Crisis on the Ukrainian Border What Sanctions Could Hurt Russia?

The U.S. and Europe are hoping to use sanctions to stop Russian President Vladimir Putin from invading Ukraine. But such punitive measures aren't always predictable, and sometimes they can boomerang and cause immense damage at home.
A technician prepares a section of pipe for the Nord Stream 2 pipeline.

A technician prepares a section of pipe for the Nord Stream 2 pipeline.

Foto: Stine Jacobsen / REUTERS

When it comes to word choice, the West is in complete agreement. A Russian attack on Ukraine would carry "political consequences" and a "heavy price," insist both Washington and Brussels. The European Union’s chief foreign policy representative, Josep Borrell, said recently that the bloc is preparing a "full set of sanctions" against Moscow.

DER SPIEGEL 4/2022

The article you are reading originally appeared in German in issue 4/2022 (January 22nd, 2022) of DER SPIEGEL.

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The problem, though, is that the consequences of such punitive measures for the Russian economy aren’t always predictable, and the harm to one’s own economy can be significant. Should the West stop buying Russian oil and gas? What would be the ramifications of a boycott on Russia’s tech sector, or of excluding the country from the SWIFT international bank transfer system? How can the West punish Putin without shooting itself in the foot? Opinions on such questions diverge significantly when Europeans and Americans start considering possible responses to the warmongering of Russian President Vladimir Putin.

The Power of Semiconductors

It is indisputable that Russia’s economy would be hit hard if the West cut deliveries of microchips to the country in response to an invasion. Such a move would be damaging to the aircraft industry and to the arms industry, both of which are key to Russian exports and to the country’s prestige. Additional measures under discussion include limitations on deliveries of parts necessary for the construction of warplanes and rockets.

Even simple semiconductors that cost just a few euros each could serve as important leverage. The global chip industry is largely dominated by companies from the U.S. and its allies, with the most state-of-the-art factories located in the U.S., Europe, Taiwan and South Korea.

With its sanctions against Huawei, the U.S. has already demonstrated just how effectively chip supplies can be used as a weapon against rivals. Since the administration of ex-President Donald Trump limited the export of smartphone processors to Huawei, the Chinese tech company’s sales have plummeted.

Russia is home to very few, mostly aging factories and they rely heavily on Western patents. The computer producer IRU, for example, which is working on developing a desktop computer made completely in Russia, imports its processors from Taiwan. And the chip producer Angstrem-T went bankrupt in 2019 after it was forced to cut ties with its American partners due to sanctions imposed after Moscow's incursion into Crimea.

Still, it would take several months for a chip boycott to have much of an effect. Cutting Russia off from the SWIFT system, the backbone of the financial world, by contrast, would have an immediate impact. Around 11,000 banks in more than 200 countries use the network to take care of cross-border transactions. "Because of the massive consequences, a credible threat to exclude Russia from SWIFT would be extremely effective," says Gabriel Felbermayr, director of the Austrian Institute of Economic Research in Vienna.

The collateral damage of such a move, however, would be significant. Even as companies in Russia would have to find elaborate alternate routes to pay their foreign bills, and the cross-border flow of cash and goods would trickle to a stop, the West would suffer as well. Exports to Russia from companies in Europe could no longer be paid for, and Europe would be unable to pay for natural gas deliveries from Russia. Furthermore, Russian debt held by European banks would be jeopardized. Such considerations led Friedrich Merz, the likely next head of Germany’s Christian Democratic Union (CDU), to warn of "an atomic bomb for the financial markets."

"A Sanction that Moscow Would Really Understand"

The problems would be of a similar magnitude if the West were to stop imports of oil and natural gas from Russia. That, too, says Felbermayr, would be "a sanction that Moscow would really understand." But it would also have grave consequences for the West.

Around 55 percent of Germany’s natural gas comes from Russia. Theoretically, Berlin could turn to other countries for help, but there aren’t enough liquified natural gas (LNG) terminals in Europe, and none in Germany.

At the same time, prices for liquified gas would skyrocket. German storage facilities are emptier than they have been in a long time, and because the markets have been liberalized, the government doesn’t have too many levers to counteract such price pressures. German Economics Minister Robert Habeck, for his part, has promised to exert more control over the gas market. "We have to improve our ability to prepare for next winter so that the gas storage facilities are full," he said in an interview with DER SPIEGEL this week. He also said he intended to reform the entire market. But such promises are of little help in the current conflict, which is why a suspension of gas imports seems just as unlikely as shutting Russia out of the SWIFT system.

The situation looks different when it comes to the Nord Stream 2 natural gas pipeline between Germany and Russia. That delivery route is not urgently needed, assuming that Russia doesn’t cut off deliveries through the existing pipelines.

Germany and the U.S. have agreed that the Nord Stream 2 pipeline will not go into operation should Russia start a war – an deal made between U.S. President Joe Biden and former German Chancellor Angela Merkel before she left office. Which means that everything depends on what Russia does next and whether it is then seen as the beginning of a war. Or whether Russia seeks to destabilize Ukraine without actually launching a physical invasion.

"The West," says a high-ranking EU diplomat, "will provide an appropriate and coordinated response."