n the eve of Russia’s expanded invasion of Ukraine, few could have anticipated the extent to which the West, led by the United States and United Kingdom, would respond. Speculation abounded with many assuming that even if it did take place Washington and London would respond strongly with sanctions, but there was little expectation that the broader Western alliance would respond as uniformly as it did. Nearly overnight, 30 years of economic connectivity between Russia and the West was practically severed. Sanctions targeting Russia’s leaders, businesses, and technology transfer were swiftly implemented, with the promise of more to follow. Russian oligarch assets were frozen, yachts impounded, and their travel was prohibited. Most strikingly, Western Europe—Germany in particular—moved to end its reliance on cheap Russian energy, incurring considerable economic and inflationary penalties as a result.
Many hoped that this economic pressure would bring the conflict to a more swift close than would otherwise be possible; that somehow the sanctions would force Russia’s elite to turn on President Vladimir Putin, bringing him to the negotiating table. Now, over 18 months into the war, those ambitious hopes were misplaced, sanctions were never going to bring about an end to the war, and despite the economic pain being felt by Russia, its economy is adapting. These expectations first misunderstood the nature of economic warfare, but also, and even more importantly, failed to see how Russia learned from the West’s response to the 2014 annexation of Crimea and adapted accordingly. This latter element is the subject of Maximilian Hess’s superb and timely new book “Economic War.”
This is a book first and foremost about Russia’s response to Western financial weapons unleashed in response to the country’s malfeasance—notably the Magnitsky Act, which authorizes the United States to impose sanctions on government officials, created after the high-profile death of a Russian tax lawyer of the same name—and Russia’s operation against Crimea and Donbass in 2014.
This is also the story of Russia’s efforts to undermine America’s financial dominance and the efficacy of its economic weapons. Given the dominance of the dollar and Washington’s expansive interpretation of its jurisdiction—any transaction involving a U.S. dollar, in effect—the United States enjoys disproportionate power and leverage. As Hess writes, “Moscow’s efforts to undermine the dollar’s geopolitical influence saw the Kremlin undertake an effort to move away from the currency for international commodity payments in the years between 2014 and 2022.” This was a key discussion point in the recently held BRICS Summit in South Africa, with a number of countries ostensibly pledging to end the dominance of the dollar. Despite Moscow’s hopes, this is unlikely to happen in the near future.
Hess offers a tour d’horizon of Russia’s global efforts to secure alternative trade agreements with countries across Africa, the Middle East, South and East Asia, focusing its energies away from Europe and the United States, and thereby reducing its exposure to the American-dominated financial system. In surveying this effort, Hess offers insights into how Russia did and does business and exposes the overlap (and occasional conflict) of political, personal, and business interests.
It is also the story of Russia’s foreign policy, conducted through economic means. Some efforts were successful, such as its embedding itself within European energy and financial architectures. In others, it was less so, or merely the beneficiary of propitious circumstances. In the Middle East, for example, where Putin found himself in the midst of a price war with Saudi Arabia which sought to strangle America’s shale oil industry, Vladimir Vladimirovich “was not in the driving seat either—the region’s shifting geopolitics played to his advantage not because of diplomatic skill but because Russia’s position as a hydrocarbons superpower offered tactical benefits to the strategic shifts underway in the region’s halls of power.”
In Europe, Russia leveraged its greatest weapons—oil and gas—to create European dependencies on Moscow: “Whereas many in Europe saw economic interdependence as a way to pacify Russia, Putin saw it as a means to limit the West’s ability to stand up to his vision for re-ordering the world.” This was not a wholly altruistic effort, of course. Countries like Germany saw incredible opportunities for domestic interests in the development of deeper ties with Russia and the ability to profit off, and grow from, cheap energy resources from the East. Despite repeated warnings from the United States and Eastern European nations, Berlin and others continued to hope for the best and ignore the possibility the worst could come to pass. Indeed, Russia made energy and economics central pillars of its policies towards the West. “Energy, corruption, and commodities would become key levers for the Kremlin to dissuade Europe from taking hostile action”, writes Hess.
