"Moscow Is Doing Far Better than Expected" How Well Are Sanctions Against Russia Working?

The European Union spent months preparing comprehensive sanctions against Russia in the event of an invasion of Ukraine. The measures are deeper than anything else ever passed in Brussels, but are they working?

Participants at the G-7 summit in Elmau, Germany

Participants at the G-7 summit in Elmau, Germany

Foto:

Michael Kappeler / dpa

The chief strategist for Europe’s economic war against Russia isn't much interested in military posturing. His uniform: gray sneakers and a blue business suit. His command center: a nondescript office on the 13th floor of the European Commission’s headquarters in Brussels with a conference table, houseplant and a cluttered display cabinet.

And if you ask him if he feels he’s the commander-in-chief in the EU conflict with Moscow, you're likely to get a dismissive wave of the hand in response. "That’s not how the EU works," he says. "My job is to probe and then work out compromises."

DER SPIEGEL 27/2022
Foto:

[M]: J.H. Darchinger / Friedrich-Ebert-Stiftung; Getty Images

The article you are reading originally appeared in German in issue 27/2022 (July 1st, 2022) of DER SPIEGEL.

SPIEGEL International

From Economic Community to Security Alliance

Björn Seibert is one of those people in Brussels whose name is known by few but whose influence is enormous. The head of European Commission President Ursula von der Leyen’s cabinet has been coordinating European sanctions packages against Moscow for seven months. He benefits from being a trained security and military expert. As a young political scientist, he conducted research at the Army War College in Pennsylvania. He later headed the executive staff of the German Defense Ministry.

Will the West’s punitive actions go far enough to deprive Moscow’s war machine of its economic base? At what point will they start hurting Putin? "You can see some things right away," the longtime Von der Leyen confidant says, matter-of-factly. "A lot of it doesn’t show up for weeks, months or even years."

What is certain is that the policy of boycotts and embargoes has profoundly changed the union itself. The EU has adopted six sanctions packages since the Kremlin began rolling its tanks.

It has frozen the assets of more than 1,100 aids of Russian President Vladimir Putin and 30 oligarchs. Most Russian banks have been cut off from Europe’s financial markets. Coal from Siberia may no longer be imported, and jet engines or truffle butter can no longer be exported to Moscow or St. Petersburg. Nearly a hundred billion euros worth of trade goods are blocked in what officials at the European Commission now openly call the "militarization of export controls."

What had once been envisioned as an economic community is transforming itself into a security alliance and is vigorously expanding its influence over the member states. In the course of its sanctions, the EU has enacted dozens of new laws, increased its staff and created a task force to track and confiscate Russian financial assets. "The Commission has cleverly used the situation to secure further powers for itself," says one EU diplomat in Brussels.

Former U.S. Secretary of State Henry Kissinger once famously complained that Europe has no telephone number. But that’s a lament the White House would be unlikely to repeat today. When it comes to sanctions, the Americans first call the EU authorities in Brussels and only after that the individual nation-state governments in Berlin or Paris.

That’s also how things are supposed to work for future conflicts, including the confrontation with China. If the economic warriors in Washington and Brussels have their way, the Ukraine war will create the blueprint for the economic equivalent of NATO to deter aggressive autocrats.

The idea was born last November, when CIA Director Bill Burns made a surprise visit to Brussels. The intelligence chief had just come from Moscow, where he had solidified his belief that Putin was planning a large-scale invasion of Ukraine and that Kyiv would be a focus. A NATO military response was out of the question, so Western capitals agreed they would have to respond to the invasion with a hefty package of joint economic sanctions.

Because the United States had already scaled back its economic interactions with Russia following the 2014 Crimea occupation, Europe had to join in on the sanctions if Putin was going to be fazed in any way. Brussels, in turn, feared that the United States could unilaterally impose sanctions and, as in other cases, extend them to EU companies, without giving the Europeans any say in the matter.

The Kremlin Was Prepared

That had to be prevented. Seibert sat down with senior officials from his directorate generals for trade, finance and energy. The most important basis for their discussion were long lists of trade flows of thousands of goods, where and how they are produced and how they could be replaced if needed. The panel used those lists to make decisions on how to "impose high costs on Russia" and "minimize undesirable consequences for its own citizens and businesses."

