Sanctions against Russia to save Ukraine and the Chinese factor, analysis by Dionis Cenușa

Op-Ed
	Moscow's main concern is to survive the storm of sanctions and adapt its economy by substituting and diversifying imports. However, these goals are complicated by the fact that any third country that wants to help Russia risks being contaminated by Western sanctions…
Dionis Cenuşa, Senior Contributor

Sanctions against Russia, albeit belated, are Ukraine's vital tool in fighting the Russian invasion after receiving foreign military aid. The first Western sanctions with a significant economic impact were triggered immediately after Russia's recognition of the independence of the breakaway regions of Luhansk and Donbas (February 23). The others quickly followed after the start of the war on February 24.

Even after more than three weeks of war, Ukrainian leader Volodymyr Zelenskiy reiterates that the West is behind on sanctions. In his opinion, these could be introduced as a preventive measure to deter Moscow (Interfax, March 2022). Nevertheless, this approach has been ignored on both sides of the Atlantic. Although the sanctions regime was developed and coordinated in advance, Washington and European capitals did not want to apply it preemptively. They saw the hasty application as a tactical weakness, which would have undermined its effectiveness. Instead, the focus was on direct negotiations with Russia, which the latter used to feign goodwill until the start of the military assault on Ukraine (simultaneously on three fronts: north, south and east). However, the current sanctions are affecting the Russian economy, but still do not have the necessary impact to stop the destruction, loss of life and Russian territorial occupation in Ukraine.

Virtually all of the sanctions, except for blocking oil, gas and coal exports, were launched between February 23 and March 22. Unlike the US, which has given up buying energy resources traded by Russia (White House, March 2022), EU countries are reluctant to make sharp moves in the same direction due to excessive energy dependence on Russia . The EU and Member States are preparing to get rid of the dependence on natural gas (2/3) by the end of 2022 and are looking for solutions to replace oil and coal imports, including increasing investment in renewable energy by 2030. In fact, the diversification of energy imports in the EU should have started 8 years ago, immediately after Russia's territorial seizures in Ukraine (Crimea, the separatist territories of Luhansk and Donbas) and instead of promoting the Nord Stream 2 gas pipeline and renew natural gas contracts with Russia. Sanctions against Russian oligarchs with confiscation of assets also seem late and should have been introduced two years ago, after the attempted poisoning of Aleksey Navalniy (in 2020). Last but not least, the comprehensive sanction of the Lakashenko regime, which played a key role in launching the Russian invasion, was justified in 2021, after the forced landing of Ryanair and the triggering of the migration crisis at the border with the EU (IPN, November 2021). The imposition of non-preventive sanctions, as well as the untimely and inadequate sanctioning of Russia and its geopolitical allies (Lukashenko's regime) for their actions fueled the Kremlin's sense of impunity and probably even inspired Putin to launch a full-scale war against Ukraine.

Stop the war or punish Russia?

So far, at the EU level alone, four sanctions packages (in total 31 measures) have been introduced against Russia in connection with the unprovoked and unjustified war against Ukraine (European Commission, March 2022). For complicity in organizing and carrying out the invasion, the sanctions were extended to Belarus. Some of the sanctions introduced so far are aimed at disconnecting a large part of the banking sectors of these countries from SWIFT and the European financial market, and any transfer of Euro currency is prohibited. The reserves of the Central Bank of Russia in the EU have also been frozen, which means reducing the financial resources available to Moscow to accommodate the sanctions. Of the total $643 billion in foreign accounts (EU, G7, Switzerland, South Korea, etc.), only $150-200 billion is available.

The EU continued to restrict imports of valuable goods to Russia (steel, at least €3.3 billion a year), with imports from Belarus affected by up to 70%. Furthermore, the EU and the G7 will not apply the "Most Favored Nation" principle to Russia. Other restrictive measures (transportation, aviation, etc.) have been introduced to attack the Russian economy in order to end the war, as well as targeted sanctions against Russian media - Russia Today and Sputnik (see Table below).

