Russia sanctions as a weapon
“Western economy will not be paralyzed”
1/20/2022, 6:38 p.m
The federal government has promised Ukraine support in the event of an escalation on the border with Russia. However, the traffic light government continues to rule out the delivery of weapons – including defensive weapons. So the only way to put pressure on Russia is through sanctions. In recent years, Russia has increasingly decoupled itself from the western economy, while at the same time Germany has become increasingly dependent on Russian gas supplies. In an interview with ntv.de, Julian Hinz from the Kiel Institute for the World Economy explains why sanctions would hit Russia harder than Germany.
ntv.de: Germany wants to put pressure on Russia with sanctions in the event of an escalation in Ukraine. What kind of sanctions would hurt Russia the most?
Julian Hinz: First of all, it’s not just about sanctions from Germany. Rather, we are talking about multilateral sanctions. That is, at least on the part of the EU, but also from the USA, Canada, Australia and Japan. This coalition of sanctioning parties has many options. More trade sanctions could be imposed, like those that have been in place since 2014. But these would probably not affect Russia that much. Financial sanctions would hit the country much harder.
One option that has just been hotly debated was excluding Russia from the Swift international payments system. How do you rate this option?
There is a precedent where one country has been decoupled from Swift: that is Iran. You can see that this has led to massive distortions in this country. Trade with Iran has ground to a halt and legal trade has become much more difficult. Exclusion from Swift would also be very costly for Russia.
What other options are there?
US President Joe Biden’s proposal would be at least as expensive. He spoke of preventing Russia from using the dollar. But these two proposals are really very extreme. I rather suspect that the existing range of instruments will be expanded, namely to impose explicit sanctions on individuals, companies or banks.
An obvious way would be to impose sanctions on Nord Stream 2 – or not to put the pipeline into operation. Would that make any difference at all if gas continues to be imported from Russia through other pipelines?
Nord Stream 2 is to some extent a prestige project. What is now being thrown into the balance should make the countries involved, including Russia, sit up and take notice.
According to BP’s “Statistic Review of World Energy”, Germany got a good half of its natural gas imports from Russia in 2019. Against this background, can Germany even afford to impose tough sanctions on Russia?
It is always said that we would suffer great economic damage if sanctions were imposed. But we have to put that in context: Russia is of course a big country, but only 2 percent of German exports go to Russia. Only 2 percent of imports come from Russia. Exports and imports from Poland are about 2.5 times larger than those from Russia. We have to put that into perspective a little when we talk about the costs of such sanctions. It’s sometimes a bit exaggerated how expensive something like this can be.
So it wouldn’t be that expensive for Germany to impose such sanctions on Russia?
It is important to see that there is a cost. Few policies are free. If one imagines what would happen if war broke out – that seems to be an alternative at the moment – then we will not be able to continue trading with Russia as we have been doing so far. The alternative is not peace, but also a very tense situation. Even doing nothing costs something.
What would be the consequences for Russia if natural gas exports to Germany were stopped?
There is a mutual dependency. The Russian economy is largely based on the export of natural gas and oil. If Germany stops getting natural gas – although it probably won’t go completely off – Russia won’t see a euro or cent for it. The moment that is touched, there will be massive upheavals in the Russian economy.
Russia’s finance minister said last week that his country could weather sanctions such as those imposed by the US on Iran or North Korea. Why is Russia so confident about this?
There are countries in the world that would not participate in these sanctions. China is a key trading partner of Russia and will not join the sanctions. But there are other countries, such as India, that would certainly not impose sanctions. The situation is similar with Iran at the moment: since these tough sanctions came into force, the country has reoriented itself towards India and China. Iran continues to exist in its current form of government, despite the sanctions. Of course, this is anything but good from an economic point of view. But the sanctions have not brought the country to a standstill, as some had anticipated. Russia would probably learn lessons from this.
Is there a risk that the German or Western economy will suffer serious damage?
The German and Western economies will not be paralyzed by these sanctions. One can say that very clearly. Russia is making itself very big. As already mentioned, a large part of Russia’s exports are raw materials. In addition, Russia is insanely dependent on foreign capital. Before the Corona crisis, the Germans were the largest group of investors in Russia. And I can’t imagine that this would continue if there were more political upheavals. Actually, the dependency situation is relatively clear, so that a Western or German economy would certainly not come to a standstill.
The German economy would still have to reckon with losses, right?
The current turnover of German companies in Russia does not correspond to the loss that would arise if these companies stopped selling there. Not all of these lost exports are truly lost – a large proportion of them are diverted to other countries. So the loss wouldn’t be nearly as great.
Clara Suchy spoke to Julian Hinz.