Experts with the same goal met in Washington, led by Deputy Secretary of State Wendy Sherman and Deputy National Security Adviser Daleep Singh, a former Goldman Sachs banker who had already worked on international financial policy in the Obama administration. U.S. officials had thick files on their desks tracing how sanctions had worked against Iran, against Russia in 2014 and against the Chinese telecom company Huawei.

But another thing also emerged from the intelligence analyses that Washington shared more freely than ever before with its allies: The Kremlin had apparently been preparing for the confrontation for a long time. Months earlier, Moscow’s energy companies had begun reducing the flow of natural gas to Europe, leaving storage facilities only fractionally full. Forecasts showed that the reserves wouldn’t suffice in the event of a cold winter.

Putin’s war chest was in good shape. His central bank head, Elvira Nabiullina, had begun stashing profits from Russia’s lucrative oil and gas operations in Western banks and central banks early on. The accounts held more than $300 billion, and the Russians assumed it was secure. After all, reserves held by monetary authorities have only been interfered with in extremely rare circumstances.

But the architects of Western sanctions weren't terribly interested in precedent. Various analyses made clear where the West was strong and the Russians weak: in finance, dominated as it is by the U.S. dollar, and in the technology sector, which is largely controlled by American computer and software corporations. These are the areas that sanctions were to target.

European Commission President Ursula von der Leyen and Björn Seibert (right), her sanctions planner

European Commission President Ursula von der Leyen and Björn Seibert (right), her sanctions planner

Foto: Thierry Monasse / Getty Images

As 2021 gave way to 2022, Singh and Seibert often spoke on the phone several times a day; and twice a week, the teams of experts in Washington and Brussels connected using a surveillance-proof video line. By the end of January, weeks before Putin’s invasion, they had laid out the broad outlines of their sanctions regime, which could be adapted to five different war scenarios. The greater Putin’s escalation, the principle went, the harsher the response should be.

At the same time, the planners needed the OK from EU member states, so Seibert brought their Brussels ambassadors into the loop in a series of secret group meetings in January and February. He always assembled the rounds in such a way that there were enough representatives from Eastern Europe to promote a decisive course against Putin.

The sanctions themselves were much less controversial than the question of the conditions under which they should be applied. Most diplomats considered the scenario of a major invasion as described by intelligence reports to be a bluff. If the invasion was limited to the Donbas region, officials considered an even milder response to be a possibility.

The West Had To Move Quickly

Once Putin directed huge numbers of his troops to march on Kyiv, sanctions planners in Brussels and Washington "only had to press the play button," as they put it. Under the shock of Russia’s all-out assault, all remaining concerns were brushed aside and the sanctions packages were pushed through in record time. As one EU diplomat recalls: "First day: announcement. Second day: discussion. Third day: adoption."

According to von der Leyen, the most extensive and severe sanctions in the history of the EU followed. At the same time, they served as a prelude to an economic war to which an old military adage applied: "No plan survives first contact with the enemy." Working out the sanctions packages would prove to be the easier part of the exercise. Maintaining them would be much more difficult.

For example, Brussels and Washington had agreed to exclude Russia’s oil, gas and coal exports from sanctions for the time being. Parts of the EU were too dependent on fuel supplies from Moscow.

But the understanding didn’t last long. Almost as soon as the first package had passed, Canadian Prime Minister Justin Trudeau announced a national oil embargo – to the delight of the strong Ukrainian immigrant community in his country and to the chagrin of those allies who don’t have energy reserves as extensive as those held by Canada.

U.S. President Joe Biden became the first to join the boycott, and Commission President von der Leyen also spoke out in favor. But it was an overly hasty commitment, as it soon turned out, because her officials had only developed rudimentary alternatives for EU countries such as Slovakia, the Czech Republic and Hungary, which obtain their fuel from Russia via pipelines. The consequence was a bitter dispute among member states that delayed the launch of the sixth sanctions package by several weeks.

The West also had to launch its attack against the Russian central bank faster than planned. In late February, government headquarters in Europe and the U.S. began receiving indications that the Kremlin had begun withdrawing assets from Western banks and monetary authorities.

They had to move quick to shut down the Russian reserves. No one grasped that more quickly than Italian Prime Minister Mario Draghi, who vehemently promoted the plan, especially in conversations with the reluctant U.S. Treasury Secretary Janet Yellen.

