Ukraine Crisis - Will Russia be able to sustain western economic sanctions?

Ukraine has been at the forefront of nearly all international news. With Russia moving a sizeable portion of its forces to Belarus, Moldova, Crimea and on its western borderline with Ukraine, there is a severe military crisis and European Union as well as other countries like the UK, France and US are actively vocal about a possible forced annexation of Ukraine by Russian Forces. Ukraine is the Russian gateway to Europe and similarly, it is the NATO gateway to Russia too. If Russia controls it, Moscow will have influence over Europe but if Ukraine joins NATO, US forces will be knocking at the doors of the Kremlin. As per an estimate, about 80+ Battalion Tactical Groups (BTGs) each with a strength of 1200-1500 soldiers of the Russian Army are knocking at the doors of Kyiv which is a worrisome situation for Ukraine.

NATO itself is divided over the issue and most East European members of NATO are not favouring any military action against Kremlin even if it launches an attack on Ukraine. Putting NATO forces against Russia in Ukraine will further compel Moscow to react which may lead to another Cold War-like situation. This leaves only one option to NATO countries and that will be putting more economic sanctions on Russia. This is a matter of debate as Russia is already under tight sanctions from the US and European Union after the 2014 Crimean crisis. It was put under all possible sanctions over 7 years since 2014, but Moscow learnt to survive despite all odds. Indeed, it weakened the economy of Russia in the first few years but bounced back in no time. Interestingly and contrary to it, a more severe impact was visible on the economy of the European Union which lost about 100 billion Euros in the first three years due to the loss of trade with Russia. Russia is a trade surplus country where exports are much higher than its imports. While NATO and European Union are gearing up for a new set of restrictions on the Kremlin this time, it is pertinent to understand will they be able to affect the Russian Economy.

1. Sanctions from the United States- US has already informed its chip manufacturers of the possibility that their exports to Russia may be stopped. A sizeable portion of Russian imports (About 45%) are machinery, tools and technology but a large portion of it comes from China, Germany and some other European countries and barely 5-6% comes from the US. So even if the US puts any sanctions on Russia, it will easily find alternatives in China & other countries.

2. Dilemma of the European Union (EU)- EU has many options lined up. The first option is to stop Russian and Oil Gas supplies through various pipelines including Nord Stream 1 & 2 as well as South Stream however the possibilities are difficult as 70% of Europe is dependent upon Russian oil and gas for their daily energy needs which is cheaper and easily available through the pipeline. In case of sanctions or denial of Russian supplies, these countries will be left with no options but to buy the expensive petroleum tankers from the middle east the transportation of which to some of the landlocked countries of Europe will be a mammoth task. Any action against Russia will directly hamper the energy security of the entire Europe.

The second option is to stop trade with Russia and in the eventuality of such action, Russia reserves the right to stop or disrupt the petroleum supplies like it did in the past. EU has tasted similar circumstances in 2014 and is not fully geared up to handle the situation this time. Further, if we leave Germany, then trade of other EU countries with Russia is minimal which will not affect the Russian economy in a great way.

We must also know that in terms of trade with the European Union, Russia has a significant trade surplus, and the loss will be of the EU countries who are already facing stiff economic crisis due to the COVID pandemic. Further, European Union itself is divided over the Ukraine issue. And apparently, to take any such decision all 27 countries of the European Union must agree which is not a possibility in this case.

3. Denial of SWIFT payment gateway- While the US and other countries are openly speaking about denial of SWIFT electronic payment gateway to Russia as part of their sanctions’ package, Brussels based SWIFT system which is the backbone of forex flow in Russia has an option to close its doors to Moscow. While the EU itself is responsible for nearly 75% of the remittances to the Kremlin, the closure of the SWIFT system will not affect Russia much. The US has already denied its entire banking system to Russia long back and it did not have any significant impact. Invariably, any such action including denial of SWIFT will prompt not only Russia but other world countries too to prepare an alternative. China is already working towards it and the possibility of Russia joining it cannot be ruled out.

4. Impact on Russian Arms Industry- Over the last seven decades or so, the United States has been competing with the Russian Arms Industry. Together both countries own nearly 70% of the global Defence market. It is highly possible that US or EU may put sanctions on Russia denying its defence exports however the effect of the same will be limited. Firstly because of the limited scope of sanctions as most of the Russian Defence Equipment buyers are outside NATO and EU who will be out of the scope of these sanctions and secondly, the major buyers of Russian Arms are countries like China, India and some of the countries who were part of erstwhile USSR. These are non-NATO, non-EU countries and will not bow down to NATO so easily.

5. Availability of Forex to Russia- One more action on cards is a denial of the availability of Euro and US dollars to Russia. While American economists are quite vocal about it, the impact is going to be reversed. As a trade surplus country with over 600 billion USD worth of foreign reserves, Russia has the capability to easily sail through. Further, in absence of USD and Euro, European countries will have to find out another alternative to pay Russia for its oil and gas. This could be in the form of another currency (Japanese Yen or Chinese Renminbi) or Bullion (Gold). The implication of any such sanction will be suicidal for both US and EU. It will not only create a forex crisis in Europe but also weaken the position of the US Dollar and Euro in the international market. Further, if this alternative works, it will end the monopoly of the US dollar from the world.

Summarising the above, two things are clear at this point in time. Firstly, Russia has a robust trade surplus economy gone through many ups and downs since it was formed 30 years back. It has seen many severe economic situations in the past and emerged victorious every time. Secondly, Russia has learnt from the sanctions imposed since 2014 and worked on its alternatives meticulously. It selected new trade partners and is emerging as a parallel power to the United States now. While European Union has run out of viable options, any action by the US will invariably be suicidal. What will happen in Ukraine is a different question. Russia invades it with full might or carries out a limited action or can liberate Kharkiv and Donbas areas just by pressure tactics the same way it did in Crimea. The list of options are endless and currently, only time has all the answers.