Explained: Why economic sanctions are likely to be even less effective against Russia in 2022


US President Joe Biden has signed an executive order to “prohibit all new investment, commerce and financing by American persons into, from or within the so-called DNR and LNR regions of Ukraine», the abbreviated reference to the breakaway regions of Donetsk and Lugansk in eastern Ukraine which were recognized as “independent” by Russian President Vladimir Putin. The two self-declared republics, where Russian-backed rebels fought Ukrainian forces and whose independence Moscow recognized on Monday, are located in Ukraine’s eastern Rust Belt and are collectively part of the Donbass on the eastern outskirts of Ukraine. The White House, which described the Russian actions as a “flagrant violation” of Moscow’s international commitments, said economic sanctions were in the works.

The dispute

Russia and Ukraine have been in conflict since 2014, when Russia invaded and seized control of the Crimean peninsula from Ukraine. In response, the The United States has adopted a series of sanctions against Russia, including economic sanctions. The Biden administration’s warning says Washington is ready to inflict “more severe economic consequences” following Monday’s developments. Economic sanctions are the West’s most potent weapon in its foreign policy arsenal, but there are question marks over how far they can go in 2022.

What is clear is that Russia’s situation is markedly different from what it was when it entered Crimea more than seven years ago.

Economic sanctions

After Russia annexed Crimea in 2014, the United States quickly imposed a series of sanctions that primarily targeted Russia’s access to financial markets. And also Moscow’s ability to export certain goods, including military equipment. The big question is whether these sanctions have actually harmed the Russian economy and whether they have helped to temper the belligerence of Russian foreign policy as a result? As the threat of new sanctions heralds a new episode in what could soon turn into a new, more dangerous East-West confrontation since the collapse of the Soviet Union, opinions are clearly divided on the question of whether the imposition of the previous round of economic sanctions kept Russia in check.

There is a growing alternative view that economic sanctions have been largely ineffective, a view reinforced following the build-up of the Russian military and Moscow’s subsequent decision on the DNR and LNR. And going forward, Russia is even less likely to be deterred by Washington’s posturing and the latent threat of further economic sanctions. On the one hand, the two self-declared republics already have extremely limited relations with American citizens. To this effect, Washington’s immediate decision to curb investment in this region will probably be symbolic rather than anything else.

More importantly, from the Russian perspective, the possibility of new sanctions must be considered in light of the fact that Russia in 2022 is no longer what it was in 2014-2015. Russia was economically much weaker at the time, going through a phase of recession after the 2014 financial crisis. The country suffered a massive currency devaluation and the Central Bank of Russia burned a lot of foreign exchange reserves during this period. trying to keep the ruble afloat.

People wait to cross from territory controlled by pro-Russian separatists to areas controlled by the Ukrainian government at Stanytsia Luhanska, the only crossing point open every day, in the Luhansk region of eastern Ukraine. (AP)

Over the past seven years, Moscow has managed to stabilize the financial system and had nearly $635 billion in gold and currency reserves at the start of February. While possible Western sanctions against Russian banks could lead to increased market volatility, Russia is likely to be able to resist the restrictions due to its abundant reserves, Russian Finance Minister Anton Siluanov said as quoted by Reuters last week. Siluanov said sanctions against Russian banks would be “unpleasant” but that the state will ensure that all deposits with banks, all transactions, including in foreign currencies, are secure. “Thank God we have enough cash and foreign exchange reserves,” Siluanov told reporters.


According to reports, US and European officials are finalizing an “extensive package” of sanctions if Russia invades Ukraine. While Moscow has repeatedly denied having such a plan, the sanctions on the table could target Russia’s big banks and its energy sector, with the possibility that Russia will be excluded from the SWIFT financial system. The SWIFT system stands for Society for Worldwide Interbank Financial Telecommunication and is a secure platform for financial institutions to exchange information on global financial transactions such as money transfers. Although SWIFT does not actually transfer money, it functions as an intermediary to verify transaction information. From Washington’s perspective, the problem, however, is that SWIFT operates from Belgium and for the US to ban Russia from the platform would require its European allies to be on board. President Biden has clearly threatened to ban Russia’s SWIFT if the latter were to invade Ukraine, but Moscow may see some leeway there.

Theoretically, being cut off from SWIFT would make it difficult for Russians to send money abroad or receive money from outside, and it would also be difficult for Russian financial institutions to transact internationally. . A ban could eventually have a cascading impact on Russian businesses, especially global energy companies. But SWIFT can only go in the direction of a ban if the decision is ratified by Brussels. And being a global platform, it would not be keen to be considered a US-controlled organization, given that it operates commercially as a neutral platform. Also, over the past seven years, Russia has been working on alternatives, including the SPFS (System for Transfer of Financial Messages), an equivalent of the SWIFT financial transfer system developed by the Central Bank of Russia. The Russians are reportedly collaborating with the Chinese on a possible venture, a potential challenger for SWIFT.

North Flow 2

Nord Stream is a gas pipeline that connects Russia to Germany through the Baltic Sea. The sanctions package prepared by the European Union in case Russia invades Ukraine includes measures targeting the Nord Stream 2 gas pipeline, Austrian Chancellor Karl Nehammer said on Monday. In reality, it may not be so easy. The $11 billion gas pipeline project has already driven a wedge between Germany and the United States and could trigger major diplomatic rows if Russia were to be flexible.

The project, owned by Russian state-owned Gazprom, stretches from Western Siberia to Germany, doubling the capacity of the Nord Stream 1 gas pipeline already in use. It also bypasses the pipeline that ran through Ukraine in a way that will impact Kyiv. German regulators have yet to issue the final legal clearances Gazprom needs to begin operations.

The United States viewed the pipeline as a geopolitical tool for Russia to increase Moscow’s influence over Europe, which it likely is.

Pipes from the landing facilities of the ‘Nord Stream 2’ gas pipeline are pictured in Lubmin, northern Germany. (AP)

But European concerns are significant: Germany is almost totally dependent on natural gas imports, with Russia providing more than half of that country’s supplies in 2020, according to IHS Markit. Additionally, while Germany is a big beneficiary, some of the gas will also flow to Austria, Italy and other Central and Eastern European countries. In addition to Gazprom, the pipeline was built with the support of five European energy companies: Austrian OMV, French Engie, British Shell, German Uniper and a unit of BASF.

Opinions within the German government seem to be very divided on the question of the gas pipeline. While German Foreign Minister Annalena Baerbock had made it clear she believed Nord Stream 2 “should be on the table” if the Russians attacked Ukraine earlier in December, the current chancellor and chief of the SPD, Olaf Scholz, had promised that his government would “do everything” to prevent Russia from using Nord Stream 2 to cripple the Ukrainian economy. His predecessor, Angela Merkel, had to fend off a request last year from German lawmakers to drop the project after the poisoning of Russian opposition leader Alexey Navalny in 2020. But on the other side, supporters of the pipeline include Gerhard Schroeder of Scholz’s own SPD party, who was German chancellor before Merkel.

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Schroeder holds key positions at Russian state oil company Rosneft and Nord Stream and has defended Nord Stream 2 in interviews and praised Scholz for his “patience”.

Given the pressure in Germany, it would also not be easy for the United States to dissuade Berlin from the pipeline ready to go into service, amid a persistent energy shortage in Germany. Moscow is clearly aware of this difficult situation on the other side.


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