The Side Effects Of The Sanctions On Russia

When it comes to the West's relations with Russia, 2024 has begun with great uncertainty. Last December, the European Union adopted its 12th sanctions package,[1] and the U.S. imposed several new measures aiming at Russian energy production and ex­ports.[2] However, if one looks at the overall situation on the "sanctions front," it seems far from being aspirational – for many reasons, among which I will mention the three most important ones.

(Source: Twitter)

A Heavy Price For Europe

First, contrary to many cases of sanctions that have been previously imposed by the Western powers on other countries, the sanctions against Russia seem to in­flict much greater damage on those who execute them than on those whom they target.

Russian losses caused by sanctions are difficult to estimate but one may count the change in a country's exports, the decline in certain industries, like those of pas­senger vehicle production, natural gas exploration, aviation, and aircraft construc­tion, among others, and direct losses such as the seizure of Russian pro­perties and reserves abroad.

If all this is calculated by comparing 2023 figures with those from 2021, one may conclude that exports fell by a bit more than 10 percent. The decline in indu­s­trial production driven by the outflow of Western investors might be estimated at 1.6-2.2 percent of GDP (about $30 billion) if one supposes that all automobile and aviation production has stopped, while the ar­rested Russian funds amount to $380-400 billion if private assets are included. Western action im­mobilized around $60 billion in Russian investments in foreign stocks made thro­ugh the Moscow Exchange.[3]

However, there are counteracting factors that are not always mentioned. The sancti­ons forced Russia to default on its foreign debt and thus prevented it from paying Western creditors up to $20 billion so far.[4] Moreover, in what I cal­led "the robbery of the century,"[5] the Russian gover­nment and private companies took over numerous Western assets in Russia valued at more than $100 billion,[6] so­me of which were guaranteed by European governments.[7] Shares of Russian companies belonging to the Western investors and valued at around $35 billion were also frozen in Russia.[8]

Moreover, at least $50 billion in private funds flow to Russia from other jurisdictions because their owners fear their money may be confiscated.[9] So, I would say that the sanctions have inflicted $230-240 billion in damage to the Russian economy so far – but at a heavy price for Europe. The Europeans admit they have overpaid up to €800 billion because of skyrocketing energy prices alone,[10] which ap­pears to be a direct result of the energy embargo levied on Russia in 2022 and the speculations on energy markets that followed. One may cite many other examples of collateral damage, like the additional costs for European airlines to bypass Russian airspace,[11] the declining revenues for the tourist industry, the falling demand for financial and judiciary services, etc. However, in any case, Europe alone has lost at least twice as much as Russia since the start of the war. Many experts argue that the West's losses are finite and will turn into benefits as it overcomes its dependence on Russia while Russian losses will last for years, leading to the country's economic decline and demise – but today no one may be sure of this perspective.

Splits In The Western Bloc

Second, the current sanctions policy vis-à-vis Russia has created far more controversy, splits, and quarrels within the Western bloc than has any other case in which the sanctions were implemented. While at the beginning of the process it was managed with complete unity, as time passed sanctions against Russian created tension among countries in the West.

By the end of 2023, I would site the special position of several EU countries that managed to soften or amend some important sanctions proposals. For example, Cyprus, Greece, and Malta op­posed sanctions against oil exports,[12] Hungary opposed any sanction proposals con­cerning the nuclear sector,[13] while it and Slovakia also secured themselves a privileged po­sition in importing Russian oil and oil products, etc.[14]

In recent months the U.S. introduced sanctions against the Russian Arctic LNG projects that possess no relations to the U.S. and are not using American investments[15] – but significantly undermine Eu­ropean natural gas supplies as the LNG shipments from Russia have been growing for many months since the end of 2022.[16] The U.S. administration, which is facing pre­sidential elections later in the year, cannot find a way forward for providing additi­onal support to Ukraine[17] and therefore is pressing the European nations to con­fiscate around $300 billion of the Russian Central Bank's reserves, which are held mostly in Europe.[18] Such an action may, as the European officials respond, be considered a breaking of international law and cause a deep distrust toward the European financial sec­tor followed by a dramatic outflow of foreign funds from the Eurozone.[19]

The entire collection of issues involving Western countries' trust to each other and the reliance of the whole world on these nations can be called the second impor­tant problem caused by the sanctions levied on Russia, and this problem might become much de­eper than the disagreements produced, would one say, by the U.S. decision to start the war against Iraq in 2003.

