Backed by the United States and its allies, Ukraine is waging two wars against Russia. The first is an all-consuming military campaign against Russian forces to reclaim the fifth of Ukrainian territory that Russia has seized since the 2014 war and its barbaric invasion of February 2022. The second is an economic war the likes of which haven't been seen since the 1940s, aimed at crippling Russia's $1.8 trillion economy, the world's eleventh-largest. So far, neither war is going as well as hoped.
On the frontlines, Ukraine's long-awaited counteroffensive has yet to make significant headway against Russia's dug-in troops. President Biden refuses to give Kyiv long-range missiles and F-16 fighter jets, among other hoped-for systems. Outmanned, outgunned, and significantly overpowered in the air, Ukraine cannot hope to make greater progress without these and other systems. Russia has spent months building a sophisticated network of defenses on the Ukrainian land it occupies—tank traps, trenches, bunkers, and minefields as far as 15 miles from the war's front lines.
The sanctions war has run into resistance, too. Since February, a coalition of four dozen countries has imposed the most comprehensive sanctions ever against Russia. Thousands of Russian individuals and companies face international restrictions. As The Economist reports, half of Russia's $580 billion in foreign currency reserves has been frozen, and most of Russia's largest banks have been denied access to SWIFT, the global payments system. Washington has stopped buying Russian oil, and a European embargo on oil and gas took full effect last February. The embargo and export controls bar Russian companies from buying microchips, engines, and military-related or dual-use technology. Russian oligarchs and senior officials cannot travel abroad and have seen their assets seized, including yachts, houses, and private planes. More than 1,000 American and other global firms no longer do business in Russia—the largest exodus of global enterprises in history.
Yet the International Monetary Fund still projects that Russia's economy will grow at 0.3 percent this year, outperforming both Britain's and Germany's. "So far, the sanctions have not yet put a stranglehold on Russia's economy," says John Herbst, of the Washington-based Atlantic Council. Herbst, a supporter of military and economic aid to Ukraine, says that Russian president Vladimir Putin is still bringing in billions of dollars to finance his war from high commodity prices, gaps in the sanctions regime, and ever more sophisticated sanctions evasion.
In fact, analysts remain divided about both the effectiveness of sanctions and the reasons for their apparently disappointing impact. Some critics argue that efforts to use economic power to foment regime change or profound changes in foreign policy have rarely, if ever, succeeded. Under both Republican and Democratic administrations since 1950, the U.S. has accounted for some 42 percent of all sanctions imposed throughout the world. But American-led sanctions against Iran, Cuba, Venezuela, Syria, and other countries to deter human rights abuses and isolate them economically have failed. So, too, have Washington's efforts to hobble companies like China's Huawei. By and large, economic warfare has proved effective in only a few cases, with Communist Poland and Apartheid South Africa being the most notable.
Jeffrey A. Sonnenfeld and Steven Tian, both at the Yale School of Management, challenge this conventional wisdom. Writing last month in Fortune, they argue that sanctions, coupled with the voluntary departure of corporations from Russia, have "crippled Putin's economy." Russia's economy is managing only to "limp along" by "cannibalizing its state-controlled enterprises" and the operations of what they call the "feckless 400," companies continuing to do business in Russia, many of which had announced earlier in the war that they were suspending operations there. Most of the top corporate sanctions-busters—including China's Alibaba, Holland's Heineken, and the French retail giant Auchan—are not American. Moreover, Sonnenfeld and Tian estimate that these companies contribute only about $200 million to Russian revenues. While every ruble raised helps continue the slaughter in Ukraine, the Russian economy will continue to suffer long-term damage that will eventually crush the nation's economic performance at home, along with its global aspirations.
"Sanctions, even like those imposed on Russia, take time to work," said Ian Bremmer, president of the Eurasia Group, a political risk research and consulting firm, in an interview.
Yes, Sonnenfeld and Tian concede, oil still flows to Asia and other energy-starved buyers, but oil and natural gas are now cheaper today than before the invasion. So, too, are grain, wheat, lumber, metals, and virtually every commodity that Russia produces. Thanks in part to the G-7 oil-price cap, which aims to limit the cost of Russian crude oil to $60 per barrel or less, Russia is now "barely breaking even on oil sales," they say. "With unwanted Russian oil trading at a significant discount but continuing to flow in ample volumes"—exactly as the U.S.-led price cap was designed to do—the world "has now largely replaced Russian supplies." So oil, gas, and other commodity exports are "no boon to a desperate Russia right now," they wrote in June.
