ECONOMY
Sanctions Only Helping Russia
to Wage War
to Wage War
June 3, 2024
Andrei Movchan
Economist, founder of Movchan’s Group investment management company
Economist and financier Andrei Movchan shares what was wrong with a recent Brookings Institution conference on Western sanctions against Russia. Experts and officials, he argues, are not owning up to the ineffectiveness of sanctions in helping Ukraine and stopping Russian aggression.
The original text in Russian was published on Facebook and is being republished here with small changes and the author’s permission.
Recently, the Brookings Institution held a conference called Sanctions on Russia: What’s Working? What’s Not? As is increasingly the case in democracies, there was clearly a lack of representatives from government agencies that actually impose and lift sanctions, yet there were many reputable experts and journalists – in this sense, the conference was informative and interesting, but hardly useful.
An uncomfortable question
Of the nine reports presented, only one, by Sergei Aleksashenko, looked at whether easing sanctions could help the West to achieve its goals. His report began with a rhetorical question – what goals does the West want to achieve with sanctions? – and the statement of a long-obvious fact – economic sanctions almost never stop wars and never ever lead to regime change.
In the other reports (as might have been expected) this question was not raised – it is very unpleasant for the audience. But there were many diplomatic proposals “for the future” – before introducing sanctions, [we should] think through and articulate their goals and why they will be effective, how their performance might change, what mechanisms for correcting and lifting them might be used, and what the possible side effects might be.
One of the reports was wholly devoted to the idea of creating a procedure for developing and implementing sanctions. No one dared to ask the obvious question: “what, we have not been doing that?” If government officials were present, I believe it sounded like this: “no way, we could have been doing that?”
But these were not the topics that dominated the conference. The main idea of the speakers (with the exception of Aleksashenko and, perhaps, Emily Blanchard of Dartmouth) was: “the sanctions are working, everything is ok, but we need a little fine-tuning.” More honest speakers cited as evidence something like this [a quote]: “the US put in place tough sanctions against Iran and Venezuela to change the regimes there. As a result, oil exports in Iran fell threefold, and Venezuela’s GDP fell by half.” The fact that regime change is not to be seen in either country did not worry the speaker.
Less honest speakers simply stated [a quote]: “there is a common misconception that sanctions do not work. This false narrative is a product of Russian propaganda, parroted by some Western media,claiming that the Russian economy is not suffering as a result of sanctions.” They, of course, did not provide evidence.
Recently, the Brookings Institution held a conference called Sanctions on Russia: What’s Working? What’s Not? As is increasingly the case in democracies, there was clearly a lack of representatives from government agencies that actually impose and lift sanctions, yet there were many reputable experts and journalists – in this sense, the conference was informative and interesting, but hardly useful.
An uncomfortable question
Of the nine reports presented, only one, by Sergei Aleksashenko, looked at whether easing sanctions could help the West to achieve its goals. His report began with a rhetorical question – what goals does the West want to achieve with sanctions? – and the statement of a long-obvious fact – economic sanctions almost never stop wars and never ever lead to regime change.
In the other reports (as might have been expected) this question was not raised – it is very unpleasant for the audience. But there were many diplomatic proposals “for the future” – before introducing sanctions, [we should] think through and articulate their goals and why they will be effective, how their performance might change, what mechanisms for correcting and lifting them might be used, and what the possible side effects might be.
One of the reports was wholly devoted to the idea of creating a procedure for developing and implementing sanctions. No one dared to ask the obvious question: “what, we have not been doing that?” If government officials were present, I believe it sounded like this: “no way, we could have been doing that?”
But these were not the topics that dominated the conference. The main idea of the speakers (with the exception of Aleksashenko and, perhaps, Emily Blanchard of Dartmouth) was: “the sanctions are working, everything is ok, but we need a little fine-tuning.” More honest speakers cited as evidence something like this [a quote]: “the US put in place tough sanctions against Iran and Venezuela to change the regimes there. As a result, oil exports in Iran fell threefold, and Venezuela’s GDP fell by half.” The fact that regime change is not to be seen in either country did not worry the speaker.