Side Effects On The Legal And Judiciary Foundations Of Western Societies

The third and most important issue is the effect the sanctions may have on the legal and judiciary foundations of Western societies. To my mind, they affect them at least in three extremely important ways. The most crucial of them is the fact that the sanctions are mostly imposed by the executive branch of power, not by the legislative one, which indicates an enormous growth in its authority. The recently adopted EU bud­get for 2024 that became a subject of numerous talks between the European Parli­ament and the Commission, includes €189.4 billion in commitments, while the san­ctions packages causing much higher leverage on European nations' budgets, never went to the Parliament for deliberations.[20] The sanctions are now evolving into a separate domain of jurisdiction that looks invincible to any involvement by the judiciary.

In Europe, the European Court of Justice delivered only one ruling lifting the sanctions imposed on a Russian citizen: this lucky man was Alexander Shulgin, the former CEO of a Russian online retailer,[21] who was sanctioned for participating in a meeting of business leaders and oligarchs called by President Vladimir Putin on the first day of the invasion of Ukraine in 2022[22] and retired from his position la­ter the same year.[23] The Court agreed that by "the sole fact that he participated in a meeting...  he could possibly have been held to be responsible for actions or policies undermining or threatening stability in Ukraine."[24] In all other appeals the sancti­ons remained in place, while several of them were lifted in the same way they were imposed – through decisions of the European Council.[25]

In the United States, not a single court ruling was delivered in favor of those subjected to the sanctions, and in the UK the number of cases is growing in which lawyers reject offers from businesspeople asking them to represent their interests in court in the case of sanctions issues.

I would argue that at this point the balance between the legislative, executive, and judiciary branches of power looks corrupted; one may say that the matter belongs to foreign policy issues where the executive powers have full authority – but in fact it concerns predominantly do­mestic issues as many of the sanctioned people had legal grounds to reside in the Western countries. Moreover, I would add that the sanctions cannot be considered a court ruling that proclaims someone guilty, since they are not the result of any deliberations in court, but they affect the privacy and proper­ty rights of those sanctioned, which fundamentally contradicts the point that there should be no punishment except those ordered by a court.

The Principle Of Retroactivity

Another important issue considers the fundamental principle of retroactivity, which has a basic importance to any rule-of-law political order. I already cited the case of Mr. Shulgin, but there were more than 20 people at the February 24, 2022 meeting with President Putin.[26]

All of them were put on the sanctions list between February 28 and June 20, 2022, and in every decision the me­eting was mentioned as a reason for the move. But prior to the start of the war no one had announced that participating in such gatherings is a crime – it would be fine if the EU authori­ties first designated Putin as a war criminal, which in some sense was done by the International Criminal Court on March 17, 2022, after almost 13 months of ongoing war,[27] and later announced any meeting with him would result in sanctions. Yet, this was not the case – moreover, many sanctions were imposed for deeds undertaken years before they were announced.

It means that the fate of some people now depends on the acts of others in a situation that cannot be chan­ged (Several Russian businessmen were charged for being involved for years in military production considered a legitimate business before 2022 and for which dozens of Western companies supplied elements and spare-parts) but because of Putin's aggression they became criminalized for their past actions, and, I would add, not one of the Western suppliers for the Russian military industry was criminalized.[28]

Moreover, the sanctions regime presupposes that the circumventing of sanc­tions is a crime by itself and this applies not only to sanctions imposed on Russia, as many international banks were fined for violating international sanctions against Cuba, Iraq, or North Korea,[29] yet the sanctions still are considered a temporary measure. Therefore, one may suppose that someone may be penalized, for example, for as­sisting the Russian Central Bank in getting its sanctioned money back and remain in jail even after the war in Ukraine is over and the funds are released. This dilem­ma also raises a lot of questions.