There is no small irony, then, that on the eve of its expanded invasion of Ukraine in February 2022, Russia appeared to be in a strong strategic position. Europe was divided, many of its national economies had grown fat on the cheap energy flowing westward. Its politicians in some cases had become co-opted, or it had successfully engendered enough doubt and opposition within national political movements to offset potential risks. NATO was divided and suffering from “brain death” and was little able to muster a common policy on coffee, let alone on Russia. It was less a function of Russia playing a bad hand well, as some suggested, and more Russia playing quite smartly to its strengths while exploiting the weaknesses of its adversaries. Moscow’s efforts to decouple from the dollar and insulate its economy from Western sanctions met with uneven success, but its policies had yielded some fruit, as Hess writes, at least in the minds of the Kremlin’s leaders.
Russia’s technocrats may well have been markedly less optimistic than Putin about the country’s economy to weather the coming financial storm. Russia had experienced sanctions before and largely escaped significant harm—there was little expectation that 2022 would be any different. It had built up robust reserves of foreign currency and reduced its exposure on the international financial stage. Interestingly, Hess notes that had Russia played its economic weapons better and smarter, it could have more effectively punished the West. Rather than attempting to distance itself from the West, had it worked to deepen its multilateral economic and financial ties in more diverse areas, the untangling that followed February 2022 would have been far more painful and difficult.
Hess masterfully captures the challenge of sanctions, writing that they are “…political restrictions and are therefore shaped by the geopolitical and domestic environment of the countries in which the targeted entities operate.” Despite early (and oddly continuing) expectations, sanctions were never going to bring about an end to the conflict in the east of Ukraine, return Crimea, or halt the 2022 expanded invasion. They are a signal of Western displeasure with Moscow’s particular policies and only as effective as the countries enforcing them choose them to be.
Economies under sanction adapt. North Korea has been under incredible sanctions and technology transfer prohibitions for its nuclear and ballistic missile programs, yet those programs continue to advance. Iran, too, remains under considerable sanctions yet its theocracy remains in place. In Russia’s case, according to U.S. and European officials, Russia has increased the production of arms beyond pre-war levels, even more so than anticipated. At the same time, Moscow has sought out assistance from Tehran to offset weapons shortfalls, and is deepening its ties with Pyongyang hosting Kim Jong-Un, the North Korean dictator, just this week.
In practice, sanctions affect the average Russian far more than they do the oligarch, pressure from whom many in the West assumed would lead to some sort of resolution. To be fair, the sanctions are impacting the economy, sharply limiting the ability of Russian airlines to operate, auto manufacturers to continue production, and more. Russia’s economy is performing far worse than it otherwise would, the ruble is depreciating and a substitution economy has emerged. Yet the average Russian is simply adapting, wishing the conflict would end, and hoping for a return to some semblance of normalcy. Pressure on the Kremlin this is decidedly not, and it does not translate into a cessation of the conflict.
Russia’s efforts to diversify away from the West have drawn it closer to India, which is enjoying cut-rate oil prices, and China, which while keeping Moscow at arms-length is a beneficiary of the West’s pressure. These trends certainly have accelerated since February 2022. It is, however, difficult to see, as Hess writes, that Moscow could have been under any illusions about the nature of the relationship with Beijing. “While Putin saw China as a partner for Russia’s agenda of seeking to challenge Washington, he failed to read how Moscow’s divergence from the West was making Russia more dependent on China in an increasingly lopsided relationship.” Certainly, within Russian strategic analytical circles, the threat from China was well-known and planned for—one imagines that recent history has only accelerated the timelines of their strategic calculus, bringing forward longer-term risks on account of Putin’s short-term failed opportunism. Moreover, it is certain that Beijing is learning the lessons of the West’s response to Moscow’s war against Kyiv, as it prepares for a possible move against Taiwan.
