Interview: Russia Sanctions
#78: With Janis Kluge
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Janis Kluge is Deputy Head of the Eastern Europe & Eurasia Division at the German Institute for International and Security Affairs (SWP). He writes Russianomics, a newsletter about the Russian economy. Our questions are in bold, his answers in block quotes.
How is Russia’s economy structured?
Russia’s economy is a relatively diversified market economy. Fossil fuels and the military-industrial complex are key parts of the economy, but 60% of GDP is generated in the services sector. Russia’s economy used to be relatively open for international trade, but sanctions and Russian countermeasures have isolated it from key parts of the world.
What is the idea behind sanctions against Russia?
There is not one single idea. Sanctions serve several goals. The most important one is to make it harder for Russia to attack Ukraine. But sanctions are also a signal to the rest of the world. They should also make Russia less of a strategic threat to Europe in the long term.
What sectors have been targeted?
The most severe sanctions are on the Russian energy industry, the military industry and the financial sector. Some companies or sectors are not sanctioned, for example food and medicines. There are also intentional gaps in sanctions to allow Russia to export fuels.
How has the Russian government responded?
The most important response came from the Central Bank, which managed to uphold macroeconomic and financial stability in the first few weeks of sanctions by introducing capital controls and raising interest rates to 20%. The government added subsidies for businesses that were suffering the most, such as airlines and the car industry.
To what extent have sanctions impacted the economic situation of ordinary Russians?
It is difficult to say what an “ordinary Russian” is. Generally, sanctions hurt the middle class the most, because they used to consume Western goods and travel to Europe. For very rich Russians, it is more of a hassle, and some have lost a share of their fortunes, but they are still doing OK. Overall, sanctions have not affected poorer Russians very much.
How about oligarchs?
Sanctioned oligarchs lost most of their wealth. There is certainly a lot of pain on the individual level, because these people loved to be in the West and be part of a global elite. Read any interview with a sanctioned oligarch – they are really bitter. No more Davos, no more Cote d’Azur. They are hurting (on a very high level).
How have Western sanctions changed over time?
Most significant sanctions were introduced in the first year of the full-scale invasion. Since then, the focus is on finetuning and fighting circumvention. More recently, the most impactful measures were introduced by the US. By threatening secondary sanctions against banks that help circumvention, they made life for Russian importers much harder.
How much of an issue is sanctions evasion?
There are many different ways in which Russia tries to adapt to sanctions. Sanctions evasion is particularly important for the energy industry and the military-industrial complex. Evasion does not make sanctions ineffective, because it is costly. The fact that Russia has to pay extra to get around sanctions is part of the costs imposed by sanctions. Sanctions will never be airtight.
What could Western governments do to make sanctions against Russia more effective?
It depends on the risks they are willing to take. Sometimes there are demands for measures that are risky and would bring economic blowback for the West, because energy prices could rise globally. Right now, Western governments focus on measures that are essentially risk-free, because they are worried about inflation and elections. This means they have to keep playing the game of whack-a-mole with circumventers and try to be creative with new countermeasures. Sanctions are also evolving and becoming smarter, not just the circumvention schemes, as Western governments (especially the US) are gaining experience with the Russian case.
What’s a question you wish you were asked and what’s your answer to it?
How long Russia can last economically: Probably a few years, but things are changing for the worse already. Russia so far has had no success with fighting inflation, which increased because of labor shortages, military spending, but also sanctions. More and more Russians will feel the war in their wallets, which could become problematic for the Kremlin politically, because most Russians are not interested in the war and not willing to make sacrifices for it.
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Sanctions also helped convince hundreds of thousands to flee the country. While the draft was the key driver, the diminished economic landscape and no hope of relief led many who had the means to leave to surmise that the country had a very dispiriting future outlook.
This sniffs like Pravda:
- sanctions are meant to create regime change
- sanctions aren't working, GDP is growing