The Temptation To Label A Group Of People As "Oligarchs"

The last point I would address here is the violation of the principle of equal judgement before the law contemplated for the same crimes. If the sanctions address some in­dustry (like those banning the air traffic between Russia and the Western nations)[30] or product (like the EU embargo on Russian crude and processed oil,[31] or the prohi­bition on selling military technologies or spare parts to Russian entities,[32] that is well and good – but many sanctions are imposed on individual enterprises and/or private persons, and there are dozens of cases in which certain people and entities appear at the sanctions lists, although others are not, even if they are engaged in si­milar business. I would even argue that these sanctions are often used as an instru­ment for sidelining companies or entrepreneurs and taking over businesses. The most intriguing example is the case in Ukraine in which Rus­sian tycoon Mikhail Fridman, whose bank was recently nationalized by Ukrainian authorities,[33] is accused of assisting the Rus­sian army in invading Ukraine since his insurance company provided services to the Russian police forces and for this he was de­­clared a criminal and put on international wanted list – while Sergei Chemezov, a close friend of President Putin and the CEO of Ros­tech, the main military-industrial holding, is just "suspec­ted" in assisting the Russian invasion with no cri­minal charges brought against him in Ukraine after two years of war.[34]

The same could be said about Russian banks, 36 of which have been put on different sanctions lists while the remaining 290 were not – and now many of the latter show a rapid growth in assets and profits since the clients simply change banks to get the previously enjoyed quality of service.[35] On the other hand, there is the temptation to label some group of people "bureaucrats" or "oligarchs" and to sanction them all (such an attempt was made by the U.S. regulators in 2017 when they considered all Russians entrepreneurs with a fortune of $1 billion or more to be "oligarchs")[36] but this approach was found irresponsible by the European authorities who dismissed the use of the term in 2023.[37] I would say that the judgment of this group also looks like a grave infringement on the principle of individual responsibility.

Last but not least is the issue of citizenship: If a Russian businessman possesses foreign citizen­ship and is doing business in Russia, this person is tre­ated as a Russian entreprene­ur (there is also a famous case of Putin's friend Gennady Timchenko, who acquired Finnish citizenship almost 20 years ago but was put on a different sanctions lists by the European governments),[38] but if some European is doing business in Russia and paying significant taxes into the Russian bud­get (as, for example, the CEOs of French trade giants Auchan and Leroy Merlin or of Austria's Raiffeisenbank do)[39] or suppling Russia with critical technologies (like the management of Total Energies which participates in oil and gas drilling in the Arctic),[40] the person remains immune to sanctions, as no EU business was sancti­oned for doing business in Russia or embracing President Putin.

Conclusion

Of course, the sanctions policy has become an important instrument of pressuring autocratic and aggressive regimes to stop their wrongdo­ings, and therefore such practices cannot be abandoned in the foreseeable fu­tu­re. However, I would reiterate this instrument should be used with great prudence and caution because it now looks that it can inflict serious harm on the Western powers – on the one hand because it may cause significant damage to their economies, in many cases exceeding that brought on the sanctioned country, and on the other hand since it undermines the very fabric of the rule-of-law-based society that for centuries served as the best guarantee for Western social and economic success. Therefore, I would suggest that it might be the best choice to refrain from developing new sanctions, to use the existing ones for the time being, and to focus the main effort on providing military and financial aid to Ukraine,[41] which may be far more rewarding than any sanctions imposed on its enemies.

*Dr. Vladislav Inozemtsev is the MEMRI Russian Media Studies Project Special Advisor, and Founder and Director of the Moscow-based Center for Post-Industrial Studies.