Still, efforts to stop Putin from funding his war face significant obstacles. The most important, Ukrainian sanctions expert Nataliia Shapoval said in an interview, is that the sanctions are neither comprehensive nor deep enough. They are still being ignored by more than 100 countries, representing over 40 percent of global GDP. Of the world's ten most populous nations, only one, the United States, has fully embraced them. Germany may have ended its debilitating dependance on Russian oil and gas—an impressive feat given that it got more than half of its gas and more than a third of its oil from Russia before the war—but Russian oil is still flowing to Asia, India, China, and other buyers (albeit at a steep discount, as Sonnenfeld and Tian note). India, for instance, has seen a 16-fold increase in oil imports from Russia since the invasion began, while its total bilateral trade with Russia has more than doubled. The ruble may be in the global currency trash bin, but Dubai still floats on Russian cash. Emirates Air, among others, continues to fly to Moscow seven times a day. Even Britain, among the most hawkish NATO members in supporting Ukraine, has yet to seize much of the estimated $1.5 billion in property owned there by Russian oligarchs.
"The reach and scope of sanctions must be broadened if they are to work; loopholes closed, and their enforcement greatly strengthened," said Shapoval, vice president for policy research at the Kyiv School of Economics and a member of the International Working Group on Russian Sanctions, convened by Michael McFaul, a former U.S. ambassador to Russia.
The working group's most recent paper, published in July, focuses on the difficulty of stopping Russia's continuing acquisition of military-related and dual-use high-tech components—or "critical technologies." According to the paper, an analysis of some 1,057 foreign components found in Russian military equipment indicates that Moscow has been able to secure parts produced by 155 companies—two-thirds of them U.S. based. Critical-component sales to Russian totaled $2.9 billion in 2022, the report states. Three-quarters of these sales were routed through intermediaries in China. The paper does not state whether Analog Devices, Texas Instruments, Microchip Technology, Intel, AMD, and other American producers are aware that their sales to China and other third-country destinations have wound up in Russia.
In some cases, Russian buyers asserted that the components were intended for civilian use. For instance, a significant share of computer components recently found in Russian ballistic and cruise missiles were purportedly bought for non-military use in Russia's space program. Russia has used its space agency, Roscosmos, to acquire technologies with both civilian and military applications. Plus, the report states, "numerous companies . . . in the Czech Republic, Serbia, Armenia, Kazakhstan, Turkey, India, and China . . . are willing to take substantial risks to fulfill Russian procurement demands."
The report's bottom line is that sanctions have not stopped Moscow from acquiring the components essential to weapons production. After an initial drop of such imports in April–May 2022, "volumes recovered to levels commensurate with trade from before the beginning of the war." By the end of 2022, 75 percent of the U.S. components obtained by Russia were supplied through Hong Kong or China, while the manufacturers stated that they had suspended all trade with Russia. Smaller, lesser-known chip traders and shell companies have found it even easier to evade U.S. sanctions, since they are less closely monitored than larger distributors. Even some companies that the U.S. has already sanctioned were still operating.
The report urges Washington and its allies to strengthen sanctions by opening more investigations and imposing stiffer fines, sharing more information more readily about such sales and transfers, encouraging countries ignoring the restrictions to abide by them, and greatly enhancing enforcement. Major loopholes should be closed, said Shapoval. For instance, the U.S. should impose full sanctions on Gazprombank, Russia's leading energy bank, which was previously exempted from sanctions to facilitate the energy trade. For her part, Shapoval wants Washington to declare Russia a state sponsor of terrorism. Such an official designation, she said, would mean that "all U.S. persons would be barred from doing any business with the Russian government. It would make it impossible even for the Chinese branch of Intel to do business with Russia." She also favors sanctioning Russia's nuclear-energy sector. So far, Washington has refrained from taking these steps, as Russia supplied 14 percent of U.S. uranium imports in 2021. "It's a question of political will," she said.
Critics warn, however, that even adopting draconian measures is unlikely to diminish Putin's aggression. "Russia's economy is hurting," said Byron Wien, vice chairman of Blackstone Advisory Partners, a subsidiary of Blackstone. "But though sanctions may be helping erode Russia's economic base, they don't seem to be persuading Putin to reverse policies and end the war."
A senior French diplomat who asked not to be named offered a similar view. "Putin isn't intimidated by sanctions in the same way that democracies are. Washington may see sanctions as a potent economic weapon, but Putin sees them as a weapon of the weak, as what the West resorts to when it is unwilling to fight."
The time lag is yet another flaw. "On a three- to five-year horizon," The Economist wrote, "isolation from Western markets will cause havoc in Russia." But as Ukrainians and their supporters warn, what will be left of their country by then? Autocracies like Russia have so far proven adept at absorbing sanctions' initial blows because they can marshal resources and, over time, find ways of circumventing them.
Shapoval disagrees. "We write a lot about circumvention," she says. "But the size of the smuggling is small compared to the impact of sanctions. The enforcement effort is large and growing. Every day more individuals and companies are being added. Sanctions impact the Russians significantly," she said, "or Russia wouldn't be trying so hard to work around them."