Less honest speakers simply stated [a quote]: “there is a common misconception that sanctions do not work. This false narrative is a product of Russian propaganda, parroted by some Western media,claiming that the Russian economy is not suffering as a result of sanctions.” They, of course, did not provide evidence.
“As if by magic, not one report addressed the topic of the conference: which sanctions are working and which are not.”
Surprising arguments for the effectiveness of sanctions
But the most interesting report, considering the incredible people who gave it, was that of Berkeley professor Yuriy Gorodnichenko (the list of his affiliations takes up a page – in particular, he teaches at Berkeley, edits the American Economic Review and the Visnyk of the National Bank of Ukraine, and advises the ECB) and Torbjörn Becker, who heads the Stockholm Institute of Transition Economics.
Both Gorodnichenko and Becker are specialists on the Russian economy, authors of books and articles on the topic, having given many interviews. They are listened to. They were clearly listened to when, in March 2022, Becker said and wrote that Russia must be deprived of income from oil exports and the Putin regime will fall, and that it is necessary to maximize pressure on the Russian financial system, etc.
But the most interesting report, considering the incredible people who gave it, was that of Berkeley professor Yuriy Gorodnichenko (the list of his affiliations takes up a page – in particular, he teaches at Berkeley, edits the American Economic Review and the Visnyk of the National Bank of Ukraine, and advises the ECB) and Torbjörn Becker, who heads the Stockholm Institute of Transition Economics.
Both Gorodnichenko and Becker are specialists on the Russian economy, authors of books and articles on the topic, having given many interviews. They are listened to. They were clearly listened to when, in March 2022, Becker said and wrote that Russia must be deprived of income from oil exports and the Putin regime will fall, and that it is necessary to maximize pressure on the Russian financial system, etc.
An oil drilling rig at the Abrakupchinsky site in Evenkiysky District (Krasnoyarsk Region). Source: Wiki Commons
As a result of the subsequent “oil price cap,” rising [global] oil prices made up for Russian losses from the discount [on its oil]. The discount did not last long, and today Russian oil is trading closer to Brent than before the war.
The “pressure on the Russian financial system” led to the fact that Russia retained hundreds of billions of dollars, while Western financial structures were deprived of them, not to mention the fact that they have spent tens of billions to beef up compliance.
But the report of these two experts was not about analyzing their mistakes; rather, the point was: if it’s not a door you are pushing, but a wall, just push harder. They assured the audience that sanctions were working: “for example, after sanctions car production in Russia fell by 60%” (this figure is, of course, incorrect, as the decline is about 40%, and the speakers apparently do not know that we are talking about the end of “light manufacturing” in Russia, i.e., putting wheels on cars– the Chinese, unlike the Europeans, put them on themselves). Without thinking twice, they proposed moving from targeted sanctioning to total sanctioning – in other words, introducing a global ban on all relations with Russia and Russians, and then (if necessary) making exceptions for someone or something.
This revolutionary conclusion was basically made on the basis of the following four arguments:
“Russia’s dependence on natural resource exports makes Russia particularly vulnerable to sanctions.” It remains a mystery how respected professors saw this vulnerability in Russia’s record earnings from the sale of its resources in 2022-23 against the backdrop of all sorts of sanctions.
The “pressure on the Russian financial system” led to the fact that Russia retained hundreds of billions of dollars, while Western financial structures were deprived of them, not to mention the fact that they have spent tens of billions to beef up compliance.
