Assessing the Impact and Effectiveness of Recent Sanctions Against Russia: Insights from Professor Julian Hinz

In this interview, we speak with Professor Julian Hinz, an expert from Bielefeld University and the Kiel Institute for the World Economy, to gain insights into the impact of recent sanctions against Russia. With the European Union discussing new measures and their implications for third countries aiding Russia in evading previous sanctions, Professor Hinz offers his assessment of the sanctions package and shares his hopes for their effectiveness. We delve into the complex dynamics of sanctions, their time-dependent effects, and the role of circumvention. Additionally, we explore Russia’s relations with China, the selection of sanctioned products, historical comparisons, and the potential for further action.

The EU recently discussed new sanctions against Russia. How do you assess this new package, especially as it affects third countries that helped Russia avoid previous sanctions? What are your hopes for the sanctions? Should they be tougher or are they sufficient?

This is a very timely question. We have now witnessed a new round of sanctions against Russia. The impact of sanctions varies depending on the specific measures. Some measures aim for an immediate impact, while others take time to play out due to their complex nature. It is only after some time that we can evaluate the need for adjustments. In the case of these new sanctions, they address the issue of circumvention by third countries, which was not adequately addressed in the previous round. Recent reports in German and European media highlighted the failure of certain sanctions and attempts to bypass them. However, this was to be expected, and it is sensible to address these issues and make necessary adjustments. Global value chains and trade links have been developed between many countries over the past decades. As ties between Europe/Western countries and Russia are severed, alternative routes may be sought through countries in the Caucasus and former Soviet Union that have links to both Russia and Western countries. There are strong incentives for all parties involved to find ways to continue their activities, such as Russian firms sourcing inputs from other countries and European/Western firms exploring new markets. I believe this was expected and that the scale of circumvention is often exaggerated. The new measures aim to strengthen the overall system that was put in place a year ago.

I attended a spring session in Luxembourg where one speaker mentioned that sanctions work but require time. However, we also see that Russia finds alternative routes during this time to strengthen its economy. How do these two factors work together as time passes?

That’s a good question. As I mentioned earlier, some measures are designed to have an immediate impact, such as freezing assets, travel bans, and certain import restrictions from the Western side. These measures directly affect the targeted economy. On the other hand, there have been stronger export restrictions in place since 2014, particularly on specialized products used in oil and gas drilling. More restrictions and bans on exports were imposed last year. However, Russia usually maintains stock and inventory of these products, allowing them to continue for some time while seeking alternative suppliers. You are correct in pointing out the trade-off between the time it takes for sanctions to take effect and Russia’s efforts to strengthen its economy. The new measures aim to make it even more challenging for third countries or firms to supply these specific items, thus complicating Russia’s search for alternative sources. It should not come as a surprise that these challenges arise, as it is extremely difficult to anticipate all potential issues. Reacting and making adjustments once these issues become apparent is the appropriate approach in such circumstances.

How do you assess Russia’s relations with China, considering China’s significant economic importance? There have been numerous agreements signed between the two countries, deepening their ties. How important is it to consider China in the sanctions?

China plays an outsized role in trade relations with Russia. It has been one of Russia’s largest trading partners, especially in terms of shares, although the exact ranking depends on how the EU is counted. Given the reduction in economic ties between Europe and Russia, China’s importance has increased both relatively and potentially even in absolute terms. However, when considering the geographic distances and logistics, it is easier for Russia to ship goods to European markets than to China. This implies added costs for Russia in terms of exporting and importing. Thus, it is not a simple replacement of relations with Europe. Additionally, European companies have supplied highly specialized products, particularly for the oil and gas industry in Russia. These products are not easily replaceable and often involve high-tech components produced by only two or three companies worldwide, which happen to be located in the West. It takes time for China or any other country to develop the capacity to produce these items. Moreover, while Russia has extensive pipelines to Europe, building pipelines to China would be a lengthy process. This poses a significant challenge for the Russian economy. Even in a hypothetical future where the conflict has ended and political and economic relations are improving, it is highly unlikely that European economies will revert to their previous reliance on Russian pipelines. Europe has diversified its energy imports through LNG terminals, which poses a lasting problem for the Russian economy. In contrast, China is not expected to follow the same path, as they are unlikely to build pipelines and dismantle their LNG terminals. Hence, the Russian position has considerably weakened and is expected to remain so.

Regarding the sanctions, how do authorities decide which products to sanction? For instance, gas has not been sanctioned due to the EU’s dependency on Russia. Are there any indications that this may change and that the EU will reduce its dependence? Additionally, there have been cases where certain products, like diamonds, were banned, but they could still be sold through other countries like India. What is the logic behind choosing which products to sanction?

