“Economic sanctions against Putin make sense” – Follow the Money

The war front between Ukraine and Russia consists not only of trenches, tanks and blood-soaked ground, but also of bankers, insurance companies and lawyers, as well as oil, microchip and luxury yacht dealers.

This part of the front runs through Manhattan’s financial district, London’s most glamorous neighborhoods and letterbox businesses in tax havens. There is an economic war raging here that is as important as the physical war being waged on the ground. At least this is what American-British Bloomberg journalist Stephanie Baker claims Punishing Putin: Inside the Global Economic War to Bring Down Russia.

Here a recently published book Baker describes how the United States and several European countries implemented an unprecedented package of economic sanctions after the Russian attack in February 2022. So extensive that, according to him, it is safe to talk about warfare with economic resources.

Some of these measures were immediately visible, such as the confiscation of superyachts and other assets of Russian oligarchs. Roman Abramovich had to sell his beloved club Chelsea. In Holland, the company behind the Holland & Barrett store chain received sanctions. Western companies such as Unilever, Shell and McDonald’s were pressured to take their losses and leave Russia.

Other measures were less visible but much more drastic.

Completely unexpectedly, the foreign assets of the Russian central bank were frozen, more than 275 billion euros. Dual-use itemssuch as microchips, could no longer be exported to Russia.

After long discussions, the oil price cap of $60 per barrel was introduced at the end of 2023. Western companies could no longer insure ships carrying oil above this price. Cyprus, where the Russian financial elite has traditionally hidden a lot of wealth, was pressured to show these clients the door.

Baker teaches us a lot about Russia’s reaction to the West’s economic saber rattling

Baker, who has written about the Russian economy since the 1990s, carefully explains how these sanctions and measures came about and how they have come about. It is not a boring story, because he gives his words the flesh and blood of people, people who have made decisions or implemented policies. And he shows how dreams and actions have diverged due to conflicting interests in the Western alliance.

But Baker also teaches us a lot about Russia’s reaction to economic saber rattling. The yachts were quickly sailed to the waters of friendly countries. The army of lawyers had to protect the property of oligarchs in Western countries. London was changed to Dubai as place to be. New logistics chains for oil and microchips ensured that Russian coffers remained full and missiles could continue to land in Ukraine.

At the moment, Ukraine’s victory seems far away. Have the sanctions helped?
“That question really frustrated me,” Baker says via online connection. He’s in Bloomberg’s buzzing editorial office in London, where he’s just graduated… extensive article has published about Western chip technology in a missile that killed a 6-year-old Ukrainian girl in the summer of 2023.

“Writing this book was already very difficult because new sanctions and countermeasures are constantly being taken. But I was also repeatedly asked whether sanctions are not a trivial matter. They wouldn’t work anyway.

But that’s not what I experienced in my research. And at some point it dawned on me: I’m only hearing Putin’s propaganda. He wants everyone in the West to think that sanctions don’t work, that the costs to us are higher than the costs to Russia, so support for sanctions will decrease.

But there are problems with sanctions, right?
‘Of course. But these problems arose mainly because there was almost no enforcement, especially in the beginning. As a result, many workarounds and loopholes have been discovered. Lately, you’ve seen much stronger enforcement, for example on ships carrying oil below the price cap. They are now sanctions and they are at a standstill, although the measures are still not enough.

Threats of secondary sanctions are also beginning to bite Putin. These are sanctions against, for example, Chinese banks that finance the export of goods to the Russian defense industry. The United States warned several banks at the end of last year, and the export figures showed an immediate effect.

In addition, it is increasingly difficult for Russian companies to enter the market yuanwith which the export must be paid for. This means that financing costs will increase significantly. So far, the United States has not sanctioned any Chinese banks, but the mere threat is enough to affect the operations of these banks.

Which sanctions do you think are the most effective?
“These are economic sanctions, especially the freezing of foreign assets of the Russian Central Bank. I don’t think Putin saw this move coming.

This also caused a great financial panic in Russia at the beginning of the war. The ruble collapsed and only thanks to smart actions Elvira as Nabioellicentral banker, the crisis has been averted. Capital outflows were restricted and interest rates rose dramatically. This woman is highly qualified and will play a crucial role in easing the pain of sanctions.”

To what extent has Russia learned from other sanctioned countries such as Venezuela and Iran?
– I believe that Russia has learned a lot. Preparation for possible sanctions was quite thorough. And when the sanctions were in effect, the plan was already ready, namely from Iran.

Iran has not been able to import dual-use items for years and has to do it through all kinds of shady international networks, like Russia is doing now. Iran also has a shadow fleet that transports oil under sanctions. The ownership of these vessels is hidden behind a network of private companies. Ships pump oil to other tankers at sea and disguise their location by falsifying GPS locations. The Russians simply adopted this model.

Follow the money showed that the oil price cap appears to be having little effect. Isn’t that an example of a sanction that doesn’t work?
‘Yes, but the main reason for that is the ceiling is too high. In my book, I describe how the roof was created. The Baltic countries, Poland and of course Ukraine wanted a much smaller amount so that the price cap would really hurt. About $20 a barrel instead of the $60 it ended up being. Other countries feared that a smaller amount would disrupt the oil market too much. And Hungary was huge blocked.

Maybe the market itself is doing the work now. Oil prices seem to be falling mainly due to weaker Chinese demand. But that could change if a massive conflict breaks out in the Middle East. At around $50 a barrel, Putin is in trouble when production and transportation costs are higher than revenues. In that case it must be Russia sovereign wealth fundnational piggy bank.

Follow the Money recently published an article on the environmental risks of the shadow fleet of oil tankers. Some experts believe these risks are too great to justify a price cap given the small impact. What do you think about it?
“I hear from policy makers that they had anticipated the deployment of such a shadow fleet. However, the size of the fleet is much larger than expected.

And they didn’t expect those ships to be so old and broken either. In my opinion, the current price ceiling does not really justify these risks. This is why the ceiling must be lowered and ships must be penalized.

As you noted in your recent article on Western chips for Russian missiles, microchip export restrictions hardly seem to be working. Can something be done about this?
“The makers of these chips say no. They say they can’t control their whole chain, only their direct distributors. They have no idea what’s going to happen next to their products.

I think that’s a lazy excuse. From the Russian export data, you can only see which companies are involved in exporting to Russia.

These companies are rather slow to react to the new reality, namely that they are and still are an important link in this type of conflict. Just like the banks did after 9/11 compliance have expanded tremendously, chip makers must do the same. And they will only do so if they are forced to do so.

Shouldn’t countries like Russia, whether in cooperation with the BRICS or not, simply create their own economic zone and international payment system to be less dependent on the US?
‘I don’t see that happening for a while. Despite all the preparations, Russia currently relies on barter to procure certain products and raw materials. They are left with plenty of rupees which they cannot get rid of due to India’s huge appetite for oil. And China’s yuan is in short supply.

Russia recently received payment from Pakistan in mandarins because other means of payment such as dollars were not available. The Russian Ministry of Defense has had to buy dollars from Rwanda, because dollars would otherwise not be available. It is not particularly economically efficient. It seems to me that these examples show that sanctions do indeed hurt. I think the benefits sometimes BRICS countries differ too much to achieve a common policy.

If you’re counting on sanctions to get Russia to pull out of Ukraine, they haven’t worked. But if you want to step up the war for Russia, they work. Inflation is high, 9 percent, interest rates are almost 20 percent, there is a large labor shortage, there are too few soldiers and a lot of talent abroad.

I am not saying that the Russian economy will collapse, but if the price of oil is also weak, then this war cannot last long.