But the report of these two experts was not about analyzing their mistakes; rather, the point was: if it’s not a door you are pushing, but a wall, just push harder. They assured the audience that sanctions were working: “for example, after sanctions car production in Russia fell by 60%” (this figure is, of course, incorrect, as the decline is about 40%, and the speakers apparently do not know that we are talking about the end of “light manufacturing” in Russia, i.e., putting wheels on cars– the Chinese, unlike the Europeans, put them on themselves). Without thinking twice, they proposed moving from targeted sanctioning to total sanctioning – in other words, introducing a global ban on all relations with Russia and Russians, and then (if necessary) making exceptions for someone or something.
This revolutionary conclusion was basically made on the basis of the following four arguments:
“Russia’s dependence on natural resource exports makes Russia particularly vulnerable to sanctions.” It remains a mystery how respected professors saw this vulnerability in Russia’s record earnings from the sale of its resources in 2022-23 against the backdrop of all sorts of sanctions.
“Another mystery is how the experts think Russia will be ‘prohibited’ from selling these resources, if China and India pay no heed to these restrictions.”
The experts did not bother with such trifles as practical implementation; they equate words with actions, without understanding at all how the global market works.
“Russia accounts for only 11 % of world oil exports, and if you take it off the market, then OPEC will boost production to compensate for the rise in prices.” Why would the cartel take actions to lower prices if it benefits most from their growth? What compensation will OPEC countries demand in exchange for boosting oil supplies? Currently, the elasticity of oil prices is very high – if an embargo reduces Russia’s exports by 50% and pushes prices up 50%, Russia will not lose out. Who will lose out is clear.
“A ban on trade with Russia will reduce the profits of private companies in the West” – when you hear the word “private” you can see a disdainful grimace on the face of the professors, both public employees – “but this reduction must be weighed against the costs of helping Ukraine in the war against Russia. If the war can be won by reducing trade with Russia, it must be done.”
The experts cite the Kyiv School of Economics, which claims that foreign companies had sales of $200 billion in Russia in 2022, making $20 billion in profit and paying $20 billion in taxes. The point here is not even that these figures are most likely made up (doubts are raised by the fact that the taxes and profits are equal, while the level of profits of all foreign companies at less than 1% of GDP clearly does not correspond to reality); rather, the point here is the stupid logic: if foreign companies operating in Russia leave, then others, including local companies, will take their place. As a result (let’s take the speakers’ figures), the $20 billion in profits will remain in the country instead of going to foreigners. But apparently economics professors do not know how this works.
Sanctions will not deter Russia
“Total sanctioning will allow Western companies to legally not fulfill their obligations in relation to Russian counterparties.” This idea is remarkable in many ways. Besides explicitly calling for the mass violation of contractual obligations, the experts ignore the simple fact that Russian counterparties will also not fulfill their obligations, and no one knows how violations from both sides would balance out.Forgive me, professors, but you should know that wickedness, like pressure, is a two-way street.
“Russia accounts for only 11 % of world oil exports, and if you take it off the market, then OPEC will boost production to compensate for the rise in prices.” Why would the cartel take actions to lower prices if it benefits most from their growth? What compensation will OPEC countries demand in exchange for boosting oil supplies? Currently, the elasticity of oil prices is very high – if an embargo reduces Russia’s exports by 50% and pushes prices up 50%, Russia will not lose out. Who will lose out is clear.
“A ban on trade with Russia will reduce the profits of private companies in the West” – when you hear the word “private” you can see a disdainful grimace on the face of the professors, both public employees – “but this reduction must be weighed against the costs of helping Ukraine in the war against Russia. If the war can be won by reducing trade with Russia, it must be done.”
The experts cite the Kyiv School of Economics, which claims that foreign companies had sales of $200 billion in Russia in 2022, making $20 billion in profit and paying $20 billion in taxes. The point here is not even that these figures are most likely made up (doubts are raised by the fact that the taxes and profits are equal, while the level of profits of all foreign companies at less than 1% of GDP clearly does not correspond to reality); rather, the point here is the stupid logic: if foreign companies operating in Russia leave, then others, including local companies, will take their place. As a result (let’s take the speakers’ figures), the $20 billion in profits will remain in the country instead of going to foreigners. But apparently economics professors do not know how this works.
