Why The Economic War Against Russia Has Failed

 Via The Spectator,

There was much mirth in the West this week when Vladimir Putin’s Victory Day parade through Red Square included just one tank, itself a relic from a museum. The inference was that Russia has lost so much military kit in Ukraine that it is a shadow of the military superpower the Soviet Union used to be.

Russia has certainly borne heavy losses (although any country conducting a foreign war would presumably have its military hardware on active duty rather than on ceremonial parade). But we should avoid being smug. The truth is that the war is not going well for the West either – at least in one respect.

When Putin sent tanks into Ukraine on 24 February last year, western countries rapidly adopted a two-pronged strategy.

One prong was that they would not engage in direct military conflict, but would support Ukraine with weapons and other military equipment. Some countries were quicker than others, but this part of the strategy has been a remarkable success. Ukraine has managed to resist Russian forces, and to push them back from many areas, even if the outcome is still far from certain.

The other prong, though, has turned out to be blunt: the plan to wage economic war with Moscow, unleashing financial shock and awe on a scale never seen before. Russia was to be cut off almost entirely, with sanctions and boycotts on all imports and exports save for humanitarian ones such as medicines. Putin’s Russia, went the theory, would be impoverished into surrender.

Few people in the West are aware of how badly this aspect of the war is going. Europe has itself paid a high price to effect a partial boycott of Russian oil and gas. UK fossil fuel imports from Russia totalled £4.5 billion in 2021; in the year to January 2023 that was – officially – down to £1.3 billion. In 2020 the EU sourced 39 per cent of its gas and 23 per cent of its oil from Russia; in the third quarter of last year this was down to 15 per cent and 14 per cent respectively.

But these figures do not explain the scale of the failure to damage the Russian economy. It soon became clear that while the West was keen on an economic war, the rest of the world was not. As its oil and gas exports to Europe fell, Russia quickly upped its exports to China and India – both of which preferred to buy oil at a discount than to make a stand against the invasion of Ukraine. Worse, some of the Russian oil exported to India appears to have been siphoned back to Europe, with a rise in the number of ships taking refined oil from India through the Suez Canal.

There seems to be some siphoning in the other direction, too. An investigation by the German newspaper Bild has uncovered a disturbing growth in exports to countries bordering Russia. The importing of German motor vehicles to Kazakhstan, for example, rose by 507 per cent between 2021 and 2022 and to Armenia by 761 per cent. Exports of chemical products to Armenia increased by 110 per cent and to Kazakhstan by 129 per cent. Sales of electrical and computer equipment to Armenia are up 343 per cent. What happens to these goods once they reach these former Soviet republics is not easy to establish, but one likely explanation is that they end up in Russia as diverted trade flows. And even if such commodities are not formally being re-exported, many Russian citizens retain visa-free access to those countries and are able to take goods across the border.

The West has had a policy of trying to target wealthy Russians in particular with economic sanctions. But ironically they are the people who can most easily access western goods through diverted trade. It is they who have dual passports; they who can afford to travel abroad in order to shop for their luxury goods. Short of a wholesale global boycott against Russia, it is very hard to prevent western-made goods reaching the hands of wealthy Russians.

The West embarked on its sanctions war with an exaggerated sense of its own influence around the world. As we have discovered, non-western countries lack the will to impose sanctions on either Russia or on Russian oligarchs. The results of the miscalculation are there for all to see. In April last year, the IMF forecast that the Russian economy would contract by 8.5 per cent in 2022 and by a further 2.3 per cent this year. As it turned out, GDP fell by just 2.1 per cent last year, and this year the IMF is forecasting a small rise of 0.7 per cent. And that is all in spite of the war in Ukraine going much more badly than many imagined it would in February of last year. The Russian economy has not been destroyed; it has merely been reconfigured, reorientated to look eastwards and southwards rather than westwards.

It was not necessarily wrong to declare economic war on Russia. The country has suffered harm from western sanctions, even if nothing like on the scale that we imagined we could inflict. But if the West is thinking that in future it can fight wars purely by economic means, without bombs or bullets, it is badly mistaken.

Western military equipment has allowed Ukraine to mount a David vs Goliath battle which it may yet win – and certainly to avoid annexation by Putin. As for economic sanctions, however, we will have to think again.

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