Russia Is Discovering that Sanctions Work. They Could Work on China, Too.
COMMENTARY
By Christopher Smart
Oct. 16, 2022 7:00 am ET
The Russian experience also suggests how Western policy might deliver better results elsewhere.
Kevin Frayer/Getty Images
About the author: Christopher Smart is chief global strategist and head of the Barings Investment Institute, and is a former senior economic policy official at the U.S. Treasury and the White House.
As the Ukraine war grinds into an even bloodier new phase, the early lessons on the value of economic leverage are coming in. They go far beyond the conventional wisdom that Western sanctions failed to stop Russian aggression. They also carry important consequences for policy makers and investors who are considering how best to engage China as President Xi Jinping secures a third term in power.
The essential wisdom is that sanctions can work if they are proportionate, patient, and clear. That wasn’t entirely the approach when the U.S. and its allies tried to deter and then turn back Russia’s initial invasion in February. But such a strategy is now coming into view for Russia, if largely by default. The West’s China policy, by contrast, still has a long way to go.
The first lesson from Ukraine, of course, is not to overestimate the potential leverage from sanctions. Even if Russian President Vladimir Putin had actually imagined that Western reprisals would essentially cut his country’s access to financing, it’s not clear he would have been deterred from what was clearly a visceral and emotional undertaking.
Some Western observers (including this one) assumed that the economic costs would at least limit Russia’s territorial ambitions in Ukraine. But Putin made an even bigger miscalculation of Russia’s own political leverage. It turns out Europeans could be provoked enough to risk interrupting their principal supply of oil and natural gas. There are echoes here from the Confederacy, which assumed its role as the world’s dominant cotton supplier during the American Civil War would keep England and France from backing the Union. European textile manufacturers back then made a painful transition to new suppliers in Egypt and the East Indies, just as Europe’s governments today are increasingly sourcing hydrocarbons from North Africa and the United States instead of Russia. It will be a cold day, indeed, before any Western leader trusts Russian energy supplies again.
The second important lesson from Ukraine is that sanctions can have an impact in specific circumstances. The West couldn’t stop Russia’s military from crossing Ukraine’s borders, but it can degrade the Russian economy and its ability to produce high-quality military equipment. The stability in Russia’s financial system and an artificially strong ruble mask the disruptions to supply chains that have left the military short of equipment production lines and the fall in consumer spending now aggravated by mobilization.
Western sanctions are also working through important indirect channels. China nominally opposes Western pressure on Russia, but it has chosen not to violate these restrictions. If anything, the recent indiscriminate Russian shelling of Ukrainian cities and hints of tactical nuclear detonations will make it harder for China, India, and other fence-sitters to skirt Western trade and financial sanctions.
The third important lesson is that sanctions must be applied on behalf of a policy, rather than in place of a policy. All too often Washington has deployed sanctions on Moscow as a first resort to punish everything from human rights violations to territorial invasion. But U.S. officials have rarely advanced a clear framework that clarifies what Russia must do for sanctions relief.
If only by default, that clarity may be coming into view. As it becomes increasingly inconceivable that sanctions would be lifted while Russian troops continue to bombard Ukrainian cities and Putin remains in power, it now seems possible that many of them would indeed be relaxed for a cease-fire, a new leader in Moscow, and at least some interim agreement on land control. None of those seem likely soon, but the economic pressure looks far more focused and therefore more likely to help advance better outcomes.
The Russian experience also suggests how Western policy might deliver better results elsewhere. China is ending the year with a weaker economy and a stronger political leader, suggesting how the Russian lessons could be applied there.
First, even the West’s vast economic leverage has real limits and will not stop China from doing what it wants to do. On their own, economic sanctions will not change Beijing’s ambitions in Taiwan or its thinking about domestic political rights.
Second, however, they can have a real impact. As China has been modernizing its economy, it has been single-minded in gaining access to Western technologies for both military and civilian purposes. China has in fact spent more money on semiconductor imports than on energy, as Chris Miller reports in “Chip Wars,” his fascinating new history of the global microchip industry.
Tellingly, for all its efforts to build up a domestic alternative industry, China remains entirely dependent on access to semiconductor designs and manufacturing equipment made by the United States or its allies. So far, Beijing has not responded meaningfully to tech sanctions, including those announced last week, because it fears losing these key elements to its supply chain. In time, Miller notes, China may well catch up, but the rest of the world will not be standing still.
This means that Western leverage is not unlimited or eternal, but it can make a difference if linked to realistic policy adjustments.
Indeed, while some Chinese officials seek to become entirely independent from the West, their best hope for keeping pace may come from even more integration in Western supply chains and more globalization, rather than attempting to reproduce all elements in the supply chain.
But even this significant leverage brings us back to the third lesson from Russia: there must be a clear policy the sanctions are meant to advance.
Washington and its allies still don’t have an obvious set of achievable goals beyond “standing up” to perceived Chinese transgressions. Tech sanctions, for example, won’t slow Chinese military spending, but there may be scope to share technology that helps advance common interests in the climate transition. Relaxing some financial sanctions could be linked to more transparency in Chinese markets in a world where China’s financial volatility can spread globally.
The important message from Russia is that sanctions will not stave off disaster, but they can work when applied clearly on behalf of a reasonable and compelling steps. This may sound fanciful as the rhetoric between the U.S. and China continues to deteriorate. But if any good is to come from the grim events in Ukraine, it might as well be a better approach to the West’s other strategic challenge.
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