Planners Also Made Mistakes

In the early morning of Feb. 28, two hours before banks opened, the West moved to freeze Russian assets worth hundreds of billions of dollars. Although the reserves in Japan initially remained untouched because the sanctions decisions had not arrived there expeditiously due to the time difference, the seizure of Moscow’s central bank was probably the West’s most effective blow to date. "Nobody saw that coming," Russian Foreign Minister Sergei Lavrov later lamented to Moscow students. "It was just theft."

Normally, it takes several months for the EU to pass economic sanctions, but this time, the punitive measures sometimes had to be implemented within a matter of hours. So, it was hardly surprising that the planners also made mistakes. On one occasion, they inadvertently blocked the export of ambulances, even though health goods were exempt from sanctions. Then they made it difficult to transport Russian titanium, which Airbus Group urgently needed for production. Brussels later had to clarify that Russia could continue to supply the raw material to Europe.

The Kremlin seemed to be at a clear disadvantage in this economic war: Some 30 percent of its exports go to the EU, but only 6 percent of European exports were destined for Russia.

Still, the Kremlin managed to cleverly counter some of the attacks. For example, Putin undermined the ban on the supply of European and American technology goods, for example, by legalizing the so-called parallel import of computers, smartphones and car parts from third countries. To curb financial sanctions, its central bank jacked up interest rates and required citizens and corporations to exchange most of their foreign exchange earnings for rubles. This has even pushed the currency’s exchange rate "above its level at the beginning of the year," the European Commission recently noted.

Above all, the Kremlin has benefited from rising world market prices for oil, gas and coal, which the West fueled with its boycott threats. Even before the invasion, Russia’s oil revenues had been increasing by around 1.4 billion euros a week, according to the agency’s analysis. And that despite the fact that Moscow has already had to "significantly curtail" the production of fuel, by 9 percent a month, according to the expert report.

Still, sanctions planners in Brussels deny any failure. On the contrary, in their report, they state that imposing immediate and high costs on the Kremlin has been extremely effective. They note that Russia’s economic output is expected to slump by more than 10 percent this year, and private investment by possibly more than 20 percent.

Because of a lack of important spare parts, Russian weapons factories had to be closed, automobile production has been severely affected and there has been a shortage of tractors, engines and data storage devices from the West throughout the country. The report notes that the measures implemented have diminished Russia’s political and economic flexibility, reduced its industrial and technological capabilities and triggered severe financial strains. In short, the paper states, sanctions are working.

Four months after the start of the Russian invasion, the economic conflict has become a war of attrition, with an added element of psychological warfare. Even as the G-7, at the recent summit in Germany, praised the West's "unprecedented coordinated sanctions measures in response to Russia’s war of aggression," Putin’s propagandists on Moscow state television were predicting that rising energy prices would drive large parts of Europe into poverty.

Gabriel Felbermayr, head of the Austrian Institute for Economic Research in Vienna, says there is no clear winner in the struggle so far. "Russia cannot sustain being disconnected from the West technologically in the long run," he says. "At the same time, Moscow is doing far better than expected because sanctions from Europe and the U.S. haven’t been consistent enough."

The measures against Russian banks, which were described as an "atomic bomb" by the West, have hardly had any effect because of the numerous loopholes, the economist says, critically. Moscow has been able to compensate for the freezing of foreign exchange revenues by increasing energy revenues. Meanwhile, Europe’s oil embargo isn’t slated to go into effect for several months. Already, Moscow has begun selling a considerable share of its oil to India, some of which then finds its way to the West despite the sanctions.

In the Felbermayr's view, the fact that the EU and America have rejected the advice of many experts to reduce Moscow's oil revenues by imposing joint import tariffs is the greatest failure of the sanctions policy. If the EU had made that move, it could have eliminated a significant part of Russia’s extra profits, he argues. However, that also could have driven up gasoline and heating oil prices even further, a development the West didn’t want to subject its inflation-stressed citizens to.

Instead, the idea is to enforce a maximum price for Russian oil that is below the level of the global market price. The idea calls for Western insurance companies, which dominate the market, to only continue providing coverage to those tankers that transport oil under the desired conditions. But many experts doubt whether enough countries will sign on to make the idea a success.

That’s why Seibert, the Brussels sanctions planner, argues that there shouldn’t be sole reliance on the economics. "The Kremlin needs to pay a heavy economic price for its brutal attack," he says. "But other measures are also needed, like arms deliveries. Only then will the pressure to end the war increase."

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