by Jonathan Rusch

Since the Russian invasion of Ukraine on February 24, a variety of Western governments, including the United States, the United Kingdom, and the European Union (EU), have imposed an ever-increasing array of sanctions against Russian President Vladimir Putin, senior members of his government, state-owned enterprises, and numerous oligarchs.[1]

In the first several weeks of the war, a number of commentators were dubious about the sanctions’ effectiveness. For example, not even three weeks after the invasion, two economic analysts concluded, without citing specific data, that “there is not the slightest evidence that Moscow will change course and ‘rehabilitate’ itself in the eyes of the West.”[2]

As the war has continued through the summer, other commentators have been concluding, with varying degrees of enthusiasm, that the sanctions are effective.  Their observations range from the reserved (i.e., “the sanctions [are] starting to bite”[3])  to the triumphal (i.e., the sanctions “are hitting Vladimir Putin and his accomplices hard”[4]).  But these commentaries, too, generally lack specific and detailed empirical analysis.  In fairness, it should be noted that – as University of Michigan Professor Paolo Pasquariello has written – “assessing the effect of sanctions . . . on the desired outcome is challenging for any social scientist”, especially in the absence of a counterfactual (i.e., what would have happened in Ukraine if sanctions had not been imposed on Russia).[5]

Recently, a Yale University team (Professor Jeffrey Sonnenfeld of the Yale School of Management and four colleagues from the Yale Chief Executive Officer Institute) issued a detailed research paper on the sanctions.[6]  “[U]sing Russian language and unconventional data sources including high frequency consumer data, cross-channel checks, releases from Russia’s international trade partners, and data mining of complex shipping data”, the paper measured Russian current economic activity five months into the invasion, and assessed Russia’s economic outlook.  Its central conclusion is that “business retreats and sanctions are crippling the Russian economy, in the short-term, and the long-term.”[7]

This post will summarize the key elements of the paper, and state some of the ramifications for sanctions compliance.

Key Elements

The paper consists of eight sections:

• Section I – Decoding Deceptive Official Russian Economic Statistics: The paper first notes that “[m]any of the excessively sanguine Russian economic analyses, forecasts, and projections which have proliferated in recent months share a crucial methodological flaw: these analyses draw most, if not all of their underlying evidence from periodic economic releases by the Russian government itself, without cross-checking or verification of data integrity.” Those releases, however, “are becoming increasingly cherry-picked”, even the favorable statistics which are released “are questionable if not downright dubious”, and “almost all rosy projections and forecasts are irrationally extrapolating economic releases from the early days of the post-invasion period, when sanctions and the business retreat had not taken full effect, rather than the most recent, up-to-date numbers from recent weeks and months . . . .[8]. 
• Section II – Re-Evaluating Russia as a Commodity Exporter: On this issue, the paper states that “Russia’s strategic positioning as a commodities exporter has irrevocably deteriorated, as it now deals from a position of weakness with the loss of its erstwhile main markets, and faces steep challenges executing a ‘pivot to Asia’ with non-fungible exports such as piped gas . . . .”[9]
• Section III – Asymmetric Weakness of Russia’s Global Economic Relationships: On this topic, the paper states that “[d]espite some lingering supply chain leakiness, Russian imports have largely collapsed, and the country faces stark challenges securing crucial inputs, parts, and technology from hesitant trade partners, leading to widespread supply shortages within its domestic economy . . . .”[10]
• Section IV – Weak Russian Domestic Consumption & Production Data Shows Import Substitution Not Feasible: Here the paper states that “[d]espite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent; the hollowing out of Russia’s domestic innovation and production base has led to soaring prices and consumer angst . . . . “ As one example, “the Russian tank producer Uralvagonzavod has furloughed workers based on input shortages; Russian production of tanks, missiles and other equipment relies on imported microchips and precision components that simply cannot be sourced right now.”[11]
• Section V – Business, Capital, and Talent Flight From Russia: For this section, the authors conducted “an intensive research effort to track the responses of nearly 1,500 public and private companies from across the globe, with well over 1,000 companies publicly announcing they are voluntarily curtailing operations in Russia to some degree beyond the bare minimum legally required by international sanctions.” As a result of the business retreat from Russia, “Russia has lost companies representing ~40% of its GDP, reversing nearly all of three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base . . . .”[12]
• Section VI – Unsustainable Fiscal and Monetary Stimulus And Kremlin Interventions Conceal Structural Economic Weaknesses: The paper maintains that
  • “Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses, which has already sent his government budget into deficit for the first time in years and drained his foreign reserves even with high energy prices – and Kremlin finances are in much, much more dire straits than conventionally understood . . . .”[13]
  • It acknowledges that “the black-box that is the budget and financing of the Russian state cannot be known with 100% precision or certainty – and especially now that Putin is going out of his way to obscure the sources and use of state spending.”  But it also recognizes that “Russian state spending and social obligations are now at a magnitude much higher than before” and that the reserves on which Russia is depending to sustain this unprecedented level of spending “are seemingly already dwindling.”[14]
• Section VII – Financial Markets Pricing In Sustained Weakness In Real Economy with Liquidity and Credit Contracting: On this issue, the paper flatly declares that
  • • “Russian domestic financial markets, as an indicator of both present conditions and future outlook, are the worst performing markets in the entire world this year despite strict capital controls, and have priced in sustained, persistent weakness within the economy with liquidity and credit contracting – in addition to Russia being substantively cut off from international financial markets, limiting its ability to tap into pools of capital needed for the revitalization of its crippled economy . . . .”[15]
• Section VIII – Conclusions: The paper concludes that “there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia . . . .” It also asserts that “[d]efeatist headlines arguing that Russia’s economy has bounced back are simply not factual – the facts are that, by any metric and on any level, the Russian economy is reeling, and now is not the time to step on the brakes.”[16]

