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Economy

The Double-Edged Sword of Sanctions

Mar 28, 2022
  • Wu Zhenglong

    Senior Research Fellow, China Foundation for Int'l Studies

Since the outbreak of the conflict in Ukraine, the West has imposed the harshest-ever sanctions on Russia, sweeping across almost every conceivable area and intending to cripple it as a country for good. Nevertheless, the sanctions — which are of unprecedented scale — have not delivered their intended impact.

The sanctions have taken a toll on Russia’s economy. In the wake of the energy embargo on Russia initiated by the United States and United Kingdom, the European Union said it will reduce Russian gas imports by two-thirds this year and wean itself from dependence on Russian fossil fuels by 2030. In addition, the West has frozen the assets of Russia’s central bank, excluded selected Russian banks from the SWIFT system and revoked Russia’s most favored nation status, thus plunging the Russian economy into unprecedented doldrums.

Russia’s stock market has plummeted, the country’s sovereign credit has been downgraded to triple-C, the ruble has plunged, food prices have climbed and several European multinationals have withdrawn from the Russian market. With the exception of crude oil and natural gas, Russia's economic, trade, investment and cultural exchanges with the West have largely come to a halt.

According to Western media reports, the Russian economy may shrink by a third this year. Even if the military operations were terminated tomorrow, it would take years for the Russian economy to see any recovery.

But the Western sanctions cut both ways and may even be self-defeating. The European and U.S. economies are suffering a backlash from the sanctions against Russia. Because of rising energy prices, the EU recorded a rare trade deficit, coupled with shrinking corporate profits and inflation-induced economic hardships. Businesses started to close or dial back operations in Russia in spite of years of market nurturing, ranging from automobiles to luxury consumer goods and daily necessities.

According to Reuters, German investor confidence saw a record decline in March, with the economic sentiment index falling to negative 39.3 in March, compared with 54.3 in February, the biggest drop since the survey began in December 1991. Germany, the largest economy in Europe, is in danger of falling into recession, and the European economy is also in peril.

Because of the U.S. ban on Russian oil imports, crude oil prices have soared, and led to a simultaneous sharp rise in gasoline prices. As a country on wheels, America feels the pinch. In addition, the rise in commodity prices triggered by the sanctions has propelled inflation to a 40-year-high, casting another layer of shade on the U.S. economic recovery.

Millions of innocent people bear the brunt of the sweeping and indiscriminate sanctions, on a scale that exceeds any previous sanctions on Russia, Iran, Cuba, North Korea and Venezuela imposed by the U.S. or other Western countries.  

Russia is a major player in four major sectors of the international market. In the energy sector, Russia is the world’s largest exporter of natural gas, the second-largest exporter of crude oil and the third-largest exporter of coal. In the agricultural sector, Russia and Ukraine have been dubbed the breadbasket of the world, accounting for one-third of global trade in wheat, corn, barley, oats and other agricultural products. In the fertilizer sector, Russia is among the top-three exporters, leading the world in trade of potash, phosphate and nitrogen fertilizers. Russia is also a leading metals trader and a key producer of titanium, nickel, palladium, platinum and other metals.

Western sanctions against Russia will threaten global economic, energy, food and metals security. This round of sanctions touches all these aspects of production, sales and exports in the above-mentioned four major fields in Russia. They generate spillover effects that will spread rapidly to disrupt the balance of supply and demand — and supply and production chains — further aggravating the price of bulk products.

Fluctuations in global crude oil prices will have a negative impact on the world economy. Disruptions in exports of wheat, corn and fertilizer could exacerbate global famine and food security, with the Middle East and African countries that rely on Russian and Ukrainian food imports bearing the brunt. Soaring metal prices will drive up costs in various sectors, such as aerospace, automobiles and semiconductors.

Western sanctions against Russia have threatened to derail the global economic recovery. The Paris-based OECD released a report predicting that global economic growth may shed another 1 percentage point because of the Russia-Ukraine conflict. And inflation, already high at the beginning of the year, will be at least 2 percentage points higher than before the conflict. Imported inflation and the impact of the pandemic on the economy aggravate the challenges faced by world economy and pose a drag on the recovery process.

The confrontation between the West and Russia bears down hard on the people. American-style sanctions, conducted at the expense of the people while serving the interests of a few, are neither moral nor legal. It has been proved time and again that sanctions are no solution; only dialogue and negotiation offer a way to resolve the conflict between Russia and Ukraine.

Since the conflict broke out, more than 3 million refugees have fled Ukraine — the largest exodus in Europe since the end of WWII — and it shows no sign of abating. The only way out of this conundrum is to end the conflict without delay. It is heartening to see that Russia and Ukraine have had four rounds of negotiations and are committed to the course.

The international community should not add fuel to the fire or intensify tensions — still less provide arms to Ukraine or encourage continued confrontation between Ukraine and Russia. The right thing to do is to make the case for peace and talks, support the Russia-Ukraine talks with a view toward achieving substantive results and calm the situation so that a cease-fire can be achieved soon.  

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