Vladimir V. Putin is making gains in his war on Ukraine while the United States and its allies struggle with soaring energy prices and inflation.
WASHINGTON – Four months after the war in Ukraine, the countries aligning with Russia are facing mounting economic pain, even as sanctions and energy embargoes have little impact on Russian President Vladimir V. Putin’s military campaign or his political status in their own country.
US officials have vowed that the Russian financial system would be battered if it attacked Ukraine, and President Biden boasted in March that sanctions “crushed the Russian economy” and that “the ruble has been reduced to rubble”. But Russian oil revenues have set records as crude prices rise. And after a dip in February, the ruble hit its seven-year high against the dollar this week.
Biden officials say the Russian economy is nonetheless experiencing damage that will increase over time, especially as restrictions on technology exports to Russia gradually hinder the growth of its industries, from aerospace to computing. And on Thursday, a White House spokesman said leaders of the Group of 7 Industrial Countries, which will begin meetings in Madrid on Sunday, will discuss new plans to further “tighten” Russia’s economy.But it’s unclear which side has more time left. The Ukrainian government says as many as 200 of its soldiers are killed every day, and thousands of civilians have died as Russia takes over territory in eastern Ukraine. Mr Putin still has almost dictatorial power, and he is unlikely to conduct serious peace talks with Ukraine as long as his army is making a profit. “The Russian financial system is back to normal after a few weeks of severe bank runs,” said Elina Ribakova, deputy chief economist at the Institute of International Finance. wrote on Twitter last week, adding that those who thought “that Russia would be without funding for a few weeks at the start of the war, would end the war, have proved naive”. Few, if any, Biden officials expected sanctions to end the war immediately. But the government and its European counterparts also did not expect the economic pressure they are now experiencing. Despite initial assurances that sanctions would not hit Russian energy exports, America has since banned imported Russian oil and the European Union has announced plans to cut imports by 90 percent this year. Partly as a result of those actions, energy prices in the US and Europe have risen, with regular gasoline averaging well above $5 a gallon in some states.
Now, Mr. Biden is bracing for midterm elections this fall, in which Republicans are likely to benefit from the rising cost of living. The end of summer will also lead to cooler temperatures in Europe, amid mounting alarms that Moscow is throttling natural gas supplies.And in a bit of a twist, the sanctions and related embargoes allow America’s main strategic competitor, China, to buy massive amounts of oil at deeply discounted prices, while Russia seeks willing customers to replace lost revenues. Biden officials initially presented the threat of “massive” economic sanctions as a means to deter Putin from invading. After that failed, their exact reasoning was unclear. In comments to reporters in Germany on Friday, Foreign Minister Antony J. Blinken said the United States is “raising costs for Russia to end the war more quickly through unprecedented sanctions and export controls.” But US officials have not publicly offered to lift the sanctions in exchange for concessions on the Russian battlefield.
“Sanctions certainly don’t stop Russian troops from carrying out the kind of military operation they conduct,” said Alina Polyakova, president of the Center for European Policy Analysis.
“Most governments have misjudged the perspectives or worldview of the Russian elite and what Putin cares about in general,” she added. “It has been clear for a long time that Putin and the people around him do not care about economic growth. What Putin and the elites care about is revenue, and they still get revenue from selling energy.”
Part of the problem, said Andrew Weiss, a longtime Russia expert and vice president for studies at the Carnegie Endowment for International Peace, is that Western countries’ economies are more exposed than their governments expected. In February, US officials rejected all plans to crack down on Russia’s oil and gas exports.
“We were intentional to focus the pain of our sanctions on the Russian economy, not ours,” Daleep Singh, the recent White House deputy national security adviser for international economics, said in late February. “None of our measures are intended to disrupt the flow of energy to global markets.”That quickly changed as the world reacted to the astonishing scale and brutality of the Russian attack and the courage of the Ukrainian resistance.
Ukraine’s fierce defense has also prolonged the conflict longer than experts and intelligence assessments predicted, leaving Russia and its opponents locked in a protracted – and still escalating – economic war.“Like all battle plans, the original transatlantic blueprint for imposing harsh and crippling sanctions on Russia collided with reality after the war actually started, forcing Western leaders to do things they originally didn’t intend or didn’t want to do. – namely imposing sanctions on the Russian oil and gas sector,” Mr Weiss said.
In addition, inflation has risen faster than White House officials predicted. Biden has blamed “Putin’s price hike” on rising costs, although Federal Reserve chairman Jerome Powell this week told a Senate committee that “inflation was rather high — especially before war broke out in Ukraine.”
US officials warn against underestimating the economic shock suffered by Russia. Mr Blinken said in Berlin on Friday that many economists predict Russia’s gross domestic product will shrink by 10 to 15 percent this year. Moscow has “so far avoided economic collapse by taking extraordinary measures to prop up its currency, but those tactics are unsustainable as the full impact of Western sanctions and trade restrictions begins to sink in,” he added.
Mr Blinken also noted that export controls mean that Russia can buy few things with its oil revenues. And he said inventories of items like iPhones are running out quickly, leaving Russians more and more behind.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
What Causes Inflation? It could be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Rapid price increases cause problems, but moderate price increases can lead to higher wages and job growth.
Can Inflation Affect the Stock Market? Rapid inflation usually causes problems for equities. Financial assets in general have historically underperformed during inflation peaks, while tangible assets such as houses have held up better.
A senior foreign ministry official said the impact of sanctions is clear in Moscow: luxury stores around Red Square, including stores selling furs, Gucci bags and Lamborghinis, have been closed for the time being. Inflation is high and people are worried about their jobs, said the official, who spoke on condition of anonymity to talk more freely about sensitive policy issues. Many wealthy Russians have left for Turkey and the United Arab Emirates.But the official also admitted that countries often show incredible resilience.
And when it comes to Russia specifically, top US officials have previously overestimated the impact of Western sanctions. In January 2015, President Barack Obama boasted that the penalties for Putin’s annexation of the Ukrainian peninsula of Crimea had shattered Russia’s economy.Today, former Obama officials say those sanctions had a modest impact at best, though some argue they kept Mr Putin from a larger invasion of Ukraine at the time.
US-led sanctions against Iran, Syria, North Korea, Venezuela and Cuba have largely not changed the behavior of those governments. Researchers have found that ordinary citizens bear the brunt of sanctions, while regime loyalists find ways to make a profit.
An important question now is whether patience with the sanctions in Western capitals can run out. Speaking to reporters last week, Biden said that “at some point this will become a bit of a wait and see: what the Russians can support and what Europe will be willing to support.” Mr Biden said this would be a topic of discussion at the Group of 7 summit.
A growing problem in Washington and European capitals – and one closely watched by the Kremlin – is the potential for strong disagreement among policymakers over further sanctions. During the recent debate among Europeans about whether to boycott Russian oil, Hungary postponed the action for weeks and forced it to cut its own imports.
On Monday, Jens Plötner, foreign policy adviser to German Chancellor Olaf Scholz, said Germans should have a serious discussion about the “exciting and relevant” issue of the country’s longstanding relationship with Russia — widely interpreted as a sign that Mr Scholz favors a more conciliatory approach with Moscow.
“Overall, I think we’ve reached the political limits of sanctions,” said Gerard DiPippo, a senior colleague at the Center for Strategic and International Studies and a former senior US intelligence officer on economic issues. “New sanctions are probably not necessary and certainly not sufficient to achieve an acceptable end to the conflict. But Ukrainian victories on the battlefield are probably both necessary and sufficient. That should be the focus of US policy.”
