Foreign Policy asks Are U.S. Sanctions on Russia Working?

The debate is between Agathe Demarais, author of Backfire: How Sanctions Reshape the World Against U.S. Interests; and Nicholas Mulder, author of The Economic Weapon: The Rise of Sanctions as a Tool of Modern War

Foreign Policy: Nick, the IMF forecasts that Russia will grow by 0.3 percent this year. Sanctions were meant to have crippled the Russian economy. What happened?

Nicholas Mulder: There are a number of things that happened, but one place to start would be Russia’s policy response. Countries under sanctions are not passive. The West has learned to fight financial crises rather well, and other countries have taken on that toolbox and managed to avoid a big financial crisis. 

On top of that, in a year of general economic turmoil recovering from the pandemic, Russia’s position as a big commodity exporter gave it a certain amount of leverage over other countries. It’s been able to readjust. It’s had more trade than we expected, and it’s found backchannels for that trade. Those things together account for much of why the sanctions have worked less efficiently than expected.

FP: Agathe, in December 2022, you argued in FP that sanctions on Russia were indeed working. Do you still think that’s true?

Agathe Demarais: Absolutely. Sanctions on Russia are working, but there has been a lot of confusion about the effectiveness of sanctions against Russia because the West’s objectives haven’t been stated very clearly. 

The sanctions were never about Russia’s economic collapse. Russia is the ninth-largest economy in the world. I don’t think it was about regime change. We know from history that this never works. I also don’t think that Western countries thought that sanctions would be a magic tool that would change Putin’s thinking from one day to another. 

The point of sanctions was twofold. The first was to send a diplomatic message of solidarity and unity with Ukraine and also a message of trans-Atlantic collaboration to the Kremlin. And from that perspective, as I wrote in Foreign Policy, mission accomplished. The second objective, which I think will be a slow, gradual, cumulative objective, is about making it more difficult for Russia to wage war in Ukraine economically, financially, and technologically.

Mission Accomplished

We sent a message. That's victory?

Many expected a collapse of Russia including its currency. Instead, the Ruble strengthened. 

And Russian oil is still flowing through a flotilla of sanction-avoiding ships. Yep, it's at a cost to Russia, but also a cost to the West. 

Oil prices have collapsed, but that's because the global economy is teetering. Prices are higher now than they would have been.

FP: Nick, sanctions aren’t stopping Putin from attacking Ukraine. Were they designed primarily for a longer-term impact?

NM: It’s clear that this is becoming a war of attrition, going into its second year, and the sanctions effort will be a long-term campaign of degradation. If the objective is to make things more difficult for Russia, then obviously the sanctions have worked. But I think it’s fair to ask a bit more of them. There were lots of claims made about how this would present insurmountable obstacles within a few months, and in that sense, now we’ve seen adaptation on both sides. That muddied the waters a little bit.

We can provide a more nuanced picture by asking not whether sanctions work or not but what are they doing and what are they not doing. Both Agathe and I agree they are degrading the Russian economy and they are forcing difficult adjustments for the Kremlin and also some adjustments for us, such as the G-7 price cap [on crude oil]. What are they not doing? Indeed, forcing Putin to break off the invasion or cause insurmountable problems that make him stop bombarding Ukrainian cities. I think that’s a better way of disentangling what is and isn’t working.

Spotlight China

FP: Let’s move to China. I want to focus on last year’s unprecedented sanctions, where Washington tried to restrict Beijing’s ability to access advanced semiconductors. Agathe, you’re the author of a book called Backfire, so I have to ask: Are these sanctions going to backfire?

AD: It’s too early to say. I don’t think that we know the answer, but I think it is worth asking what the consequences of a decoupling of the U.S. and Chinese economies will be. Will American companies and possibly European companies lose access to the Chinese market? This goes back to Nick’s point about the Russian economy. We shouldn’t expect China to sit idly by and say, “OK, you want to decouple or cut our access to semiconductors: No problem.” There will be policy responses. We do not know what they will be, but we can bet that Western companies could lose access to a Chinese market, which would entail a loss in revenue and possibly less expenses for research and development in the tech sector in Western countries. 