Table. EU sanctions against Russia and Belarus in the context of aggression against Ukraine, February 23 - March 15, 2022

Source: Compiled by the author based on data from the European Commission

In addition, the EU has activated individual sanctions against 877 people and 62 entities. To prevent that oligarchs, economic elites and Putin’s proxies, as well as their Belarusian couterparts, from escaping sanctions, the EU, together with the G7 and Australia (32 Western states), has established a "Freeze and Seize" Task Force. The latter must ensure the correct application of the provisions for the identification, freezing and confiscation of assets. Unlike the EU, the US has issued a list of prioritized names, which includes 50 people, including Vladimir Putin. At this stage, France has managed to freeze around 150 million euros belonging to sanctioned Russian citizens and properties worth 500 million euros. So far the future of the seized assets is unknown. Ukraine has proposed to use the accumulated money to cover the costs of war reparations, which could exceed 100,000 million dollars. Another option is to condition the return of frozen assets in exchange for progress in the complete territorial de-occupation and withdrawal from Ukraine by Russian military forces.

Counter-sanctions and first steps to adapt

In response to Western sanctions, Russia compiled a list of "unfriendly" states, which includes 49 states (NG, March 2022), including the EU, G7 states, and Ukraine. In the same context, the Russian side has established a blacklist, which currently includes 13 US politicians, including President Joe Biden, against whom personal sanctions are applied for the alleged "promotion of Russophobic messages" (MID, March 2022). One of the most likely counter-sanctions initiated by Moscow may be the nationalization of assets belonging to companies from these states, especially if they withdraw from the Russian market. Until then, the business of the departed companies is under the "external administration" of the Russian government. In total, as of March 20, some 400 international companies have permanently closed their offices in Russia or temporarily suspended operations (Yale.edu, March 2022). These companies self-sanction in order to avoid association with Russia, prevent secondary effects of sanctions, or indirectly contribute to the financing of the Russian budget, which allocates resources to carry out military aggression against Ukraine.

A series of intervention measures have been initiated, in line with Putin's instructions to "adapt" to the sanctions, which, in his opinion, would have been introduced anyway (TASS, March 2022). At least five important adaptation measures taken by the Russian authorities since the launch of the Russian military aggression against Ukraine on February 24 can be highlighted.

First, the government is trying to allocate funds from federal resources to lend to commercial banks and the business community, in order to ensure the financial stability and functioning of the economy. By the end of 2022, at least $24 billion (2.2 trillion rubles) could be made available for this purpose.

Second, after Master Card and Visa ceased operations in Russia (as of March 10), Russian banks began looking for ways to secure international payment opportunities for Russian citizens. Although the MIR card has more than 75 million debit cards (30% of the market), it allows the payment of services in the countries of the Eurasian Union, Tajikistan, Turkey and Vietnam. Therefore, its usefulness is extremely limited. In this sense, Sberbank is studying the possibility of issuing cards that combine the MIR payment system with that of China, represented by UnionPay (more than 4 million cards in Russia), operating in 180 countries around the world (Bloomberg, March of 2022). Along the same lines, some Russian banks are preparing to open yuan deposit accounts for the entire population, after previously being available only to elite categories of clients. These steps allow the liberalization and popularization of the use of Chinese currency in Russia. Even if Western sanctions lead to the de-dollarization of the Russian banking-financial system, the massive use of Chinese currency or the “yuanization” of the Russian economy takes time to come to fruition (Kommersant, March 2022). In addition, banks have started to launch new online payment services. Thus, GazpromBank developed the GazpromPay service, which conceptually resembles the Paypal system. GazpromPay allows you to connect existing cards and create new virtual accounts, through which payments can be made online, including from local online stores.

Third, after disconnecting from the SWIFT international transfer system, the Central Bank of Russia expanded the operations of the National Payment Card System (SNCP), which was under development and limited use after the introduction of the first economic sanctions against Russia in 2014 (for being involved in the MH17 civil plane downing). The disadvantage of the SNCP system lies in its compact geography, which includes only Russian operators. At the same time, the Russian side has hinted that foreign entities will be able to connect to the Russian bank transfer system.

Fourth, central and local authorities have initiated loan programs to develop import substitution capabilities or activities carried out by Western companies leaving the market. For example, the mayor of Moscow, Sergey Sobyanin, has launched an anti-crisis "road map" to support the business environment in the context of sanctions. The proposed measures include the initiative to allocate a total of about $4 million (500 million rubles) in the form of loans for the construction of local networks of fast food restaurants. The move came after McDonalds announced the suspension of its operations in Russia (The Guardian, March 2022).