Implications

This paper is by no means the final word on the effectiveness of the Ukraine sanctions – particularly because the conflict is already protracted[17] and could well last for years.[18]  Even so, sanctions compliance officials (and the lawyers who advise them) should peruse this paper — not merely to get a deeper appreciation of the effects of the sanctions, but to incorporate material from the paper in corporate briefing and training materials.   Because the Ukraine sanctions have intensified the already formidable challenges for financial institutions and other firms[19], it is important that business, risk, and compliance executives remain well-informed about the effectiveness of sanctions in order to sustain their companies’ commitment to maintaining their sanctions-compliance programs.

Footnotes:

[1]  See Jonathan J. Rusch, Sanctioning the Russian Rich, Inkstick, May 20, 2022, https://inkstickmedia.com/sanctioning-the-russian-rich/.

[2]   Gary Clyde Hufbauer and Megan Hogan, How effective are sanctions against Russia?, Peterson Institute for International Economics, March 16, 2022, https://www.piie.com/blogs/realtime-economic-issues-watch/how-effective-are-sanctions-against-russia.

[3]  Russia’s Ambitions and the War in Ukraine: Q&A with Dara Massicot, Rand Review, June 29, 2022,  https://www.rand.org/blog/rand-review/2022/06/russias-ambitions-and-the-war-in-ukraine-qa-with-dara.html.

[4]   The sanctions against Russia are working, Delegation of the European Union to Ukraine HR/VP Blog, July 20, 2022, https://www.eeas.europa.eu/delegations/ukraine/sanctions-against-russia-are-working_en?s=232.

[5]   Paolo Pasquariello, Russia-Ukraine war: What to know about sanctions—their effects and effectiveness, University of Michigan News, May 3, 2022, https://news.umich.edu/russia-ukraine-war-what-to-know-about-sanctions-their-effects-and-effectiveness/.

[6]   Jeffrey A. Sonnenfeld, Steven Tian, Franek Sokolowski, Michal Wyrebkowski, and Mateusz Kasprowicz, Business Retreats and Sanctions Are Crippling the Russian Economy (August 2022), https://deliverypdf.ssrn.com/delivery.php?ID=883022123123082095025080004013097126050076068001039051073088007098009019097119083095110048059008102059004067092110065115103009012020000002083003090064071084124087015048045084126064116079122031123008112116004116018105115126065103115082109026080116122020&EXT=pdf&INDEX=TRUE.

[7]   Id. 3.

[8]   Id. 6-8.

[9]   Id. 3.  See id. 10-36.

[10]  Id. 3.  See id. 36-43.

[11]  Id. 51-52.

[12]   Id. 53, 68.

[13]   Id. 3.  See id. 63-64.

[14]   Id. 63.

[15]   Id. 4.  See id. 64-68.

Jonathan J. Rusch is a Senior Fellow at New York University School of Law’s Program on Corporate Compliance and Enforcement; Adjunct Professor at American University Washington College of Law and Georgetown University Law Center; and Principal of DTG Risk & Compliance LLC. He is a former Deputy Chief in the U.S. Department of Justice’s Fraud Section, and former Senior Vice President and Head of Anti-Bribery & Corruption Governance at Wells Fargo.

The views, opinions and positions expressed within all posts are those of the authors alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law.  The accuracy, completeness and validity of any statements made within this article are not guaranteed.  We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the authors and any liability with regards to infringement of intellectual property rights remains with them.