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A year ago tomorrow was when Russia’s campaign to subject Ukraine to Vladimir Putin’s will turned into a full-scale invasion. By launching it, the Russian president and his colonialist autocracy broke two things. One was the postwar international order, until then threadbare but still holding. The other was the reigning perception in the west that autocracies could be somehow accommodated for mutual benefit. But if the former shattered, the latter merely cracked.
It is something to celebrate that the scales have fallen from many western eyes — the most important cases being Germany’s Zeitenwende and its recognition that it was a mistake to cultivate energy dependence on Russia, as well as how impressively fast Europe has freed itself from that dependence. Yet too many western leaders hold on to old misconceptions about the Russian regime. Some think “we” must eventually push for some solution that Putin, too, finds acceptable (which is what we did in Georgia in 2008 and Ukraine after 2014 — bringing to mind the apocryphal Einstein remark defining insanity as doing the same thing over and over while expecting a different result). Some say Putin/Russia (these views tend to conflate the two) must not be humiliated (as if the dictator’s life-long sense of humiliation, rooted in the Soviet Union’s collapse, would be overcome by anything less than totally dominating Ukraine).
I think what sustains this misplaced awe for Russia is the tendency to see its war on Ukraine as “merely” a war over who gets to control territory. It is, however, so much more a war about how the territory in question is governed. To see this, we need to pay more attention to the nature of Russia’s occupation, both in regions it has seized in the past year and those it invaded since 2014. A good place to start is Anne Applebaum and Nataliya Gumenyuk’s article, based on the work by the Ukrainian Reckoning Project. (It doesn’t hurt, too, to reread the literary classics on totalitarian regimes, as explained by their own henchmen in works such as Darkness at Noon or 1984.)
The difference in “governance” — too bloodless a term — between Russia and Ukraine is not just down to one sanctioning torture, rape and plunder and the other not. As I wrote on the day of last year’s invasion, it is also a matter of the economic system each country has been putting in place: Ukraine has been violently punished for Europeanising its economy — a system that for all its flaws is inimical to Russian control. Understanding these differences, which go deeper than simply where the border is drawn, is crucial for keeping our eye on the ball and staving off “Ukraine fatigue” in the west. I warned about that risk last May and was pleasantly surprised to see that my fears were not confirmed: western resolve has held up well.
This must continue. And that means redoubling support for Ukraine’s existential struggle and European future. What does that mean? This is not a column for military analysis, but with an economist’s game theory glasses on, we can at least point out that the weapons the west has slowly become willing to give would have done more good — on the ground and in terms of deterrence — had they been granted faster and with less hand-wringing: it would have made clearer, sooner, the cost to Russia of Putin’s crimes.
This is, however, a column for economic analysis, and in economic terms this is already a war between Russia and the west. Putin unleashed his economic warfare in 2021 when he dialled down gas deliveries to Europe, which meant its reservoirs were unusually empty as winter arrived, and higher prices were intended to soften up Ukraine’s western friends. Since then, of course, the west’s response has been much more forceful than anyone thought. The EU has put together 10 sanctions packages in almost the same number of months, and the scale and scope of the sanctions from the united west have been unprecedented.
So, in the next two weeks, I want to look more closely at a particular set of sanctions. From an economic point of view we can distinguish between sanctions on stocks of valuable assets that belong to the Russian state or individuals connected with it, and those on the flows of resources in and out of Russia. Some of the early sanctions were on stocks, most significantly the path-breaking move to sever Russia’s access to its foreign exchange reserves in western countries. In addition, of course, many private assets of the Kremlin’s henchmen and corporate proxies were frozen.
In sanctions policy since then, the focus has mostly been on further restricting the flow of resources to and from Russia. In sanctions on flows, two areas have rightly taken pride of place. One is Russia’s sale of energy resources — with most oil sales now banned from most of the west, and a price cap required for any other sales serviced by western companies. The other is Russia’s ability to import goods that helps it perpetrate its assault on Ukraine, such as advanced semiconductors and other tech that hugely enhance military strength. These have done a lot of good and should all be tightened further.
But there is a need to go back to the earliest sanctions on asset holdings, for a number of reasons. First, because the move of blocking official reserves was unprecedented and done at extreme speed, it had flaws. Over time, the sanctioning coalition has had to recognise both that it did not cause the financial collapse it was intended to, and there were many shortcomings in the way the measure was designed. An overhaul is overdue.
Second, while sanctions on flows may be expected to hurt more over time — the longer you are without an income, the worse it gets — that is not necessarily true for sanctions on stocks of assets. German chancellor Olaf Scholz recently wrote in Foreign Affairs that “sanctions would have to be in place for a long time, as their effectiveness increases with each passing week”. But in the case of central bank reserves, the opposite is the case. Not just because of design flaws, but because even the best-designed asset freezes hit at once. If anything changes over time, it is that those whose assets are frozen find ever better ways of coping without.
And also because, third, flows become stocks over time if they are not consumed. The fact that the sanctioning countries left untouched Russia’s energy sales to Europe for so long, even as they made it harder for the country to import most things, means that the country has built up a cumulative surplus nearly as big as the reserves that were blocked after the invasion: in all of 2022, Russia’s current account surplus was more than $220bn. There is, in other words, a big pot of Russian state money that can in principle function as “shadow” foreign currency reserves. That makes it timely to ask whether they blunt the effect of blocking the reserves, and what to do about this.
Last but not least, because the amounts involved in the stocks of assets are enormous. The Central Bank of Russia itself estimated that it lost access to about half of its reserves, or a staggering $300bn or more. The saved export surpluses come on top. This is serious money, and only amounts of this magnitude will be enough for Ukraine’s reconstruction. The frozen private assets of oligarchs are woefully inadequate in comparison — the European Commission’s “freeze and seize task force” has put them at €30bn across the EU.
What happens with Russia’s state assets, both official reserves and accumulated energy surpluses free from sanctions, matters enormously both for winning the war and for winning peace. It’s good that the sanctioning coalition has returned its attention to them (not before time): last week the Swedish prime minister announced the creation of a working group looking at the possibility of using Russian assets to rebuild Ukraine.
So, in the next few weeks, I will pick up the pace here in Free Lunch, with a series of twice-weekly newsletters. On the next Tuesdays and Thursdays, I will go through what we know and what we don’t know about both the blocked reserves and the accumulated energy profits. I will also cover the debate that’s being had — and the debate I think we should be having but aren’t — on what to do about both.