Sanctions will not deter Russia
“Total sanctioning will allow Western companies to legally not fulfill their obligations in relation to Russian counterparties.” This idea is remarkable in many ways. Besides explicitly calling for the mass violation of contractual obligations, the experts ignore the simple fact that Russian counterparties will also not fulfill their obligations, and no one knows how violations from both sides would balance out.Forgive me, professors, but you should know that wickedness, like pressure, is a two-way street.
“If you think you can just kick someone to the curb, eventually you will be the one getting kicked.”
North Korea's Hwasong-6 tactical ballistic missile, a modification of the Soviet R-17 Elbrus, on parade in Pyongyang in July 2013. Source: Wiki Commons
At this point, note that the balance is strongly in favor of Russia and the Kremlin, which, using sanctions as a cover, is simply nationalizing assets in Russia.
“Total sanctions are effective – for example, they have deterred North Korea.” I regret that I missed the opportunity to ask the speakers: how, excuse me, are your total sanctions deterring inherently resource-poor, small and war-torn North Korea, if today it is a nuclear power, possessing long-range ballistic missiles with 200 launchers, more than 4,000 tanks, 8,500 artillery pieces, 5,100 missile launch systems, 11,000 anti-aircraft installations, 500 warships (40 submarines), 730 combat aircraft, is actively selling weapons for export, including to Russia?
Or maybe sanctions are deterring Iran from the real possibility of becoming a nuclear country tomorrow or from funding terrorists around the world? Why do you think that they will deter Russia – a huge, rich country with links to China and whose resources are in high demand by many countries?
Do not get me wrong – I am not at all advocating business as usual with Russia. If the West sees Russia as an aggressor and wants the aggression to stop, it must act to reduce the Kremlin’s capacity to wage war. But what is being proposed, it turns out, only helps Russia to wage war, while “reputable economists,” like those who spoke at the Brookings conference, it turns out, do not seem to understand the basics of their field.
Yet the “sanctions” discourse effectively shields Western officials and experts from the only real question: what should be done to help Ukraine and stop Russian aggression if sanctions do not work? And Western officials and the economic experts who serve them need to avoid this question, because if it is asked loudly, it will turn out that the West is not at all eager to stop the war, even though it has all the capabilities to do so. Why? is a question that remained unanswered at the recent conference.
“Total sanctions are effective – for example, they have deterred North Korea.” I regret that I missed the opportunity to ask the speakers: how, excuse me, are your total sanctions deterring inherently resource-poor, small and war-torn North Korea, if today it is a nuclear power, possessing long-range ballistic missiles with 200 launchers, more than 4,000 tanks, 8,500 artillery pieces, 5,100 missile launch systems, 11,000 anti-aircraft installations, 500 warships (40 submarines), 730 combat aircraft, is actively selling weapons for export, including to Russia?
Or maybe sanctions are deterring Iran from the real possibility of becoming a nuclear country tomorrow or from funding terrorists around the world? Why do you think that they will deter Russia – a huge, rich country with links to China and whose resources are in high demand by many countries?
Do not get me wrong – I am not at all advocating business as usual with Russia. If the West sees Russia as an aggressor and wants the aggression to stop, it must act to reduce the Kremlin’s capacity to wage war. But what is being proposed, it turns out, only helps Russia to wage war, while “reputable economists,” like those who spoke at the Brookings conference, it turns out, do not seem to understand the basics of their field.
Yet the “sanctions” discourse effectively shields Western officials and experts from the only real question: what should be done to help Ukraine and stop Russian aggression if sanctions do not work? And Western officials and the economic experts who serve them need to avoid this question, because if it is asked loudly, it will turn out that the West is not at all eager to stop the war, even though it has all the capabilities to do so. Why? is a question that remained unanswered at the recent conference.
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