The economic response to the 2022 invasion was, and remains, overwhelmingly Western. The poorly titled “Global South” has not joined in as vociferously or as aggressively as the United States and Europe and is unlikely to do so. Even within Europe, the response has not been as uniform as the narrative would suggest with additional sanctions being held up in late Spring 2023 by Greece and Hungary. Countries like Brazil have refused to sell Ukraine arms, and countries in Africa—in whom Russia has spent considerable time and effort (both directly and through proxies like Wagner)—have remained on the sidelines. This is all the more ironic given that Africa and the Middle East are disproportionately affected by higher grain and food prices resulting from the disruption of exports from Russia and Ukraine through the Black Sea—an agreement governing which just expired and has yet to be renewed.
This is not all a Russian story of perfidy. Many Western companies, as Hess shows, helped Moscow circumvent sanctions, gain access to materials and goods, and move money in and out of the country. The now infamous Kerch Bridge was built using European technology and in which photos of the company’s engineers are seen training their Russian counterparts, despite post-Crimea sanctions. Today, even after over a year of conflict, many Western companies continue to do business with and in Russia, stuck between the reputational risks of doing so and punitive measures from Moscow should they choose to leave. The longer the war continues, the greater the likelihood that Western companies seek to circumvent sanctions or increase pressure on their respective governments to bring the war to a close, if for no other reason than to resume doing business with Russia.
In “Economic War” Hess has penned a truly insightful book about Russia’s broader economic and financial ambitions, its preparation for conflict with the West, and its desire to resume its status as a “great power.” While this is not explicitly the story of Ukraine, it is deeply informative about what would come to pass after Moscow’s expanded invasion in February 2022, and how the conflict with Kyiv could well progress. Vitally, Hess returns clarity and perspective to erroneous assumptions about the efficacy of sanctions and the West’s economic response to Russia’s war against Ukraine. This measured focus is vital if the West is to sustain financial pressure against Russia and to help draw the conflict to a close, and as it looks to future conflicts, as well.
a global affairs media network
The Financial Front of Russia’s War
Photo by Rinson Chory on Unsplash.
September 16, 2023
Expectations that economic sanctions would pressure Russia into turning away from its ambitions in Ukraine were misguided at best. In his latest book, Maximilian Hess expertly explores why the Kremlin and Russia's oligarchs have been so resilient to sanctions, writes Joshua Huminski.
O
n the eve of Russia’s expanded invasion of Ukraine, few could have anticipated the extent to which the West, led by the United States and United Kingdom, would respond. Speculation abounded with many assuming that even if it did take place Washington and London would respond strongly with sanctions, but there was little expectation that the broader Western alliance would respond as uniformly as it did. Nearly overnight, 30 years of economic connectivity between Russia and the West was practically severed. Sanctions targeting Russia’s leaders, businesses, and technology transfer were swiftly implemented, with the promise of more to follow. Russian oligarch assets were frozen, yachts impounded, and their travel was prohibited. Most strikingly, Western Europe—Germany in particular—moved to end its reliance on cheap Russian energy, incurring considerable economic and inflationary penalties as a result.
Many hoped that this economic pressure would bring the conflict to a more swift close than would otherwise be possible; that somehow the sanctions would force Russia’s elite to turn on President Vladimir Putin, bringing him to the negotiating table. Now, over 18 months into the war, those ambitious hopes were misplaced, sanctions were never going to bring about an end to the war, and despite the economic pain being felt by Russia, its economy is adapting. These expectations first misunderstood the nature of economic warfare, but also, and even more importantly, failed to see how Russia learned from the West’s response to the 2014 annexation of Crimea and adapted accordingly. This latter element is the subject of Maximilian Hess’s superb and timely new book “Economic War.”
This is a book first and foremost about Russia’s response to Western financial weapons unleashed in response to the country’s malfeasance—notably the Magnitsky Act, which authorizes the United States to impose sanctions on government officials, created after the high-profile death of a Russian tax lawyer of the same name—and Russia’s operation against Crimea and Donbass in 2014.
