The first anniversary of the start of the conflict in Ukraine is also that of an unprecedented international sanctions regime levied against Russia by the EU, US, and their partners. Even Western observers – let alone Russia – are surprised by the sanction coalition’s ability to remain mostly aligned and united over the past year.

Nonetheless, the impacts of sanctions are obviously mixed; Russia was able to adjust its economy effectively and generate sufficient revenues to sustain its military efforts, largely thanks to bumper oil and gas revenues. Ironically, much of these – over USD 600m daily in the first three months of the conflict – flowed from Europe, despite sanctions. Even by late 2022, the EU still had an EUR 8bn monthly trade deficit with Russia. As expected, a major global economy – and key energy exporter – has proved harder to constrain than prior targets of sanctions.

Heading into 2023, the situation is changing. Bans are in force on most Russian oil and oil product imports into Europe, alongside experimental price cap mechanisms meant to limit Russian revenues without curtailing production. Co-ordinated technology export controls, with critical support from Japan and South Korea, are strangling Russian industry. 

The conflict will get worse before it gets better; the prospect of a political settlement remains remote. Sanctions will remain in place, putting Russia – one of five permanent members of the UN Security Council and erstwhile G8 economy – on par with pariah states like Iran, North Korea, and Syria. Only an abrupt (and unlikely) change in political leadership could bring about a rapid relaxation of sanctions. Both geopolitics and business will continue to adapt to and manoeuvre around sanctions risks.

Companies should bear in mind three lessons from the past year of Ukraine-related sanctions going forwards:

Sanctions work, but slowly

Despite persistent and valid concerns about “weaponisation” and overuse, sanctions are still a preferred Western policy tool. However, the Ukraine conflict has forced a reappraisal of when and how they work. Historically, sanctions sought to force governments to change policies and behaviours and were viewed as temporary, extraordinary measures. Even in the weeks before the conflict, the US believed the credible threat of punishing sanctions might yet deter military action.

Now, Western policymakers have few illusions that sanctions might change Russia’s strategic calculus in Ukraine. Like the conflict itself, Western sanctions are attritional, intended to gradually degrade Russia’s capacity to fight in Ukraine and project global power. Under sanctions, Russian financial transactions become more complex and costly; military and industrial stocks cannot be easily replaced; innovation and productivity stall; product quality deteriorates; and “brain drain” intensifies. Achieving these effects will require sanctions to be maintained indefinitely.

However, sanctions are also no longer necessarily a low-cost option. Russian energy cut-offs as a result of and in retaliation for sanctions have plunged Europe into recession, even if mild winter weather quelled immediate fears of shortages and rationing. Germany’s long-standing and lucrative industrial model, predicated on cheap Russian gas, is likely to be permanently disrupted. Energy importers like Japan and South Korea have faced higher prices and increased risk of energy disruption. Inflation has also fueled social and labour unrest worldwide, driving an anti-sanctions backlash even in parts of Europe. 

International co-ordination is essential

Sanctions targeting Russia (and Belarus) work because they enlist major global economies (which also happen to regulate key aspects of global trade and finance). Much early commentary focused on the number of countries that were not implementing sanctions. However, Russia’s trade with China and India, though growing, is no substitute for access to the European market. Trade with smaller emerging and developing countries remains marginal, and these states have strong incentives to abide by sanctions if they want to continue doing business with the US and Europe.

The Ukraine conflict also shows that the geopolitical signaling power of sanctions can be as important as their economic impact. In its first press release outlining sanctions in February 2022, for example, the US Treasury described them as a “show of unity” among Ukraine’s supporters. Indeed, the ability of Western countries and partners to remain aligned and co-ordinated on sanctions over the past year symbolises their strategic unity and solidarity with Ukraine. By the same token, any fracturing of the Western consensus on sanctions could indicate broader challenges in maintaining united support for Ukraine.

Technology is the new frontier

A notable feature of the Russia sanctions regime is its use of broad and co-ordinated technology export controls (originally honed by the US against Chinese technology companies). These sanctions are mainly intended to hobble Russia’s defence industrial base, but they also affect many civilian products. Famously, Russian automaker Avtovaz designed a car without airbags and other safety measures that it was unable to source from trade partners (it has since been able to procure airbags, according to media reports).

In weaponising technological (in addition to financial) dominance,  the Russia sanctions regime is a sign of things to come, with uncertain implications. On the one hand, the sanctions show that technology is still a strategic moat; knowledge and innovation at the leading edge remain highly concentrated in a few countries – even a few firms – that are under the jurisdiction of or responsive to Western sanctions.

On the other hand, this will not always be the case. At least in some critical areas, such as capable low-cost military drones, adequate technology already resides with countries like Iran and North Korea, who have no incentive to comply with sanctions. In leading edge technologies, such as advanced semiconductors, sanctions sceptics including China and India are racing to catch up. Complying with such controls may also expose international companies to regulatory retaliation via blocking statutes or other measures. Russia will continue to adapt its trade linkages and supply chains to the world of Western sanctions, prompting durable changes in its economy and the global economy.

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