The war that Putin loses: economic sanctions, more effective than military ones

In a matter of days, United States and his allies used the economy as a weapon of war against Russia for its invasion of Ukraine and caused enormous destruction.

The sanctions immediately put Russian President Vladimir Putin on the defensive, forced to fight runaway inflation. The Russian Central Bank, without access to its foreign reserves, tried to appeal to whatever resources it could find to limit the pronounced fall of the ruble.

Economists agree that Russia’s $1.5 trillion economy (7% the size of the US) will deteriorate rapidly, at a rate unprecedented for a nuclear power.

There is pressure to impose more economic punishments. Ukrainian MP Oleksandra Ustinova met with US senators on Tuesday to call for more immediate sanctions.

“They work,” he said. “In Ukraine, people line up to receive weapons. “In Russia, people line up to get money from ATMs because they know they may not be able to do it in two days, or it will be half as much.”

The United States and its allies reacted to the Russian invasion with a series of devastating financial measures, reflecting the enormous changes in the way a globalized, digitized world, highly dependent on access to money, confronts conflicts.

In the past there were economic targets that were accompanied by military maneuvers, such as the bombing of factories, blockades and the capture of strategic resources. But the sanctions imposed last week indicate that financial markets can respond much faster than conventional weapons.

Sanctions replace direct military interventions. US President Joe Biden has repeatedly said that he would not send soldiers to Ukraine, although he would send weapons and war material.

The impact of the sanctions will largely depend on how the fighting progresses and whether Russia manages to take control of Ukraine or gets bogged down and the sanctions are getting more costly by the day.

The value of the ruble has fallen 35% since Friday, February 25, according to financial data firm FactSet. This unleashed higher inflation, pushed up interest rates and caused a shortage of goods that affects the Russian population.

“The Russians are going to suffer, but if Ukraine succumbs quickly and his government falls, Putin is unlikely to face pressure to force him to resign,” said Benn Steil, director of international economics at the US Council on Foreign Relations. On the other hand, if the conflict drags on and a lot of blood is spilled, sanctions can force it to withdraw, claiming victory.

Steil stressed that the sanctions and the freezing of assets by the Russian Central Bank could make other countries stop using the dollar for their international transactions, which would allow them to better resist the type of pressures that Russia is suffering today. This, in turn, could weaken the dollar’s role in the world economy.

“The measures may accelerate the move away from the dollar as the dominant currency for international transactions,” Steil said. “China will take the sanctions as a warning that it should also reduce dependence on the dollar.”

French Finance Minister Bruno LeMaire went so far as to say in a radio interview on Tuesday that “a total economic and financial war against Russia” had been declared.

He later partially recanted and issued a statement saying that the use of the word “war” had been inappropriate.