Do sanctions work? More precisely, have the sanctions imposed on Russia in recent years worked? Given the growing tendency of Western states to resort to economic sanctions against countries they dislike, these are important questions. In the case of Russia, sanctions are the main tool used by the West to express its opposition to Russian foreign policy, and more generally to the ‘Putin regime’. Discovering whether they are achieving their supposed objectives (whatever those may be) should be a priority for students of international affairs, as well as for politicians.
According to the University of Birmingham’s Richard Connolly, however, ‘do sanctions work?’ is the wrong question, or at least it’s a question that can’t be answered until other questions have been answered, most notably ‘what is the effect of sanctions on the targeted country?’ And to answer that question you have to consider other ones, such as ‘how exactly do sanctions impact the targeted country?’ That in turn requires one to investigate in depth the political and economic structure of the target to understand how it operates and how it responds to external pressure. Every country is different, and operates according to a set of ‘intricate relations’ between the state, its citizens, and the various institutions within it. As yet, however, studies of the sanctions imposed on Russia have not sought to take these into account, leading to simplistic analyses. As Connolly says in his new book Russia’s Response to Sanctions, ‘Policymakers and other public figures prone to making hyperbolic statements about the state of the Russian economy today, and then using those statements as a basis for formulating policy and attitudes towards the country, often appear to do so without the aid of even a rudimentary understanding of Russia and its economy.’
To make up for this deficiency, Russia’s Response to Sanctions aims not to answer the question ‘have sanctions against Russia worked?’, but instead to determine what effect they have had on Russia’s political economy and how the Russian state has responded to them. To do this, he first examines the Russian political-economic system and then looks in more detail at the Russian state’s response to sanctions in the critical areas of energy, defence, and finance, all of which have been specifically targeted by the West. The result is the most sophisticated analysis I have yet read on the impact of Western sanctions on Russia.
According to Connolly, the key feature of Russia’s economy is that profits earned in those parts of the economy which are globally competitive (primarily, though not exclusively, energy industries, and which Connolly calls Sector A) are redistributed by the state to support industries which are not globally competitive (Sector B) through direct subsidies, preferential access to credit, and so on, in other words through what economists call ‘rent sharing’. This sustains a fairly large domestic industrial base (contrary to criticisms that Russia doesn’t produce anything), but one which exports very little and focuses on the domestic market. It also ties the state (as the rent redistributor) and domestic producers together in complex networks of dependency, while making the state the primary actor in the economy (thus making it more accurate to talk of Russian political economy than just economy).
Russian political economy has it costs. The system of rent redistribution supports uncompetitive industries, discourages innovation, and makes economic success dependent to a large degree on political connections. However, in the face of Western sanctions it has had certain advantages, making the Russian state well placed to redistribute scarce resources to limit sanctions’ impact.
Connolly argues that the Russian state has responded in three main ways to sanctions: 1) securitization of the economy; 2) import substitution/localization, 3) diversifying its external economic links.
The first of these means that the Russian government has increasingly looked at the economy through the lens of national security, and been willing to experience some economic costs in order to enhance that security. Securitization has also inclined it further towards the other two measures (import substitution and diversification) in order to decrease Russian dependency on the West.
In his sections on the energy, defence, and financial industries, Connolly shows how import substitution and diversification have worked in practice. In the oil and gas industries, for instance, Russia has been highly dependent on imports of foreign technology to assist in the more difficult resource extraction projects. To address this deficiency, Connolly reports that ‘the government allocated considerable financial resources to support the development of energy extraction equipment in Russia’, as well to projects such as the Zvezda shipbuilding complex in the Far East. At the same time, it began to purchase more and more technology from China and other non-Western sources. The strategy was thus not ‘deglobalization’ but ‘reglobalization’.
Similar patterns can be observed in the defence and financial sectors. For instance, to compensate for the loss of Ukraine as a supplier of crucial components, large sums of money were invested in creating alternative Russian sources of supply. At the same time, Russia increased defence cooperation with China. Likewise, in response to Western financial sanctions, the Russian state moved to provide direct support to Russian banks and to help large cooperations like Rosneft pay their foreign loans. It also developed alternatives to the SWIFT electronic payment system and Western credit rating agencies and introduced the Mir credit card to replace VISA and Mastercard, while seeking out new sources of capital in non-Western states.
The effect of these measures, Connolly concludes, was to greatly limit the impact of Western sanctions. These undoubtedly caused considerable disruption in the short term. Some projects in the energy sector were cancelled; the production of naval vessels was delayed; Russian companies found it harder to access credit. But within a very short time this disruption was overcome. Russian production of oil and gas has actually grown since sanctions were introduced. So too has the production of Russian defence industries. And in the financial sector, ‘the impact of sanctions was diluted relatively quickly’, as previous outflows of credit from Russia fell considerably. Overall, Connolly says, ‘Russian policymakers were able to formulate a rapid and sophisticated response’ to sanctions, which has been quite successful in limiting their negative consequences.
What then has been the effect of the Russian response to sanctions?
First, it has created a system that ‘is less vulnerable to external pressure’ than that which existed before, in that it is more independent from the West. Second, it has accelerated a shift in Russia’s place in the global economy towards the East. This obviously has political ramifications which Connolly does not explore. Somewhat perversely, Western sanctions have reduced, not increased, Western leverage over Russia. This is probably permanent.
Next, Connolly notes that Russia’s response ‘appeared to reinforce the prevailing system of political economy’. Russia was able to respond the way it did precisely because of the existing system in which the state acts as a rent redistributor. As a result of sanctions, the state is now even more deeply involved in such redistribution. This is something that Connolly doesn’t go into, but this doesn’t bode well for proponents of regime change in Russia, who hope that sanctions will create a divide between the elite and the regime and encourage the former to bring down the latter. Sanctions more probably have tightened the connections between regime and key economic stakeholders, making the latter even more dependent on the former than before. It has thereby created strong incentives for these stakeholders to continue supporting the existing system. For this reason, as Connolly does note, the response to sanctions has probably made liberal economic reforms of the sort often demanded by Western commentators less likely.
This then begs the question of what the long term effect on the Russian economy will be. The Russian government has argued that import substitution will not only protect Russia from foreign pressure but will also promote Russian industry, thus bringing economic benefits. This may be wishful thinking. By reinforcing the existing political economy, the Russian response to sanctions has quite possibly strengthened the sort of inefficiencies one would expect to see in a rent-seeking system. Connolly suggests that this might be the case but stops short of arguing that it definitely is, instead remarking that it is too early to tell whether the Russian government’s policy will have positive or negative consequences. In the short term, for sure, it has come at an economic cost, but a fairly limited one, and the government has made it clear that it is willing to pay it.
Connolly concludes that, ‘The sanctions imposed by the West in 2014 exerted a powerful influence over the development of political economy in Russia. However, this influence manifested itself in a fashion that was probably not intended by Western policymakers.’ This strikes me as a fair conclusion to what is a well-argued book. As academic books go, Russia’s Response to Sanctions is not particularly dense. Nevertheless, its academic nature (as well as its $100 price tag) means that it is unlikely to reach a large audience. That is a shame, as Connolly’s analysis has significant policy implications. Without directly addressing the question of whether ‘sanctions work’, it does subtly threaten some of the foundations on which sanctions policy is based. Any future study of anti-Russian sanctions will have to take this book into account if it wants to be taken seriously.