The United States and its allies around the world are waging an unprecedented economic war on Russia with no end in sight, and it’s unclear if the sweeping sanctions will change the Kremlin’s calculus in Ukraine or help trigger a global economic recession.
Russia has withstood an initial shock from a wave of U.S. and other financial sanctions, and managed to shore up its currency with drastic measures, despite President Joe Biden’s vow to reduce the ruble to “rubble.”
But even if Moscow manages to avoid an economic meltdown in the short-term, the long-term impact could be permanent damage to its status among the front ranks of world economies. Russia is headed toward a recession and could emerge from the war stripped of its ability to wield oil and gas as a geopolitical weapon, as European governments move to break their dependence on Russia’s energy, experts say.
“I think there will be a real economic cost,” said Daniel Yergin, vice chairman at S&P Global and author of “The New Map: Energy, Climate, and the Clash of Nations.” “Russia will continue to be a major energy producer, but it won’t be an energy superpower anymore.”
In the meantime, Russia is selling fossil fuels and other raw materials to keep hard currency flowing into the country and to soften the blow from a virtual financial blockade and an exodus of foreign companies.
“As long as Russia can continue to sell oil and gas, the Russian government’s financial situation is actually pretty strong,” said Jacob Funk Kirkegaard, nonresident senior fellow with the Peterson Institute for International Economics (PIIE). “This is the big escape clause of the sanctions.”
Sanctions can take years to gain traction, if at all, and often never achieve the stated political goal. But appalling scenes of destruction and credible reports of alleged atrocities are pushing political leaders on both sides of the Atlantic to look for ways to tighten the screws on Russia and raise the cost of the Kremlin’s attack on Ukraine.
From Brussels to Tokyo to Washington, governments have unveiled more punitive measures in recent days, including U.S. and European restrictions on more Russian banks, naval shipbuilding firms, a U.S. ban on exports to three Russian airlines including Aeroflot and sanctions on Russian President Vladimir Putin’s children.
The Biden administration says the sanctions are having a serious impact and will gather force in coming months. And officials say the draconian steps taken by the Russian central bank to safeguard the ruble show that Russia’s financial system is in crisis.
“Russia will very likely lose its status as a major economy, and it will continue a long descent into economic, financial, and technological isolation,” the White House said in a statement on Wednesday.
“The combination of the exit of Western firms and the imposition of export technology sanctions has cut off access to equipment and spare parts, which is already impeding operations in industry and transport and will be more crippling over time,” a Treasury Department official told NBC News.
Before the invasion, U.S. and European officials had ruled out measures that would touch Russia’s energy exports, fearing disruption of the global economy. But now Western leaders say they are debating how to clamp down on Russia’s oil and gas sales — the lifeblood of the country’s economy.
The European Union is banning Russian coal imports and European leaders say they plan to cut Europe’s imports of natural gas by two-thirds by the end of the year. But there is growing pressure to go further, with Ukraine’s Eastern European neighbors leading calls for cutting off Russian energy imports to Europe.
Europe relies on Russia for about 40 percent of its natural gas and 25 percent of its oil. A debate is raging across Europe about how fast countries can find alternatives to Russian energy, and some European government officials say it’s impossible to quit Russian natural gas overnight given the degree of Europe’s dependency.
Germany’s economics and climate minister, Robert Habeck, said recently his country would not be able to wean itself off Russian gas until at least 2024. If an embargo on Russia gas went into effect now, Germany’s gross domestic product could contract by as much as 5 percent, with devastating effects for Germany’s population, according to Habeck.
Despite warnings of economic blowback, a recent poll showed a majority of Germans, 55 percent, support an embargo on Russian energy, according to a survey by the broadcaster ZDF.
Whatever restrictions are ultimately imposed on Russian energy exports, the combined effect of the war and major sanctions is fueling a surge in inflation in Europe, the U.S. and elsewhere.
Washington and its allies are now bracing for yet more inflation as the war drags on, and some economists are warning that growth in Europe and America will likely slow this year. As central banks try to tame inflation with higher interest rates, the result could mean a recession for Western economies or at least “stagflation” — anemic growth coupled with rising prices.
“The point of sanctions is to hurt the other guy more than yourself, so it’s a balancing act and I think they’re just going to have to keep calibrating that,” said Brian O’Toole, a former Treasury Department official and now a fellow at the Atlantic Council think tank.
Since World War II, sanctions of this scale have never been imposed on an economy as large as Russia’s, and the consequences are still uncertain — for both Russia and the global economy, said Gerard DePippo, a former U.S. intelligence official who specializes in economic analysis.
“We’ve never attempted to hit such a large economy, that is so important for commodity exports, with such severe sanctions, and the world is grappling with that,” said DePippo, now a senior fellow at the Center for Strategic and International Studies think tank.
Apart from the energy market, the war and sanctions are driving up global food and fertilizer prices, with aid organizations warning of a looming disaster in poorer countries. Ukraine and Russia are leading exporters of grain and fertilizer.
The sanctions also have deepened a move away from globalization to a bifurcated world economy, with two supply chains — one linked to China and its partners and other linked to the U.S., the E.U. and its partners, experts say.
Cut off by financial and other sanctions from most of the world’s advanced economies, Russia could look to China to fill the gap in manufactured goods and technology. But there are limits to what China can do for Russia, as it does not necessarily have the high-end tech products needed to keep Russia’s aviation and military export industries operating, experts say.
Moreover, large Chinese banks and companies will be wary of flouting sanctions and doing business with Russia if it means jeopardizing lucrative business in major markets, said Kirkegaard.
“Do you really want to exchange access to a captive shrinking Russian market, for access to all the advanced democracies in the world, Europe, the United States, the G-7, South Korea, Singapore? Do you really want to do that?” said Kirkegaard. “I certainly don’t think that the technologically most sophisticated Chinese companies, banks, et cetera, would want to do that.”
Although Russia’s central bank has staved off a collapse of the ruble, Russia is headed for an economic recession, with estimates ranging from a 5 to a 15 percent contraction.
“There’s no world in which the Russian economy, if this is sustained, is not harmed substantially. It will be harmed,” DiPippo said.
How the war ends in Ukraine, and what terms Russia eventually agrees to, remain open questions. But Russia may have lost a wider struggle for global power and influence, according to Yergin, of S&P Global, who wrote a seminal book on the oil market called “The Prize.”
Putin said two weeks ago that Russia is a reliable energy supplier, but “the Europeans don’t believe that anymore. They don’t want Russian energy,” Yergin said.
Russia “won’t have the capital and technology to maintain its present position," he said. "Russian industry will be cut off again from the world as it was during the Soviet times.”