Economic Warfare: The Power of the Global Market against Vladimir Putin

Russia's recent February invasion of Ukraine represents a watershed moment in world geopolitics. On the one hand, the war is a requiem to the spring of liberal democracy that Europe experienced after the fall of the Berlin Wall and the subsequent collapse of the Soviet Union. On the other hand, the recent statements made by China, reaffirming its closeness to Moscow, imply a new unfolding panorama regarding the division of power in the world. Finally, the intensification of the sanction regime imposed by Western powers against Moscow opens up a range of deterrent measures and offensive possibilities for the conflict to come.

Previously, economic sanctions imposed on various autocracies have managed to cripple their finances, but thus far failed to collapse their regimes politically, as The Economist recently confirmed. However, the virulence of the set of sanctions imposed on Russia in the past week is unprecedented. This puts high level of pressure on the Kremlin, which will now have to deal with growing discontent on the domestic front. It also poses risks for the international community, however, as Moscow could strike back with similar measures. In addition, the potential economic collapse of Russia – the 11th largest economy in the world – can affect global markets at large.

Washington Puts the Screws On

The origin of economic sanctions against Moscow is not, in fact, the invasion of Ukraine. When President Vladimir Putin made the decision to clandestinely invade the Crimean Peninsula, in 2014, both the United States and several European countries condemned these actions with economic measures. Keeping with precedence, as The Economist mentions, the strength of those sanctions was comparable to those previously imposed against Venezuela or Iran. The Kremlin overcame these difficulties and continued to concentrate power around Mr. Putin and his oligarchs. However, the February invasion completely changed the tone of the Western strategy.

Under the American leadership, Western powers have directed their financial artillery against the stability of the ruble, whose value has been shattered. Furthermore, inflation has accelerated in Russia and many Western companies operating on Russian territory have ceased operations. Oil prices have once again reached $100 a barrel and scarcity, all too common in the days of the USSR, has returned to being a silent and constant presence on Russian streets. The Russian oligarchs have seen their assets – real and financial – seized and their sympathies towards the regime seem to be receding. Will the Kremlin be able to bear the domestic costs of international sanctions again?

A Bleak Tomorrow

The high economic costs will indeed come with high political costs, Diego Macera – an expert economist – explained to IWAB. The economic situation of the Russian people is going to deteriorate rapidly in the coming weeks. This level of severity in the sanctions has never before been applied against an economy of this size. What makes them especially harsh is their transversality: there are several governments that are taking measures against Russia and also against the private sector. In the medium term, a shift to a higher level of autarchy is possible given the scale of Russia, but that is going to come at a very high cost for the average Russian citizen, Mr. Macera adds.

Talking further about the sanctions’ impact, Mr. Macera points out that Russia will be disconnected from global markets. Their banks will not be able to receive or send money. The measure is complemented by the embargo on trade, with the exception of gas and oil. Russia is not China, Mr. Macera indicates; In several sectors, its economy is unable to function without the products, inputs and capital from the West. Although in the short term this system of pressure is very effective, in the medium term this could – without intending to – decouple global finance and accelerate the vision of a polarized world, with a financial system led by China on one side and the US on the other.

Going back to the domestic politics analysis, Mr. Macera considers that together with the rest of the measures, the ruble's loss of value makes it much more difficult for the Russian people to access goods and services from abroad. This applies to final goods that Russia does not produce. Russian economy was by no means ready to fight this war, Mr. Macera concludes. Now, the question that is becoming more relevant every day is how long it will take for the faltering economy to transfer the political cost of the war onto Mr. Putin. And the answer will be one of the most important variables to consider in future analysis of Russia and its commercial relations with the West.

A Possible Russian Response

So far, nothing seems to indicate that the Western powers and Russia are willing to engage in an open war; however, Russia has a way of responding with financial measures to the actions of its adversaries. Russia's vast arctic gas fields give Moscow the ability to potentially deprive Europe of that asset. In addition, there are essential products on the world market that could be directly affected. Russia and Ukraine together, for example, produce a third of the wheat the world consumes. Therefore, it is fundamental to understand that the impact of the sanctions can have damaging spillover effects far beyond the Russian economy.

The Paradox of the End Game

The next steps that the West takes against Russia will have to be calculated with extreme care. Escalating economic pressure against Moscow too much can lead the Kremlin to make desperate decisions that could end up triggering a dangerous spiral. Also, the clear decision not to engage militarily against Russia leaves the West no choice but to continue applying pressure with sanctions. However, this pressure must aim to bring down the regime that rules Russia and not the economy of the Russian people. If there is a victim of the Kremlin autocracy besides the people of Ukraine, it is - paradoxically - the Russian people. The Russian people didn’t invade Ukraine; the government did.

* Diego Macera (MPP from University of Chicago) is a Peruvian Economist. CEO of the Peruvian Economy Institute (IPE) and a Board Member of the Peruvian Central Reserve Bank (BCR).