Leibowitz on Trade: The Limits of Sanctions on Russia

We are seeing the limitations of western sanctions now. Economic penalties on bad actors always have these limitations. There are numerous examples in the postwar world. The US has imposed these penalties many times: export controls, country-specific sanctions on Iran, Iraq, Libya, Syria, and individuals in those and other countries, just to name a few.

These sanctions work to a degree—but they have obvious weaknesses. First, they hurt the innocent—the people in the countries penalized who are not responsible for the transgressions of the country they live in. They also hurt people and companies in the United States and other friendly countries who must pay more or get less for their money. Second, they are not completely effective, because all of them have exemptions and gaps in coverage. Third, the penalized countries find ways around the sanctions through third countries that do not cooperate in enforcing the sanctions. Fourth, as their inability to achieve the endgame of changing a government’s behavior becomes obvious, calls to end the sanctions will increase.

We are seeing all these weaknesses in the Russian and Belarusian sanctions. International trade activity involving those countries has plummeted and their economies are shrinking dramatically. But so far, there is no sign—none—that Russia and Belarus are withdrawing from Ukraine. To the contrary, Russia is increasing its attacks, and appears increasingly confident that it can outlast the West.

The situation in Ukraine is not static. Russian forces have been making slow but steady gains in eastern Ukraine. Ukraine is calling for more and better weapons for this new war of attrition. The heavy toll on Ukrainian civilians is increasing, as long-range missile attacks on cities and towns far from the front lines kill and wound innocent civilians.

The situation in the NATO countries is not static either. The sanctions, like all economic measures, have collateral damage. Western Europe, which has long relied on Russian oil and gas, is seeing huge price increases (up 700% in natural gas prices since 2021). Pressure to relieve Western Europe from the very real prospect of electrical blackouts and lack of heating in the coming months will grow.

The contest has become a race against time. Russia has shown its willingness to sacrifice many Russian and Ukrainian lives. NATO has provided significant weapons to the Ukrainians that have so far achieved a lot. Russia has abandoned its original goal of overrunning Ukraine, and the battle in the east is almost, but not quite, a stalemate.

But the West has not been willing to provide the type weapons that can really turn the tide by forcing the Russians to retreat. If Ukraine cannot defeat the Russians decisively, some type of negotiated settlement seems all but inevitable. Such a settlement would result in Russia maintaining control of eastern Ukraine, Crimea and large swathes of the southern part of the country. That would deprive Ukraine of much of its industrial heartland and coastline. Other countries interested in altering the geopolitical landscape would be emboldened.

The West imposed what were billed as crippling sanctions on Russia. The measures have shrunk the Russian economy and cost several oligarchs their yachts and island hideaways. The sanctions have seriously hurt the Russian economy. But the new stage of the war, marked with bitter fighting and almost unbelievable destruction, shows the limits of sanctions as a strategic weapon. Russia is still capable of doing hideous damage to Ukraine. The devastation will continue until one side or the other prevails.

If sanctions are to contribute materially to an end to the war, they must be strengthened. The weakest aspect of the sanctions is the failure to make a dent in Russia’s revenues from energy sales, which are estimated to fund half of Russia’s budget.

The West kept energy flowing from Russia because Europe relies on it. Western Europe, a key part of the NATO alliance, is dependent on supplies of Russian oil and gas. If the West embargoed Russian energy as a sanction for starting the war, Germany and other Western countries would be severely injured (and their support for continued sanctions would erode).

The sanctions have been inadequate and Russia has learned to live with them. More must be done.

For one, the West as a whole must help reduce Western Europe’s dependency on Russian energy. That means more energy supplies (chiefly oil and gas for the present) that will reduce the importance of Russia in Europe’s energy picture. It must also try to reduce global energy prices, thereby reducing Russia’s energy revenues even more. While the Biden administration has not said so, in part to mollify climate activists, this appears to be happening. US oil and gas production is booming, and prices seem to be coming down as we speak.

Russia is putting pressure on Western Europe by threatening to reduce supplies—another race against time. Europe could be short of supplies immediately, as the Russian gas supplier, Gazprom, is scheduled to shut down the Nordstream 1 pipeline (the major avenue for gas supplies to Europe) for routine maintenance on Monday, July 11. The shutdown could be protracted if Russia sees an advantage from tightening the screws on Europe.

President Biden is off to Saudi Arabia this week to discuss energy issues and Middle East peace with the members of the Gulf Cooperation Council (Saudi Arabia, Oman, Kuwait, Qatar, Bahrain, the UAE). Surely the President will discuss the possibility of increased production of oil and gas from that area, but these subjects will not be highlighted. (Today in The Washington Post, the President wrote about the reasons for traveling to Saudi Arabia but did not mention the war in Ukraine.)

Another little-remarked development is negotiations with China regarding the Section 301 tariffs. Rumors have floated that the administration is considering removing some of these tariffs, ostensibly to reduce inflationary pressures. Economists have estimated that elimination of the Section 301 tariffs could reduce inflation in the US by one percentage point, or about 15 percent of the rate of inflation. Secretary of the Treasury Janet Yellen, who has been openly calling for the tariffs to be cut or eliminated, is leading these talks. Surely one issue to be discussed is whether China will reduce its purchases of Russian energy.

Finally, the world’s food supply is increasingly jeopardized by the war. Ukraine and Russia are two of the world’s leading grain exporters. Russia is blocking grain exports from the largest Ukrainian seaport, Odesa. Russia has mined the Odesa harbor (ironically using Ukrainian mines captured when Russia occupied the Crimea in 2014). There are rumors of talks between Russia and Ukraine to permit grain shipments to leave Odesa, but I think there are too many obstacles for a near-term solution. Shipping will not be safe until the mines around Odesa are swept. And Russia’s promises to allow safe passage would be of dubious value.

If no agreement is possible, food shortages and price spikes around the world are inevitable as summer gives way to fall and winter, increasing pressure for a negotiated settlement.

The West is worried that Putin could push the nuclear button (or threaten to do so) if he is confronted with defeat in Ukraine. That suggests a negotiated settlement is necessary. But negotiation requires Russia to commit to substantive discussions and a concession that war of aggression is unacceptable. And bringing Russia to the table requires their defeat on the battlefield, which in turn requires more weapons to the Ukrainians.

Keeping NATO unified requires massive shifts in energy supplies. The United States can help by increasing production of oil and gas. We are already taking some steps to do that, but it is not nearly enough to meet the problem. As noted above, winter is coming.

We may be able, through the combination of crippling sanctions and military aid to Ukraine, to convince Russia to stop its game of conquest. But sanctions are inherently inadequate by themselves.

Lewis Leibowitz

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