Sanctions will not be enough

The West has come up with several economic sanctions against Russia in response to the latter’s invasion of Ukraine. The immediate impact of it is already being felt with the Russian ruble suffering a drastic fall in the international currency market. Removal of key Russian banks from Society for Worldwide Interbank Financial Telecommunications (SWIFT) is hurting Russian businesses and expatriates. Fall in ruble’s exchange rates has pushed up interest rates. Foreign direct investments destined for Moscow are already being diverted off Russia.

Russia is also likely to bear the consequences of its foreign reserves being off-limits. Much of these reserves--$ 630 billions of it—are in banks of the United States, Japan and the European Union and Russian central bank is barred from accessing it. However, China is not participating in the freeze of the accounts and 13% of its reserves are held in Chinese yuan.

The sanctions could be termed the most severe punishment on a nuclear superpower that cannot be confronted by the West in a battlefield. The West knows it too well that the Russians will not buckle under economic pressure and stop the war. However it is sure to come out with a bloodied nose with its economy taking a severe beating and provoking a good amount of unrest against the authoritarian President Vladimir Putin.

Disconnection from SWIFT does not mean any curtailment of their ability to make foreign exchange payments. It only slows down payments as individual banks can still enter into arrangements with individual banks in the G7 countries for payment. But it can be done only at the risk of a retaliatory threat from the US.

Russia is among the top suppliers of raw material to world markets. Similarly, it is a major buyer of consumer goods, importer of technology and investment equipment. This is where it will hurt the Russians most. Several businesses will suffer bankruptcy triggering massive unemployment.

But the West, dependent as it is on oil and gas from Russia, has not limited payments related with Russian energy resources. Europe consumes about 500 million tons of oil a year, a third of them come from Russia. Besides this, they import around 80 million tons of petrochemicals. Moreover EU sanctions are not as severe as those by the US. This means the Russians can still operate their euro accounts. Much of Western Europe also depends on Russian wheat, edible oils and fertilizers. Sanctions would reduce such exports and are likely to hurt the West more than Russia.

The case of Russia is however not similar to that of Iraq or Syria. The US sanctions could not force Iran to back down from its strident position on acquisition of nuclear power.

Russia certainly cannot be cowed down with West sanctions. The West may have to look for alternatives to brokering peace between Ukraine and Russia.