The sanctions imposed high costs on the entire economy and society of Russia, and are inhibiting and blocking the economic ability of the Russian state to continue its aggression against Ukraine, says Paweł Turowski, an analyst at the National Security Bureau, in an interview with BiznesAlert.pl.
BiznesAlert.pl: How can we assess the impact of sanctions on Russia over the past 8 years? Is there any way to classify them?
Paweł Turowski: The sanctions against Russia can be divided into three types. The first, the least expensive, but causing certain impact in international relations, is the application of personnel sanctions against key people in a given political system. They include bans on entry or asset freeze for certain people. These actions show that the international community does not agree with a particular way of conducting policy by a given state. They are a nuisance to the private lives of people in power, but do not adversely affect economic relations.
The second type of sanctions is about precise strikes against the economic system of a particular country, hindering the inner workings of a particular sector or economic subsystem (e.g. blocking the supply of machinery and equipment for the extraction of crude oil). In this case, the development of the economy as a whole is not undermined, but we do undercut the growth of particular sectors.
The third type of restrictions, previously not applied to the Russian Federation, is sanctions aimed at dismantling the economic power of a given state. Currently, two types can be distinguished – the first are imposed by the US, aimed at destroying the Russian economy by hitting its foundations – the credit and banking system. The second, used by the European Union, strikes directly at the main source of budget revenues of the Russian state exports of crude oil to the EU market.
What have the sanctions imposed by the US impacted?
The US sanctions hit the financial and credit sectors by blocking the possibility of obtaining loans in the international financial system.
To put it simply, this mechanism doesn’t allow banks to carry out increased lending in relation to their reserves. The loss of this ability leads to a sharp decrease in the scale of loans obtained. This is how US sanctions have impacted Russian banks. A significant reduction in lending reduces the availability of credit and consumption of machinery, industrial products, goods, services and, consequently, inhibits the pace of economic growth, which translates into a significant reduction in tax revenues to the budget, including VAT and CIT. The main shock that hits the financial system triggers intermediate shocks that hit the key subsystems of the economy transport, logistics, energy, new technologies and weapons, mining, the metallurgical, electrical industries. The chaos creates cash-flow problems, weakens the financial mechanisms of supply chains.
Recently, the public opinion has been interested in the issue of cutting Russia off from the SWIFT system – a kind of internet banking that guarantees fast and unhindered availability of all international interbank transactions. It should be noted that it is significantly more important to really cut off Russians from the mutual borrowing schemes. This strikes at the core of the Russian economy.
Are the EU sanctions on Russian oil hurting the Russian economy? According to the Russian government, the problem is negligible, because China, India and Pakistan are eager to buy the oil. Is this scenario realistic?
Mathematics reveals the truth. Let us quote the data of the Central Bank of Russia (CBR) from 2019 (this is the last year of pre-pandemic international trade, so it is representative of the booming world economy after the end of the pandemic). According to CBR, Russia has sold 250 million tons of oil for USD 115 billion, 138 million tons of oil products for USD 64 billion and 184 bcm of gas for USD 41 billion. In total, it earned 220 billion dollars however, what is worth emphasizing, as much as 80 percent of the proceeds come from the export of oil and petroleum products. Only 20 percent is gas revenue. European countries and Turkey bought 57 percent of Russian oil, which is about 142 billion tons of oil. The same countries bought as much as 66 percent of petroleum products exported from Russia. These figures clearly demonstrate the scale and importance of the European continent for the export of Russian hydrocarbons. When it comes to gas the figure is even higher – 85%.
In theory it is possible to replace the European markets with other customers, but this possibility is limited by the ability of transport systems to divert Russian hydrocarbons. The geography of oil pipelines indicates the enormity of the problems for such a project. In 2019 Russia exported about 250 million tons of raw materials. The only oil export pipeline in the Far East, the WSTO main line, has the capacity to transport 80 million tons of oil per year. This is not enough to replace the Western states, that are buying approx. 140 million tons of oil. The other routes for oil exports are the Druzhba onshore pipeline to Central European countries (Poland, Germany, Czech Republic, Slovakia, Hungary, Croatia, Serbia) and four offshore export terminals – two on the Baltic Sea and two on the Black Sea. Even if the sea terminals are capable of increasing their transhipment capacity by accepting the surplus oil from the refineries that will no longer accept oil from the Druzhba pipeline due to the EU sanctions, the next challenge will be to acquire the necessary number of tankers to transport the Russian oil from European ports to the Far East. This leads to a significant increase in transport costs – caused by the lengthening of the freight by at least several to several dozen days, depending on the destination.
Will the Russians find a way to circumvent sanctions, as they have done so often before?
The market always operates according to the basic logic of economics. The most suitable components or final products shall be selected based on their price and quality. If the Russian economy faces the challenge of finding replacement components, for example in the automotive sector, previously purchased in Europe, it cannot be ruled out that it will find an alternative supplier somewhere, provided that the threat of indirect sanctions does not affect such a manufacturer. If new contractors deliver components to Russia, it is very likely that their cost may be higher. If the economic calculation had been in favor of these alternative components, cooperation would certainly have been established earlier.
So what is the impact of the sanctions imposed so far on Russia? In the last seven years, the Russian economy has not collapsed dramatically, and, consequently, the policy of the Kremlin has not changed.
Some readers remember the times of communism in Poland and the fact that the United States and western countries in response to the martial law in 1981 introduced sanctions against the economy of the Polish communist state. They did not stop the will of the politicians to continue undemocratic internal policy, but by undercutting production, industry, supply of citizens with consumer goods inhibited the economic capacity of the state, generated a permanent economic crisis. As a result of the very high economic costs caused by the sanctions, the centre of power in the country was permanently weakened and the political system became highly vulnerable to collapse. If the sanctions work in accordance with the presented sequence and structure, then we are now faced in Russia with the will of the current political center to continue military aggression against Ukraine, but at the same time, the apparent economic slowdown, the sharp loss of competitive advantages of Russian industrial products, translates into an intractable economic crisis. These phenomena objectively create strong tensions within the political elite of Russia and throughout Russian society. The sanctions imposed high costs on the entire economy and society of Russia, and are inhibiting and blocking the economic ability of the Russian state to continue its aggression against Ukraine. Referring to the effects of previous sanctions imposed after the seizure of Crimea and the separation of part of the lands of the Luhansk and Donetsk oblasts from Ukraine, it can be noted that in 2015-2021 international restrictions led to the fact that the Russian economy grew significantly slower than the average rate of development of the world economy. It is difficult not to notice that such a situation would have to be regarded by the leadership of the Russian state as a threat, because in the long term it led to the weakening of Russia in relation to the key countries of the world and, consequently, to the loss of its former position in the international order.
Interview by Mariusz Marszałkowski