March 29, 2022

Economic sanctions are political instruments applied by the international community or individual countries to adjust or punish the acts of a government, a group of persons, entities or individuals. And although often economic interests play a role in the imposition of sanctions, the objective of economic sanctions is to maintain or establish peace and security. Often, economic sanctions are the final step of escalation before entering into warfare.

This is also why sanctions are generally imposed in tranches, prior to warfare. In Europe, this is done by way of EU Council Regulations and Council Implementing Regulations. Every time a conflict or behaviour escalates, further sanctions can be imposed.

The raging war in Ukraine, and the response thereto by the EU, is a good example of this escalation ladder. Every next step taken by Putin is met with further escalation on the sanctions ladder. Within a month, this has led to one of the strongest and fiercest packages of sanctions ever imposed against a country, sanctioning almost every relevant aspect of the Russian economy, ranging from export and import bans to massive asset freezes, sanctions on the assets maintained by the Russian Central Bank and even a ban from the Swift banking communication system.

That being said, except for a brief period of time in 2014, rarely has an ongoing war with a nuclear power been fought with sanctions. Sanctions are no match for real warfare. Sanctions require an implementation time, and do not have immediate effects. They are simply too slow to fight a war.

This is evidenced by the fact that, despite the heavy sanctions against Russia, the war is still ongoing. And it must be said, the average sanctions regime includes relatively mild sanctions, having hardly any effect at all. That also applied for the 2014 sanctions against Russia. Those sanctions took into account the EU interests in the oil and gas sector in such way that their effects were hardly noticeable.

How different are the current sanctions. From statements made by Russian Minister of Foreign Affairs Mr. Lavrov, it becomes apparent that even Putin’s regime did not expect the current sanctions. And although indeed the sanctions require implementation time, the sanctions are so heavy that their effects can already be seen. The rate of the Rubel has dropped to less than EUR 0.01, Russia’s credit rating has gone to “junk status”, a huge percentage of Russia’s Central Bank’s reserve has been blocked, depriving Russia from its warfare money, several blocked oligarchs have turned their back to Putin and many Russian banks are out of business in the rest of the world due to the Swift sanctions.

But more importantly, and this has never been shown before, the war and the sanctions have started the “cancelling” of Russia by private parties, causing immediate withdrawal of almost all important Western players on the Russian market, even leading to countering sanctions by Russia, expropriating Western properties in Russia. This really shows that strong sanctions like those imposed against Russia are effective, and these side effects are even stronger than the actual sanctions. Eventually they will force Putin’s administration to change its course and may even force a coup or removal of Putin.

And the long-term effects aren’t even entirely clear yet. What is clear, is that, at any point in time, the sanctions should also be wound down. This is an important element to the role sanctions in international diplomacy and in de-escalation and re-establishing peace. A good example is Iran, that has been forced to diminish its nuclear plans in return for sanctions relief, which had destroyed their economy. Another thing the Iran sanctions have shown, is that whereas it’s relatively easy to impose sanctions, winding down sanctions can take a long time and cause many difficulties. This applies in particular to the Swift sanctions.

Re-establishing a Swift connection with Russian banks can be done fairly quickly, but re-establishing correspondent banking relations will take years, as it requires the now sanctioned Russian banks to meet the strict solvability requirements and sufficient AML and other relevant compliance requirements imposed on and by Western banks. Furthermore, Western bank will have to be willing to re-enter into such relationships with those banks and to invest in that connection again. The same goes for all Western companies and firms that have withdrawn from Russia. It will take decades, if ever, for those to return.

Therefore, the sanctions, as well as Ukraine’s fierce resistance, assisted by the West, may, and probably will, force Putin’s regime to change its course at some point in time. De-escalation, with simultaneous winding down of the sanctions, will be of utmost importance when that course changes to a more peaceful one. However, the effects of the sanctions and the “cancellation” of Russia will linger on for a very long time after the war.

Yvo Amar, Sanctions Lawyer and Partner at BenninkAmar Advocaten – March 2022