This is also the story of Russia’s efforts to undermine America’s financial dominance and the efficacy of its economic weapons. Given the dominance of the dollar and Washington’s expansive interpretation of its jurisdiction—any transaction involving a U.S. dollar, in effect—the United States enjoys disproportionate power and leverage. As Hess writes, “Moscow’s efforts to undermine the dollar’s geopolitical influence saw the Kremlin undertake an effort to move away from the currency for international commodity payments in the years between 2014 and 2022.” This was a key discussion point in the recently held BRICS Summit in South Africa, with a number of countries ostensibly pledging to end the dominance of the dollar. Despite Moscow’s hopes, this is unlikely to happen in the near future.
Hess offers a tour d’horizon of Russia’s global efforts to secure alternative trade agreements with countries across Africa, the Middle East, South and East Asia, focusing its energies away from Europe and the United States, and thereby reducing its exposure to the American-dominated financial system. In surveying this effort, Hess offers insights into how Russia did and does business and exposes the overlap (and occasional conflict) of political, personal, and business interests.
It is also the story of Russia’s foreign policy, conducted through economic means. Some efforts were successful, such as its embedding itself within European energy and financial architectures. In others, it was less so, or merely the beneficiary of propitious circumstances. In the Middle East, for example, where Putin found himself in the midst of a price war with Saudi Arabia which sought to strangle America’s shale oil industry, Vladimir Vladimirovich “was not in the driving seat either—the region’s shifting geopolitics played to his advantage not because of diplomatic skill but because Russia’s position as a hydrocarbons superpower offered tactical benefits to the strategic shifts underway in the region’s halls of power.”
In Europe, Russia leveraged its greatest weapons—oil and gas—to create European dependencies on Moscow: “Whereas many in Europe saw economic interdependence as a way to pacify Russia, Putin saw it as a means to limit the West’s ability to stand up to his vision for re-ordering the world.” This was not a wholly altruistic effort, of course. Countries like Germany saw incredible opportunities for domestic interests in the development of deeper ties with Russia and the ability to profit off, and grow from, cheap energy resources from the East. Despite repeated warnings from the United States and Eastern European nations, Berlin and others continued to hope for the best and ignore the possibility the worst could come to pass. Indeed, Russia made energy and economics central pillars of its policies towards the West. “Energy, corruption, and commodities would become key levers for the Kremlin to dissuade Europe from taking hostile action”, writes Hess.
There is no small irony, then, that on the eve of its expanded invasion of Ukraine in February 2022, Russia appeared to be in a strong strategic position. Europe was divided, many of its national economies had grown fat on the cheap energy flowing westward. Its politicians in some cases had become co-opted, or it had successfully engendered enough doubt and opposition within national political movements to offset potential risks. NATO was divided and suffering from “brain death” and was little able to muster a common policy on coffee, let alone on Russia. It was less a function of Russia playing a bad hand well, as some suggested, and more Russia playing quite smartly to its strengths while exploiting the weaknesses of its adversaries. Moscow’s efforts to decouple from the dollar and insulate its economy from Western sanctions met with uneven success, but its policies had yielded some fruit, as Hess writes, at least in the minds of the Kremlin’s leaders.
Russia’s technocrats may well have been markedly less optimistic than Putin about the country’s economy to weather the coming financial storm. Russia had experienced sanctions before and largely escaped significant harm—there was little expectation that 2022 would be any different. It had built up robust reserves of foreign currency and reduced its exposure on the international financial stage. Interestingly, Hess notes that had Russia played its economic weapons better and smarter, it could have more effectively punished the West. Rather than attempting to distance itself from the West, had it worked to deepen its multilateral economic and financial ties in more diverse areas, the untangling that followed February 2022 would have been far more painful and difficult.
Hess masterfully captures the challenge of sanctions, writing that they are “…political restrictions and are therefore shaped by the geopolitical and domestic environment of the countries in which the targeted entities operate.” Despite early (and oddly continuing) expectations, sanctions were never going to bring about an end to the conflict in the east of Ukraine, return Crimea, or halt the 2022 expanded invasion. They are a signal of Western displeasure with Moscow’s particular policies and only as effective as the countries enforcing them choose them to be.
