History and logic suggests there’s no shock and awe in sanctions

US president Joe Biden, left, and Russian president Vladimir Putin. Pictures: AFP

If Vladimir Putin was expecting the worst possible economic punishment for invading Ukraine, he didn’t get it.

The second round of sanctions announced by Joe Biden on Thursday, to be imposed in concert with the European Union, the UK, Japan, Australia and others, created shock and awe only in so far as it failed to live up to expectations.

Russia’s 10 largest financial institutions, holding “nearly 80 per cent of all banking assets in Russia” would be forcibly cordoned off from developed financial markets, the president said.

That sounds like a business opportunity for their smaller Russian competitors, who hold the other fifth of assets. Money is fungible, so the remaining unsanctioned Russian banks can pick up the slack of the sanctioned ones.

And as the global financial crisis taught us, no sector is as adept at evading the principle and letter of regulations.

The new “unprecedented export control measures”, the president said, will cut off more than half of Russia’s hi-tech imports. What about the other half?

Far from choking the main source Russian wealth, oil and gas revenues, which make up around two thirds of Russia’s exports, the president said these sanctions were designed “specifically designed to allow energy payments to continue”.

But the biggest mystery of all was why Vladimir Putin himself escaped financial censure.

‘It’s on the table’

The Russian president, at the helm of Russia one way or another for more than 20 years, is extremely rich, with estimates of his wealth running into the hundreds of billions of dollars.

“It’s on the table,” the president said, when asked why Mr Putin has so far escaped censured. If not now, when?

Seemingly never, investors thought. As the president was speaking, the major US share indices began to claw back earlier losses. The S&P500, the main US stock index, was up 1.5 per cent on the day.

More generally, sanctions have an inauspicious history as a deterrent, as attempts to undermine odious regimes in Zimbabwe, Iran, Cuba, Venezuela, and North Korea have shown over many decades.

“When Soviets invaded Afghanistan the first time, Jimmy Carter stopped US farmers exporting grain the Soviet Union, so the Soviets went to the Argentina military junta and cut a great deal for long-term supply, propping up that regime for even longer,” Steve Hanke, a professor of economics at Johns Hopkins University, tells The Australian.

Sanctions hurt both parties too. Financial and real trade is a two-way street.

Russia will maintain access to Chinese and Middle Eastern institutions, for instance, which however clunky their systems compared to Wall Street and the City, will surely step up to grease the wheels of the dilapidated Russian economy.

To be sure, these new measures will hurt Russia’s economy, frustrate many of the president’s oligarch friends, who’ve been added to blacklists drawn up in Washington and London that will impede their personal and financial freedom.

But they appear unlikely to dissuade Mr Putin from his aggression in Ukraine, let alone undermine his position in Moscow.

Enforcing such complex, far-reaching sanctions, will be costly too. “They create a huge international criminal class that gets around the sanctions – do you really think North Korea is totally sealed off from the rest of the world, as is intended?” Hanke says.

The US trumpeted the halt in the certification process for Nord Stream 2, the giant pipeline that is ready to transport gas from Russia to Germany, earlier this week.

But the certification process wasn’t due to be completed until much later this year in any case, leaving open the possibility the pipeline eventually comes to life.

Russia’s own history shows how difficult it can be to force third parties to comply. Even Napoleon, who controlled all of Europe in the early 1800s, was unable to stop Russia from trading with Britain, leading to his downfall.

Russia’s invasion of Ukraine is a tragedy. But history and logic suggest economic sanctions won’t stand in the way of determined tyrants.