Firstly, it should be noted that the idea of Europe, particularly Germany, being solely dependent on Russia for energy has been challenged in the past year. The dependency goes both ways since Russia’s revenue stops when gas or oil deliveries cease. Additionally, Russia has faced difficulties in selling oil and gas at the previous rates. The selection of sanctioned products is a highly political decision. There are considerations of what will harm the targeted economy, in this case, Russia. It is evident when we observe the range of instruments targeting the oil and gas industry, among other products. However, there are also instances where certain products that one might expect to be sanctioned are not. This decision involves a cost-benefit analysis. The “benefit” here refers to the cost that can be imposed on the targeted economy. Simultaneously, it takes into account the costs it imposes on one’s own economy. Lobbying groups play a role in shaping this decision. Last year, we witnessed various industries arguing that a gas embargo would be catastrophic for certain European economies, which ultimately turned out not to be the case. This demonstrates the political considerations involved in selecting which products to sanction. It is not a simple process of randomly picking products. As we see now, the overall embargo on Russian exports from European countries to Russia has decreased significantly but not by 100%. There are still substantial trade relations with Russia, indicating that it is not a complete severance of ties.

And do you think that this will happen in the future? That’s, like reducing this number of trade? Or you’re not expecting that?

I don’t know. I think it could be possible, but I’m not sure if that’s the direction we’re heading in. I believe it would be more important to consider which products would harm the targeted economy rather than focusing on a complete trade ban. At this point, I think we are still far from implementing such drastic measures.

When the sanctions were imposed on Russia last year, what were your expectations regarding their impact on the Russian economy? Were your expectations met or were the effects more or less harmful than anticipated?

It’s difficult to precisely predict the outcomes, especially since the actual sanctions imposed were not what I initially expected. The restrictions placed on the Russian central bank, for example, had a significant and severe effect in the first few weeks. However, the reaction by the Russian Central Bank was professional and played a crucial role in stabilizing the economy. In terms of restrictions on oil, gas, and natural resource exports, I would say that the overall impact aligned with my expectations. The Russian economy faced challenges in finding alternative markets due to existing pipelines, but over time, they managed to adjust and explore other options. It’s worth noting that there are still significant trade relations with Russia, as the decrease in exports from European countries to Russia was around 50%, not a complete halt.

In terms of historical examples or comparisons, which cases would you consider the best to analyze? What lessons can we learn from previous sanctions, such as those imposed on Iran or in the case of iron ore?

When it comes to effective use of sanctions, one case that stands out is Iran. The sanctions imposed on Iran effectively isolated the country from a large part of the global economy for more than a decade. However, it is important to note that the regime in Tehran remains intact, and there are indications of a continued nuclear program. Assessing the effectiveness of sanctions depends on the desired goals and the counterfactual scenario. Comparing the current world with sanctions against the hypothetical world without sanctions helps us understand that sanctions do restrict the targeted country’s economic and political engagement. However, their success depends on the specific goals and desired outcomes. Sanctions are just one tool in the diplomatic and political toolkit.

Can we consider Russia as the most sanctioned country we have experienced so far?

No, I don’t believe Russia can be considered the most sanctioned country in history. There are examples where countries have faced complete embargoes or isolation from the rest of the world. North Korea, for instance, has experienced far more severe sanctions compared to Russia. It’s important to note that comparing the impact of sanctions can be challenging due to the size of the Russian economy and its relative self-sufficiency. Despite the restrictions on their main sources of export revenue, Russia has not collapsed economically. In comparison, North Korea has faced decades of isolation and economic challenges, yet it has managed to sustain itself to a certain extent.

What are your suggestions regarding the sanctions? Where do you see room for further action, or do you believe Europe has reached its maximum capacity? Are there any suggestions for additional measures?

I see two areas where further action can be taken. Firstly, we need to address the issue of circumvention. It’s essential to identify and tackle the methods used to bypass sanctions. One potential tool to consider is implementing “rules of destination” in trade policies. Similar to “rules of origin,” these rules would ensure that goods are genuinely reaching their intended destination and not being transshipped to Russia. Enforcing such rules would require careful consideration and coordination among countries. Although rules of destination may be more challenging to implement than rules of origin, they could help mitigate the circumvention of sanctions.

Secondly, Russia relies heavily on shipping to sell its oil and gas, and many European shipping companies, particularly from Greece and Cyprus, are involved in this trade. To strengthen sanctions, it could be beneficial to restrict not only the import and export of Russian oil by countries but also the involvement of companies facilitating Russian shipping. This would be an additional lever to make the sanctions more stringent and effective.

There have been questions about the timeframe for the sanctions to have an impact, with some predictions suggesting the collapse of the Russian economy by the end of 2024. Can such prognoses be made, and what are your expectations?

Making precise prognoses is exceedingly challenging due to the dynamic nature of economies and the unpredictable reactions of economic agents. People, regardless of their location, are creative in finding ways to achieve their goals. While predictions may suggest a collapse of the Russian economy by the end of 2024, they often assume certain conditions and paths leading to that outcome. However, it is difficult to anticipate if Russia will find alternative import sources, develop domestic production capabilities, or overcome the challenges they face. It’s important to note that economies, including European economies, have shown resilience to significant changes. For example, Germany successfully reduced its energy imports from Russia within a relatively short period without a substantial negative impact on its economy. Therefore, it is uncertain how the Russian economy will fare, and it’s likely that political factors will play a significant role alongside economic considerations.