Economies under sanction adapt. North Korea has been under incredible sanctions and technology transfer prohibitions for its nuclear and ballistic missile programs, yet those programs continue to advance. Iran, too, remains under considerable sanctions yet its theocracy remains in place. In Russia’s case, according to U.S. and European officials, Russia has increased the production of arms beyond pre-war levels, even more so than anticipated. At the same time, Moscow has sought out assistance from Tehran to offset weapons shortfalls, and is deepening its ties with Pyongyang hosting Kim Jong-Un, the North Korean dictator, just this week.
In practice, sanctions affect the average Russian far more than they do the oligarch, pressure from whom many in the West assumed would lead to some sort of resolution. To be fair, the sanctions are impacting the economy, sharply limiting the ability of Russian airlines to operate, auto manufacturers to continue production, and more. Russia’s economy is performing far worse than it otherwise would, the ruble is depreciating and a substitution economy has emerged. Yet the average Russian is simply adapting, wishing the conflict would end, and hoping for a return to some semblance of normalcy. Pressure on the Kremlin this is decidedly not, and it does not translate into a cessation of the conflict.
Russia’s efforts to diversify away from the West have drawn it closer to India, which is enjoying cut-rate oil prices, and China, which while keeping Moscow at arms-length is a beneficiary of the West’s pressure. These trends certainly have accelerated since February 2022. It is, however, difficult to see, as Hess writes, that Moscow could have been under any illusions about the nature of the relationship with Beijing. “While Putin saw China as a partner for Russia’s agenda of seeking to challenge Washington, he failed to read how Moscow’s divergence from the West was making Russia more dependent on China in an increasingly lopsided relationship.” Certainly, within Russian strategic analytical circles, the threat from China was well-known and planned for—one imagines that recent history has only accelerated the timelines of their strategic calculus, bringing forward longer-term risks on account of Putin’s short-term failed opportunism. Moreover, it is certain that Beijing is learning the lessons of the West’s response to Moscow’s war against Kyiv, as it prepares for a possible move against Taiwan.
The economic response to the 2022 invasion was, and remains, overwhelmingly Western. The poorly titled “Global South” has not joined in as vociferously or as aggressively as the United States and Europe and is unlikely to do so. Even within Europe, the response has not been as uniform as the narrative would suggest with additional sanctions being held up in late Spring 2023 by Greece and Hungary. Countries like Brazil have refused to sell Ukraine arms, and countries in Africa—in whom Russia has spent considerable time and effort (both directly and through proxies like Wagner)—have remained on the sidelines. This is all the more ironic given that Africa and the Middle East are disproportionately affected by higher grain and food prices resulting from the disruption of exports from Russia and Ukraine through the Black Sea—an agreement governing which just expired and has yet to be renewed.
This is not all a Russian story of perfidy. Many Western companies, as Hess shows, helped Moscow circumvent sanctions, gain access to materials and goods, and move money in and out of the country. The now infamous Kerch Bridge was built using European technology and in which photos of the company’s engineers are seen training their Russian counterparts, despite post-Crimea sanctions. Today, even after over a year of conflict, many Western companies continue to do business with and in Russia, stuck between the reputational risks of doing so and punitive measures from Moscow should they choose to leave. The longer the war continues, the greater the likelihood that Western companies seek to circumvent sanctions or increase pressure on their respective governments to bring the war to a close, if for no other reason than to resume doing business with Russia.
In “Economic War” Hess has penned a truly insightful book about Russia’s broader economic and financial ambitions, its preparation for conflict with the West, and its desire to resume its status as a “great power.” While this is not explicitly the story of Ukraine, it is deeply informative about what would come to pass after Moscow’s expanded invasion in February 2022, and how the conflict with Kyiv could well progress. Vitally, Hess returns clarity and perspective to erroneous assumptions about the efficacy of sanctions and the West’s economic response to Russia’s war against Ukraine. This measured focus is vital if the West is to sustain financial pressure against Russia and to help draw the conflict to a close, and as it looks to future conflicts, as well.