Fifth, in order to avoid an acute shortage of IT products and other technologies in the short term, the authorities have prohibited the export of 200 categories of goods. These include both technological and medical, agricultural and electrical equipment, including means of transport, but also some wood products, etc. In this way, the Russian side is trying to reduce the effect of Western sanctions, which are aimed at crippling the Russian economy and stopping the war against Ukraine, respectively.

The Chinese factor and "sanctionsphobia"

China has declared "neutrality" both in the face of Russian aggression against Ukraine and in the face of sanctions against Moscow. A strategic alliance between China and Russia is essential to divert Western attention from Chinese aggressive foreign policy towards its Asian neighbors. Similarly, the impact of Western sanctions on Russia's political and socioeconomic stability concerns Beijing. It cannot be ruled out that similar sanctions against China could be imposed at any time as a punishment for human rights violations in Xinjiang, Tibet or Hong Kong. China shares the same, but even more pronounced, concerns about the support Taiwan may receive from the West if the Chinese side decides to use military solutions to take control of the island. It is from these considerations that the official Chinese discourse highlights that the Taiwanese case is internal, therefore, it would be incomparable with Ukraine, which faces aggression from a third country.

The prolongation of the Russian military aggression in Ukraine (already for more than 3 weeks) strengthens, deepens and diversifies the regime of sanctions against Russia, which once implemented will become precedents in the management of other global affairs. Therefore, China's room for maneuver is quite limited. On the one hand, according to Chinese Foreign Minister Wang Yi, political relations with Moscow are "rock solid" (Reuters, March 2022) and cannot simply be abandoned in order to maintain the balance of power towards the US and the EU. And on the other hand, China wants to protect its industry and exports from the spread of sanctions on them. The US has warned of sanctions if Russia receives military or economic assistance from China. In this context, the message of Chinese diplomacy is to seek specific "diplomatic solutions" to the Russian aggression against Ukraine (CNN, March 2022). At the same time, pro-Beijing media sources express official dissatisfaction with the unilateral imposition of sanctions (against Russia) and interpret US warnings as an attempt to damage Sino-Russian relations (GlobalChina, March 2022). In the context of EU and US support for Ukraine, China seems more than determined to provide political support to Moscow. At the same time, the use of extraterritorial sanctions is circumvented by bypassing the UN Security Council, where both China and Russia can exercise their veto. Apparently, China considers the depth and speed of the sanctions against Russia totally inappropriate. The simplification of decision-making processes for the adoption and coordination of sanctions among Western states gives them a superior strategic advantage over geopolitical actors perceived as "systemic rivals", as is the case with China.

If Western sanctions remain intact, meaning future post-war agreements between Ukraine and Russia will not work, then the Russian economy will remain isolated. Under such conditions, Russia could become a "North Korea" dependent on Chinese imports and loans. Furthermore, although the Russian banking system shows interest in replacing the dollar with the Chinese currency (yuan), Chinese companies maintain a certain distance from Russia so as not to compromise their access to Western financial markets. However, the situation may change if Russia faces unbeatable Ukrainian resistance and China decides, at the highest political level, to take the risk of sanctions and firmly support Russia.

In lieu of conclusions...

Russia has serious dilemmas ahead. Its economic situation is too fragile to come with proportionate counter-sanctions, and the only measures are political symbolism and have no effect in the West. Moscow's biggest concern is surviving the storm of sanctions and adjusting its economy through import substitution and diversification. However, these goals are complicated by the fact that any third country that wants to help Russia risks being tainted by Western sanctions.

Russia's capitulation to Western sanctions creates more problems for Beijing than if the Russian military manages to force Ukrainian leader Volodymyr Zelensky to surrender. Therefore, the neutrality invoked by the Chinese side favors the survival of the regime of Vladimir Putin, whose military adventure in Ukraine shakes the ground under his feet. Beijing does not support sanctions against Russia or the idea of ​​providing military assistance to strengthen the Ukrainian resistance. And yet, these are the only ways to increase the costs of the war for the Russian side and create the necessary conditions for signing a ceasefire truce.

This analysis is published for the German Hanns Seidel Foundation and the IPN News Agency.

IPN publishes in the Op-Ed rubric opinion pieces submitted by authors not affiliated with our editorial board. The opinions expressed in these articles do not necessarily coincide with the opinions of our editorial board.