more high-risk to circumvent western embargoes, and patrols are increasing.

And while the rouble has rebounded to its pre-war levels, this is on far smaller volumes of trade, given that not as many countries and companies accept roubles nowadays. Russia’s inflation stands at 17 per cent on the year – driven up to a 20-year high thanks, in large part, to international sanctions. Even though Putin has the cash to keep his economy ticking over for some time, Russians increasingly feel as if they’ve been pushed to the outer edges of the global economy, priced out of what they could normally purchase, much of which has disappeared from the shelves altogether due to embargoes.

Russia won’t be able to avoid a major recession, forecast by the OECD to mean an economy 10 per cent smaller this year and at least 4 per cent next year – a far worse outlook than any European country. But the gas money flooding in as never before gives Putin more leverage than such a heavily sanctioned country might otherwise have. And he’s using it to try to persuade the ‘neutral’ countries that he is heading for victory, while the West is heading for a cost of living crisis from which its elected leaders may find it difficult to recover.

The sanctions, when they came in, were not really part of a long-term strategy. It was almost a spontaneous response, from governments and global corporations, and the effects on the West were not properly gamed. There are already signs of Germany wavering, failing to deliver to Ukraine the arms it promised. It’s no real surprise that western countries which benefit from some level of energy independence, such as the US, are more bullish on indefinite embargoes, while it seems as though Scholz is hoping the conflict will be over by the time winter comes. But all of them, to varying degrees, must deal with the impact of sanctions spreading much further than the intended target.

A shrinking Russia, increasingly without access to foreign goods and services, versus an economically stagnant West that is only just beginning to feel the first twinges of the serious economic pain to come. The question now is who blinks first.

Kate Andrews joins Julian Jessop on Spectator TV to discuss Russian sanctions.