How will the West punish Russia for invading Ukraine?

In a policy note from January 2022, prior to the Russian invasion of Ukraine, the Vienna Institute for International Economic Studies, a think tank, discussed the potential impact of different sanction packages on the Russian and EU economies. As a baseline, the authors assume increased Russian military presence in the Donbas region, deeming a full military invasion of Ukraine unlikely. Given that the invasion is now happening, this piece compares the authors’ sanction predictions with those imposed to date.

Picture by 'Stillness in Motion'

The institute identified three key Western sanction options in the case of a full Russian military invasion in Ukraine. In the following, we will compare them one-by-one to the sanctions the West has so far imposed on Russia.

Sanction 1: The restriction of energy imports from Russia

Prediction: Countries would restrict their energy imports from Russia in order to deny the country a crucial source of income. However, the authors argue the measure would lead to “a massive inflation and a recession in the global economy, and especially in the EU”. They, therefore, deem this option “highly unlikely”.

Reality: Western States have not yet officially restricted the import of Russian oil and gas. However, the German government has put the ratification of the new gas pipeline Nord Stream 2 on hold indefinitely. This is not equivalent to cutting off Russian energy supply to the European market which is not contingent on Nord Stream 2 but it serves as an important political signal of European solidarity with Ukraine. Europe is highly dependent on Russian energy supplies and would suffer immensely should supply lines be cut off. As of the end of 2020, Russia accounted for 32% of European gas consumption.

Sanction 2: Limiting Russian banks’ access to capital markets

Prediction: Isolating Russian banks would cause significant financial disruption in Russia through a reduction in lending and investment. The Russian government would therefore need to inject large sums of capital into the banking sector. The authors conclude that cutting access to US dollars while simultaneously disconnecting Russia from the SWIFT payment system would have the most severe impact on the Russian economy.

Reality: The EU member agreed on 26 February to expel Russia from the SWIFT system in addition to limiting Russia’s access to the EU’s capital and financial markets. Skeptics such as the German government had originally warned that the suspension of Russia from SWIFT may not have the desired effect since Russia could fall back onto its own system called SPFS. Furthermore, there is fear that suspending Russia’s access to SWIFT will impact the European energy supply since it will make trans-border transactions more complicated and expensive.

Section 3: Banning high-tech exports to Russia

Prediction: The authors predict that only industries that rely on high-tech parts Russia cannot import from China would be hard hit by this sanction. It is expected that Chinese goods would substitute at least some of the European tech exports.

Reality: The EU members have decided to ban exports of high-tech parts such as semiconductors to Russia immediately. This would inhibit Russia from building “a prosperous future” according to EU commissioner Ursula von der Leyen. Among other key industries, the lack of cutting-edge technology from the West shall make it impossible for Russia to upgrade the oil refineries on which its economy so heavily relies. However, China which is already Russia’s most important single trading partner may be able to substitute some of the technology needed. The EU’s own share in Russia’s foreign trade has declined in recent years from around 50% to 34%.

Conclusion

As recently as January 2022, a full-blown Russian invasion of Ukraine and the sanction regime the West was likely going to impose on Russia as a response seemed unlikely. Russia’s unjustified military aggression against its neighbour has now triggered all three sanction options the Vienna institute had identified as “nuclear” for the Russian economy. The effects are likely to be economically detrimental to both sides and it remains to be seen how high a price EU members are willing to pay to punish Russia for starting a war in Europe.