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The economic front in Russia's war against Ukraine

A screen displays exchange rate at a currency exchange office in St. Petersburg, Russia. (Dmitri Lovetsky, File/AP Photo)
A screen displays exchange rate at a currency exchange office in St. Petersburg, Russia. (Dmitri Lovetsky, File/AP Photo)

The international community may not be sending soldiers to counter Russia’s invasion of Ukraine.

Instead, they’ve launched unprecedented financial penalties against Russia.

So what impact will sanctions have on Russia’s economy?

“We may be looking at a stagflation. Low economic growth, but high inflation. I don’t know that that will happen,” Lipsky adds. “But the risk of that are all much higher now than they were two weeks ago.”

Russian President Vladimir Putin called the sanctions something else entirely.

This weekend he said they are ‘akin to an act of war.’

“That leaves us no choice but to take proportionately tough retaliatory measures,” Putin said.

Today, On Point: The economic front, in Russia’s war against Ukraine.


Patricia Cohen, global economics correspondent for the New York Times. (@PatcohenNYT)

Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center. (@joshualipsky)

Timothy Frye, professor of post-Soviet foreign policy at Columbia University. (@timothymfrye)

Also Featured

Kseniia Guliaeva, freshman at Wesleyan University, from St. Petersburg.

Interview Highlights

What were some of the sanctions and economic penalties in the first days of Russia’s invasion of Ukraine? 

Patricia Cohen: “There’s dozens of different countries that have put on sanctions that have varied somewhat from each other. There has been, you know, hundreds of individuals that are affected. There is differences. But let me just put them in kind of three big categories that I think would be most helpful to understand what’s going on.

“So I think the most surprising, and by far the most potentially powerful, was the decision to, in essence, freeze the assets of the Russian central bank. So even though what Putin had done in order to, in a sense, sanction proof Russia, was build up a huge pile of reserves in foreign currency, and foreign currency exchange reserves. And 643 billion. But, you know, roughly half of that, even though it’s owned by Russia, is essentially under the control of banks in the U.S. and Europe and Canada, et cetera. And so those assets are frozen.

“… Now, this is an incredibly powerful tool, and I’ve spoken to some economists who actually say, If you use this tool and it destabilizes or brings a collapse of the currency, the Russian ruble, you know, you can literally destroy an economy and that we should be careful about how far we want to take this. But that really is what is causing the most shockwaves.

“Then the second piece, which we’ve all heard about, this SWIFT, you know, this messaging system, its connection to financial institutions, which probably nobody ever heard of before. But now suddenly everybody’s an expert in. But so Russian banks essentially have been locked out of using that. Which means it just makes it very difficult to make payments back and forth, even if you were allowed to.

“And then the third piece is basically preventing any companies from doing business with Russia. And this can be very powerful, not only because of direct sanctions that say, you know, you’re not allowed to sell them parts for their cell phones, for their military equipment, and things like that. But what’s called secondary sanctions, which is that even companies that may not be directly affected don’t want to kind of come under the scrutiny of the U.S. Treasury Department, that they may be involved with. So there’s a kind of ripple effect from those. And those are really the baskets, I think, in terms of thinking about sanctions and why they’re working right now.”

Have we seen this many sanctions so quickly launched against a specific nation?

Patricia Cohen: “In the lead up to all of this, I talked to several economists and people who study sanctions and pretty much the consensus is, well, you know, they have limited impact, and it really depends on what is the goal that you’re trying to do. And oftentimes if you’re trying to get something very specific, that they could possibly have an impact. But if it’s something that the country sees as really crucial to its survival, then possibly not.

“The thing that’s different, though, about these sanctions, which is maybe a little bit hard for people to understand. But you know, part of the reason that they are so powerful now has to do with this kind of modern financial system that we have now, where everything is kept in kind of electronic digital records. And so, you know this kind of reach is very much a function of a very modern global financial system that has dominated the West. And in a digitized world that didn’t necessarily exist decades ago.”

On the international cooperation with economic sanctions

Josh Lipsky: “I am also uncomfortable with the framing in terms of warfare. But this is as close to akin to warfare as you can come in the economic context. And when we think about what we heard at the beginning, from Patricia Cohen, close to $400 billion of Russian money, as they think about it and it is Russian money, was taken away from their bank account overnight. And if you put that in context, that’s the size of Austria’s entire economy removed from your bank account with flipping a switch.

“So from Putin’s perspective, it’s a version of economic warfare. And if we think about the arc of these tools over a 20 year period, go back to post-9/11. These sanctions tools were escalated as a way to go after terrorist financing, but only complementary to military action that was happening. Then you go to Iran 10 years later. Sanctions were part of maximum pressure to bring them to the table. But the threat of force was always in the background. Now, sanctions are the only weapon, and it’s a significant weapon. But the threat of military force is not there.