FP: Agathe, since Nick brought it up, will an overuse of sanctions lead to countries looking for alternatives to the dollar?

AD: There are three main ways for countries to shield themselves from sanctions, to vaccinate their economies. The first is de-dollarization. It’s a very clear trend. The U.S. dollar is still used for about 40 percent of global trade. The other side of the coin is that the majority of global trade is conducted not in U.S. dollars. Since 2020, Russia and China conduct most of their bilateral trade in Russian rubles and in Chinese renminbi. And that’s obviously not a random thing. It’s a clear strategy. There’s been a lot of discussion about the freeze of the foreign exchange reserves of Russia’s central bank, which had about the equivalent of $640 billion in reserves. But only half of this was frozen because the other half was denominated in foreign currencies or in gold.

The second tool for shielding their economies from sanctions is alternatives to SWIFT [the Society for Worldwide Interbank Financial Telecommunications]. SWIFT is the global rolodex of banks connecting all banks to each other, and China has an alternative called CIPS [Cross-Border Interbank Payment System]. If China were to be cut up from SWIFT from one day to another, it would have a plan B. There is also an offensive capability from the Chinese perspective because one day, likely by 2040, China will become the world’s largest economy, and it could say, “To do business with us, you need to use our financial system.” 

FP: Agathe, I’m curious about the role of the global south in this as the world becomes more multipolar. How does this change the way in which Washington thinks through sanctions?

AD: This is the big question. I think that there is a lot of resentment in the global south against former colonial powers, mainly European countries, such as France and the United Kingdom. This narrative against former colonial powers now has another element, and it is resentment against sanctions.

I would expect in the coming years and decades that the battle to win hearts and minds in a multipolar, fragmented world will be about winning these hearts and minds in the global south because we have two blocks already being formed. We have a Western block; that is very clear. We have another block including China and Russia and other so-called rogue countries. But where will the global south be? About two-thirds of the global population live in countries that are either neutral or Russia-leaning when it comes to Ukraine. There will be a lot of work for the United States and other Western countries to regain hearts and minds in the global south.

FP: Nick, if sanctions produce all these second-order problems, then what can a country or a consortium of countries do when another country flouts international law and goes rogue? In other words, is there anything else in the toolbox?

NM: I would say that there is a whole spectrum of means that a country like the United States can employ, but we have to take a step back and think about what the full range of tools in our toolbox actually is—all the way from diplomacy to threats of military action. Of course, if you can solve anything without military action, it’s always much better. But the ideal sanctions—and when they do really work—are sanctions that are powerful enough to not be merely symbolic but not so powerful as to needlessly antagonize and force a kind of fortress and entrenchment response in the targets. And that means that the sanctions must go hand in hand with some set of demands that could reasonably be acceded to. And that seems to me to be the best way of making sanctions work.

Will Biden’s Chip Sanctions Work on China?

Industry Week asks Will Biden’s Chip Sanctions Work on China?

I never expected U.S.-China relations could get any worse. Then, last month, the Biden administration pulled the pin on a grenade by announcing sweeping restrictions on the sale of advanced semiconductor technologies to China. The aim is to thwart China’s chip-making capabilities and advancements in space, military, and supercomputing.

The fallout from the sanctions will overwhelm any token goodwill coming out of Xi and Biden’s recent G20 meeting in Bali. The sanctions are even more severe than the ones Trump implemented during his tenure. They bar American citizens from working with Chinese semiconductor companies and, going further, forbid foreign companies that use imbedded American technologies from exporting cutting-edge semiconductors and equipment to China. 

The sanctions will certainly hit China in the short term. But do they pose a real threat to China’s long-term aspirations of reaching high-tech independence? Perhaps—although it is just as likely that they will backfire on the US.

