The sanctions imposed on Russia by the US for its illegal invasion of Ukraine are not of the same class as those adopted hitherto. They are starkly different in nature and scope even from those imposed earlier on Russia in 2014 when it occupied Crimea. This time around, they are joined by other European allies. Unlike in the past, the sanctions are total or comprehensive and the intention is to isolate Russia from the global economy.
The Wall Street Journal published a piece titled “The West’s barrage of sanctions severs Russia from much of the world” (February 28). Another article summarised the sanctions thus: ban from SWIFT, banking restrictions and export controls. Putin has described the actions as “economic warfare.” Many analysts agree with the charge.
When initial reports emerged about Russia’s exclusion from SWIFT, which was not normal or legal, there were debates among experts on alternatives. The reference was to China’s CIPS and the emerging digital fintech systems that are considered to be superior to SWIFT in terms of cost and efficiency, though it was admitted that they would take time to become operational. These debates became secondary with the barrage of sanctions unveiled in the following weeks.
The US is habituated to sanctions and has been using (or abusing) its global dominance and the extraordinary role played by the American dollar as a reserve currency. To date, more than 20 countries are subject to sanctions. Most are limited in scope and seek to promote the economic interests of the US or US-owned MNCs. Several studies have shown that “the US keeps turning to sanctions despite their mixed record” (NPR, February 24). In more recent years, especially under Donald Trump, they were based on the whims and fancies of the President and also turned into foreign policy tools. Sanctions against Cuba, Iran and North Korea have failed to achieve the objectives even after long years when those countries had to undergo hardship and face shortages of medicine, food, etc.
Even after such a frustrating record of sanctions, why did Biden decide to impose a ferocious package on Russia? One may give him the benefit of doubt and argue that, perhaps, his advisers learnt from experience and were determined to make the sanctions this time total and as fierce as possible to punish an aggressor. However, Global Times quoted a Chinese academic as saying, “There’s a possibility that Joe Biden is showing his hardcore posturing on global issues to American voters, in order to rescue his falling support rate.” (March 14)
Whatever the official objectives behind these sanctions, if we study their impact not only on Russia but also on others, it is ominous. Unwittingly, it destroys a global order that was evolved during recent decades, paradoxically, under US leadership, pressure, persuasion and guile. The sanctions will create a bipolar Cold War scenario with no clarity on which country will be on which side.
The earlier global order, which was called “rules-based”, offered an opportunity to many counties even with all its asymmetries and infirmities. Globalisation had become the mantra for many nations. The sanctions will result in reversal of the process by severing the links and structures regardless of political allegiance. It may Balkanise trading groups.
A part of the sanctions concerns restrictions on banks. The Office of Foreign Asset Control list (OFAC) has stopped Russia’s central banks, the country’s finance ministry and the national wealth fund from accessing the dollar. American banks are advised against any dealing with Russian banks. What is extraordinary is that Russian assets valued at $630 billion are frozen. That means Russia cannot use them until Uncle Sam permits it. Many analysts have questioned the wisdom of this decision. Dollar became a “safe haven” because of its safety, liquidity and value. The US had an unsullied record of holding them. Jim O’Neill, formerly of Goldman Sachs, wonders “whether this episode set the stage for the kind of monetary and financial fragmentation that some analysts long anticipated?” (Project Syndicate, March 2). Some analysts take the view that it could shake the faith in the dollar and lead to the rise of currency arrangements linked to yuan, rupee or others. They foresee the decline of dollar dominance.
Cross-border currency and foreign transactions are so interconnected that it is not practicable to unravel the source or nationality. They are at the bottom of loans, mortgages or other arrangements. Though the initial impact of sanctions is modest, the full outcome is yet to emerge since we do not have a full idea of interlinked contracts. As Gillian Tett from the Financial Times put it, “Financial war, like the real variety, creates aftershocks and collateral damage. It would be naive to think this will hit Russians only.” (War in Ukraine threatens global financial system, March 3.)
There are serious implications such as the disruption of supply chains impacting areas like energy, food supplies, defence and trade. They will require a separate column. The immediate problem is to settle a bilateral arrangement. As explained by the MEA spokesperson Arindam Bagchi, there is lack of clarity and the government is awaiting details of unilateral sanctions. He ducked the question of the restoration of the older rupee-rouble model.
We have to face major disruptions or even chaos in many areas like trade, finance, etc. as a result of these unilateral US sanctions that hurt others. The only hope is that with the cessation of the war in Ukraine, the US administration will moderate them. These sanctions are not forever.
Served in the Ministry of Finance, GOI, and retired as Joint Secretary