“And I think that’s a very interesting development in the arc of the use of these tools. And it’s unprecedented to have the G-7 sanctioning a G-20 economy, the 11th largest in the world, and basically isolating them from the global financial system. Causing panic at the bank, causing financial distress within the economy, limiting medical supplies and access to technology. Is that war? Is it not? I don’t know. But it’s blurring the lines in a way we haven’t seen before.”

On using economic tools versus engaging in war

Josh Lipsky: “This is asymmetric, right? Russia is waging a military war in Ukraine and people are dying every day. And we are responding with economic tools and those are a blunt instrument that affect primarily the everyday Russians who will see their savings evaporate, who see high interest rates, who see inflation, higher food prices, lack of access to basic goods, inability to access their money.

“So the question is, if you think about response and counter response, yes, is it good we are not fighting World War III? Of course. But are we fighting on an asymmetric playing field? I think the answer is yes. And who’s really being punished from the sanctions? And the idea … is that we’ll put enough domestic pressure on Putin to either change course or just inflict enough pain to destabilize. But to do that, you have to destabilize and put the entire Russian economy into akin to a depression. And so we have to think carefully about those choices and the ripple effects both in Russia and then on the global economy.”

On sanctions in Russia after the annexation of Crimea

Timothy Frye: “I did some research on Russian public opinion towards the economic sanctions after the annexation of Crimea. These were targeted sanctions on the Russian elite. And what I found was the Russian public had a worse opinion of the United States and Europe after they both levied sanctions on Russia. But there wasn’t a backlash in support of President Putin, as many people expected. Ordinary Russians blame the Russian government for the bad economic performance. You know, fully recognizing that the targeted sanctions were specifically going after elites, and corporate entities and didn’t really affect them so much.

“What we’re seeing now is the spillover effects that have led to the currency going from 75 rubles to the dollar, to 140 rubles to the dollar. And as we’re starting to see some large factories seize up and stop production because they don’t have access to microprocessors. A question that’s going to be really important to watch is whether Russians blame Vladimir Putin for inviting the sanctions, or do they blame the West for actually levying the sanctions?

“And that’s very difficult to predict. Russian public opinion has not generally been in support of the introduction of Russian troops into Ukraine, in this decade of polling data. You know, to bear this out. Now that the troops are actually there, though, I’m sure that there will be patriotic elements within Russia who rally around President Putin, and we’ll just have to see how long that lasts.”

When we’re talking about effectiveness, have any sanctions in history actually been effective?

Timothy Frye: “So it’s a really good question, and it’s very difficult for academics to demonstrate this. Because each sanction case is so different, they each have different context. The scope and scale varies a lot. And there’s so many other background factors that are taking place that it’s difficult to isolate the impact of sanctions. And then again, we’re dealing with the Russian case, which is just unprecedented to have sanctions of this size, and scale on an economy as large as Russia’s. But there’s a few things to think about.

“… Sanctions can be an important bargaining chip during negotiation period. So having levied them prior to the conflict, you know, this will be one tool that the West will use in negotiations with trying to reach a settlement with Russia. They also signal the perseverance, the willingness of the global community to express their outrage, much more so than if they had not used sanctions and just tried to condemn them or just had a U.N. vote.

“Also, the sanctions are designed to really degrade the military capacity as well, you know, to the extent that microprocessors and other high tech goods are not getting to the Russian defense sector. That is also something that needs to be appreciated. So, you know, whether sanctions will work in the straight line way that many people think, that it just causes the elite to turn on President Putin for a decision that’s causing them economic pain? That’s not, we don’t often see that. But in the totality of the effects that sanctions have. I think one could make the case that they do change behavior.”

Do you think the economic sanctions will have any impact on Vladimir Putin’s decision-making regarding Ukraine?

Timothy Frye: “Yes, certainly. Putin has been able to stay in power by fending off these dual threats of coups and mass mobilization. And the collapse of the ruble and the financial sanctions make both of those challenges all that much more difficult. Whether it’s enough to bring him down is an open question. But he won’t be able to rule in the same way that he has done for the last 20 years.”

Related Reading

New York Times: “Economic Ties Among Nations Spur Peace. Or Do They?” — “Russia’s war in Ukraine is not only reshaping the strategic and political order in Europe, it is also upending long-held assumptions about the intricate connections that are a signature of the global economy.”

New York Times: “Russia Tried to Isolate Itself, but Financial Ties Called Its Bluff” — “The United States, Europe and their allies are not launching missiles or sending troops to push back against Russia’s invasion of Ukraine, so they have weaponized the most powerful nonmilitary tool they have available: the global financial system.”

This article was originally published on WBUR.org.

Copyright 2022 NPR. To see more, visit https://www.npr.org.