A Next-to-Impossible Task?

If history offers any clues, then China faces a tough road ahead in achieving semiconductor prominence. 

Huawei, China’s flagship multinational organization, could not have become the largest telecommunications equipment manufacturer without initially partnering with Canada’s Nortel. Thanks to joint ventures with German, Japanese and American auto companies, China today boasts the world’s largest automotive market. 

And what happens when China tries to go it alone? It usually fails. Unable to find a joint-venture partner, the state-owned Commercial Aircraft Corporation of China (COMAC) has spent the last 14 years unsuccessfully trying to build a Boeing 737-like commercial aircraft. 

Don’t Bet Against China

But let’s not totally count China out. Underestimating China and the will of its people has been a losing bet for the past 30 years. I give them more than a puncher’s chance to reach a level of respectability and competitiveness.

Sure, the sanctions will invariably delay China’s progress. Global market intelligence firm International Data Corporation estimates that while China is currently three to four generations behind leading-edge technologies, it could catch up in in as few as 10 years.

Investment capital certainly won’t hold China back. Beijing announced in 2020 that it would invest $1.4 trillion in high tech over the next five years, with much of it in the semiconductor space. This makes Biden’s CHIPS and Science Act, a $52.7 billion plan to revitalize semiconductor manufacturing, a drop in the bucket.

Before the sanctions, China was learning from the world’s best tech companies. China’s state media reported in 2021 that all the chips in their new space station, as well as in China’s Mars rover that landed on the red planet that year, were made in China.

China also has a geopolitical angle to play. China is betting on America’s weakened clout. And it may have a point. Just look at the U.S. sanctions imposed on Russia for Putin’s invasion of Ukraine. India, Spain, Germany and Japan—democratic nations all—have actually increased Russian imports since the invasion began in February.

India has been particularly vexing to the U.S., as it maintains strong diplomatic ties with Russia, continues to purchase Russian munitions and crude oil and abstains from condemning Russia on human rights violations. 

Today, American and foreign companies alike are seriously vetting the de-Americanization option. Nikkei Asia recently reported that Japanese and Dutch semiconductor companies could produce equipment without the use of any U.S. technology.

Industry Week concludes with my position, emphasis mine.

The US and China are digging in for a long battle. Both countries over the next decade will claim small victories here and there, but ultimately, as most economists say about trade wars, there aren’t any winners; only losers.

Trade Wars are Neither Good Nor Easy to Win

President Trump stated "Trade wars are good and easy to win."

He was wrong. 

“Trade wars are good and easy to win,” President Trump said https://t.co/utGCRKDc38

— David Frum (@davidfrum) November 25, 2020

Good review of the China tariffs started under Trump and kept by Biden: they "failed economically, politically and legally"

"Trade wars are easy to win"... but for whom? 😏https://t.co/hmFsE7Gqrb

— Arnaud Bertrand (@RnaudBertrand) October 13, 2022

"Trade wars are good and easy to win."

For the record, not only did Trump’s trade war with China fail to restore manufacturing jobs, had the tariffs not been imposed, the US would have received over $100B in profits for exports instead of losing $200B in a trade war. pic.twitter.com/XzfVztT4F4

— John Powers (@ReportingfromNY) January 3, 2023

Biden Escalates Trump's Foolishness

Please note A New Green Deal Trade War Accelerates Between the US and EU

Biden is doing what Trump would have done if only Trump thought of it. 

Of course, Trump's reasons for made in the US would have had nothing to do with green policies, just normal America First stuff. 

Also recall my December 19, 2022, post EU Imposes the World's Largest Carbon Tax Scheme, Inflationary Madness Sets In

There's economic stupidity across the board as noted in Al Gore and John Kerry Aim to Hijack the World Bank for Climate Agenda.

Subsidies, tariffs, sanctions, and trade wars all have a cost. The result will be more inflation, more nationalism, and higher costs for consumers.

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