Russia’s invasion of Ukraine demands a resolute response from the West. The tools available to punish Vladimir Putin’s regime are limited, however, and one appears even to be aiding it. Revenues from Russian energy exports since February dwarf the financial costs of fighting in Ukraine. According to calculations by energy researchers in Finland, Russia has gained slightly more than £140 billion in sales of oil, gas and coal since President Putin launched the invasion, whereas the direct costs of the war amount to about £86 billion.
These independent estimates give surface plausibility to Putin’s boast yesterday at the Eastern Economic Forum in Vladivostok that the war will ultimately strengthen Russia. But they should not dissuade the West from its present course. Direct military intervention against a nuclear-armed power is not feasible, but helping Ukraine fight its own defensive war is morally required. And one element of that strategy is to impose punitive economic sanctions on Russia. Allied with military aid to Kyiv, it is the right strategy.
Sanctions have aggravated energy shortages in the West, which have hence driven wholesale prices higher and thereby benefited oil and gas exporters. But this is a transition period in which the West is weaning itself off Russian supplies. Energy revenues over the past six months are a partial indicator of the state of Russia’s economy.
Overall, Russia’s GDP has contracted by about 5 per cent over the past year. Sanctions are depressing economic activity, driving up inflation (which currently stands at about 15 per cent at an annual rate) and worsening the budget deficit. To depress living standards is not an end in itself but a necessary expedient to ensure that the Putin regime understands the consequences of violating international law so flagrantly. Moreover, it will be wealthier Russians who disproportionately feel the impact of shortages due to western sanctions, as they have greater access to imported goods.
The energy sector, moreover, is just one part of the Russian economy. Manufacturing production is collapsing as western firms have overwhelmingly withdrawn from Russia, curtailing domestic producers’ access to technology, such as semiconductors, that they need.
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Finally, western efforts to curb dependence on Russian oil and gas have yet to bear fruit. The European Union’s ban on Russian oil imports takes effect in December. Russian volumes in natural gas, which are admittedly much less significant as an export earner, have sharply contracted, partly as a result of deliberate Kremlin policy to retaliate against EU countries.
There are also financial sanctions, and these are biting. The inability of Russian banks and companies to raise funds in western capital markets is a severe liquidity constraint. Nor is there evidence that Chinese banks are able to fill the gap by extending credit facilities to Russian concerns, as they do not wish to be put under US sanctions either. The dollar is the world’s preeminent reserve currency, and Russia has no means of bypassing the effect of western financial sanctions.
Western households are suffering an intense squeeze on living standards but reducing and ultimately eliminating reliance on Russian energy is good for the economy and for global governance. Western sanctions are a long-term strategy to aid Ukraine and they are working. They should be intensified, not despaired of.
