​Sanctions? It Takes Time, but They Work

The effect of the system of sanctions against Russia is a legitimate question and was raised recently by The Economist with the aim of pushing for rigorous measurement of its effects and developing a platform to make them more incisive and effective. This is nothing like the tendentious and superficial interpretation expressed by certain politicians engaged in an electoral campaign. Riding public dissatisfaction with the inevitable sacrifices that a war in Europe is imposing on citizens and businesses, they cast into doubt the effectiveness of sanctions against Russia. So what assessment can be made at the moment with respect to the seven packages of sanctions launched by the European Union since February?

This evaluation is not simple, for two reasons. The first is that both the Russian Central Bank and Rosstat (the Russian National Institute of Statistics) have stopped publishing official data, releasing instead propagandistic statements. A recent study by Yale School of Management (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4167193) and a report by the European Council - (https://eu-solidarity-ukraine.ec.europa.eu/eu-sanctions-against-russia-following-invasion-ukraine_it) - in addition to the many scholars who have turned to the subject - try to reconstruct a reliable and realistic picture. Thus, the scenario of decline in the Russian economy is becoming increasingly clear, despite the surge in growth of its trade surplus. The second reason is that any sanctioning decision, even the most severe, must face up to a strongly interconnected economic and financial reality in which the sanctioned countries, such as Russia, are not impermeable entities but have both connections that are difficult to contain and mechanisms for circumventing the sanctions themselves. It is the same old story as for sanctions throughout history.

To judge the effect of sanctions, rather than reacting emotionally you need to reason with respect to the objectives that you want to achieve. For the European Commission, the objectives were and remain three: a) to weaken the Kremlin's ability to finance the war; b) inflict clear economic and political costs on the Russian elite that financed the war; c) reduce the Russian economic base. The seven packages of sanctions, which are in addition to those already in place since 2014 after the invasion of Crimea (the effects of which can be read in a 2019 ISPI report, https://www.ispionline.it/it/pubblicazione/fact-checking-russia-e-sanzioni-22134), have acted in fact on three different fronts: 1) targeted sanctions against specific individuals (to date more than 1,200); 2) sanctions of a commercial nature, both on the export front to Russia and above all on imports by Russia itself; 3) sanctions affecting capital movements and the financial system, starting with the blocking of SWIFT transfers made at the beginning of the Russian invasion.

Regarding these three objectives, the first has probably been less effective in the short term, the second has not (yet) made progress towards the collapse of Putin's leadership, while the third is inexorably proceeding, sliding Russia towards a recession but above all towards overall scarcities and impoverishment. Many talented and educated individuals have fled Moscow or have decided not to return there because so many foreign companies and distribution chains have definitively abandoned that market. An immediate collapse was avoided not because the sanctions do not work but because the Russian Central Bank did a good job of managing a strong rise in interest rates to tame inflation, of blocking the flight and movements of capital on the inside, and of managing the ongoing flow of foreign currency from the purchase of gas and oil by the West. But the governor of the Russian Central Bank, Elvira Nabiullina, says today she is seriously concerned about the state of health of the Russian economy, and the minus sign on Russian GDP foreseen for 2023 is admitted even by state propaganda. The sudden heart attack was therefore avoided but the disease continues inexorably. As Boeri and Perotti wrote in Repubblica of September 15, we need to give the sanctions some time. One reason is that it is not so easy for Russia to replace Europe's purchase of gas and oil with sales to China and India, due a lack of transport infrastructure to Asia but above all because China is only interested in buying a part of Russian crude. Plus, it is not at all easy to replace European imports of high quality technology and products with supplies from less qualified countries. Anecdotal stories leaked by the press speak of a race to disassemble everything from household appliances to Aeroflot planes to scrounge spare parts for the military.

If the goal was to deal an immediate mortal blow to the Russian economy, Europe should have stopped buying gas and oil straight away. In February we were not ready to do this - just as we were not ready to deal with the issue of war in Europe - but perhaps these months have served to make Europe think differently. The Russian economic decline continues, though the country still holds up financially because Russia is a less integrated economy than many others, more accustomed to dramatic crises and, above all, because it is not a democracy and its citizens have no choice. The cost that the West is paying must not give us second thoughts or make us forget that in the heart of Europe in 2022, one country has invaded another and is carrying out an inhuman and barbaric war, indifferent to so many men and women who have lost their lives. Let no one be tempted to maintain the lifeline of a system that at some point will have to surrender, not merely in exchange for a slightly warmer home this winter.