Economic and defense analyst Igor Danchenko speaks to ntv.de about Western sanctions and whether they actually have the potential to change the course of Russia’s war against Ukraine. Danchenko hopes for an end of the war in 2023, but he also sees a scenario of a new Iron Curtain between the West and Russia.
ntv.de: Over one year after the start of Russia’s war against Ukraine and subsequent Western sanctions against Russia: How is the Russian economy doing?
Igor Danchenko: On the one hand, the Russian economy is doing better than it had been anticipated by Western policy makers. We also know that the impact of sanctions against Russia has been rather marginal and countries like Russia so use this as a way of trying to become more self-sufficient. On the other hand, long-term effects will inevitably be more negative than what we have already observed.
Will Russia be able to make itself completely independent from the West?
Let’s assume Russia does have this opportunity to shake off Western influence and they were able to jump start several economic or social programs, many of which have been in the pipeline since the Soviet times. Even if that were to happen, then Russian resources are still limited. Russia competed for foreign investments and access to Western technologies for decades. They now spin it as the West having taken advantage of Russia. But at the end of the day, Russia is dependent on foreign investments. And what Putin miscalculated: These investments from the West have not been replaced with alternative investments from other countries.
Investments from countries like China?
Like China, like the Middle East, like certain African countries. These markets are limited, so there will also be problems ahead for Russia. But the sort of shock that we expected the Russian economy would encounter never materialized. For example, the Euro/Dollar exchange rates skyrocketed initially in the first week of the invasion and by the mid of March 2022, with the intervention of the Russian central bank, they stabilized and have been more or less stable since then. But again: There have been only a few big investments in Russia in the past, so why would they suddenly increase in such a tense environment?
To what extent are Western sanctions actually working? Will they gradually dry out the Russian economy to a point where this could have an impact on the war?
We see that the sanctions didn’t work too well over the years, also after the annexation of Crimea in 2014. So why should they now work miraculously over night? But to be clear: The Russian economy is severely impeded by sanctions and increasingly impeded by Putin’s war effort. The military industrial complex, mass manufacturing of ammunition, does drain a lot of resources. The Russian economy is surviving, that’s how I would describe it.
The level of European sanctions is already extreme. There is not much more that could be done. I don’t think the West is going to dry up the Russian economy. Russia will reorient itself to other markets, which it has already been doing aggressively. I would agree with those that suggest that Europe has exhausted the sanctions mechanisms. I’m not saying that we shouldn’t or can’t get creative, but honestly: Sanctioning people like Alina Kabaeva’s mother – I mean that’s a joke.
Looking at energy prices: Will countries like Germany face high costs once again next winter?
It’s quite possible. These are market prices, and the OPEC keeps interfering in markets. The West has not been able to form an adequate response to OPEC, and particularly to OPEC+ potential challenges. There is also the GECF (Gas Exporting Countries Forum), which has been lurking in the background for the past decade. But what if Russia or another country were to revitalize it? There is definitely potential for dynamic. On the net: Energy is going to be more expensive in Germany for the next few years – this winter for sure.
On the other hand: The markets are already correcting. If oil and gas doesn’t come from Russia directly, it can come in the form of LNG through a third country, which is already happening. Sanctions are being bypassed and oil products are coming to Europe via India, which are in parts refined from Russian oil. Because the Russians have to bypass sanctions, they have set up a fleet of ghost tankers. They need to move crude oil from tanker to tanker, mix it with other oil sorts and otherwise mask a share of energy exports. Then third countries like India refine it and export oil products. That is the kind of sanction evasion, which is hard to monitor or enforce compliance. But either way, all of this further shrinks Russia’s profit margins.
Can this form of avoiding sanctions be controlled or monitored?
If the West were to persuade China and India to join sanctions on Russia, then maybe there would be a stronger impact, but short of that, the market is simply re-adjusting. This means that Germany will be getting the same oil and gas mixture as it has been. Not as directly, and of course it will be more expensive, but ironically, some of it will still actually be of Russian origin.
We’ll also see what will happen with the Arctic LNG projects. Russia does have its own patented liquefaction technology, called “Arctic Cascade”, which is being tested by the Novatek company. If Russia’s LNG projects succeed despite sanctions and other restrictions, then more Russian LNG would be available on the world market, which would likely relieve some of the pressure that is at times felt in Northern Europe and Northeast Asia. Or, if more LNG comes from the Russian Arctic to India and China, then more North American LNG may be available to Germany and its neighbors, at more reasonable prices than today.
What impact does the war generally have on energy markets?
The energy markets are coming to this new form of equilibrium. By the time the war is over, the world will be a different place. I don’t see the end of the war yet, but I do see this new energy market equilibrium, which is actively forming as a response to it. The war isn’t over, but the world has already adjusted. And the more the world adjusts, the less attention it will pay attention to Putin’s aggression.
When and how will this war end?
I hope the war will end in 2023. However, the political will of all the parties involved is to go very far in trying to accomplish their goals. I’m afraid that since the summer of 2022 this war and many things connected to it have in part become a face-saving exercise. Everybody is so entrenched in their positions that nobody is ready to advance any sort of peace plan.
There is no person of the caliber of, for example, Richard Holbrooke; but sometimes all it takes is a Richard Holbrooke to bulldoze through a conflict and impose some form of bad peace all parties get used to. I personally regret there is no political will for that, which means that it really depends on the battlefield at this point. Ukraine may retake some of its territory, and Russia will try to seize more Ukrainian territory, or at least cement its current foothold. If a stalemate is on the horizon, then that is where the new Iron Curtain or iron fence could stretch in the coming decade. In the meantime, the US and the EU should not shy away from appointing special envoys.
By Iron Curtain do you mean an actual physical wall?
No, metaphorically. Yet, it may resemble Korean Demilitarized Zone or the Berlin Wall.
So the conflict be frozen at some point?
Effectively yes. And there could be some sort of demilitarized gray zone, possibly along the borders of Luhansk and Donetsk and around Crimea.
Looking at the US and the West in general, including Germany: What is the biggest threat for this region at the moment?
I think there are two: The excessive polarization of society, and of course corruption.
corruption?
Some western societies have lost a lot of political middle ground. Some have been losing the economic middle class too. And many have become indifferent, choose to look the other way or cling to a comforting conspiracy theory. Polarized societies are less cohesive and are more vulnerable to serious disruptions from within and from without, including from state actors such as China and Russia. That is always a threat. And corruption is always something to keep an eye on, including in this context.
Interview: Philip Sandman