Sanctions against Russia will likely not work
Most countries have reacted with severe economic sanctions against Russia, with the hope of putting pressure on Russian economy and on the ties between oligarchs and Putin. Although these sanctions will be very effective in bringing Russia’s economy to its knees, it will not lead to a break between Putin and oligarchs. This article will highlight in what ways Russian elite actually benefits from sanctions and/or war. Note that the views in this article are my own.
It is important to understand who is on the opposing side of the sanctions and who we are trying to punish. Russia is ruled by Putin and oligarchs. Oligarchy is a structure where power is concentrated in a few individuals and is often defined as “the rule of the rich”. After Soviet Union collapse, oligarchs came to rule across majority of former soviet union republics (e.g., Ukraine, Belarus, Moldova) due to power vacuums and unclear property ownership. For example, imagine that a state has a factory responsible for the production of all the agricultural equipment in a country. When USSR collapsed, the ownership of that factory was in limbo and would normally transfer to the newly established state. Nonetheless, in many instances, either due to bribery or poor property ownership laws, the ownership ended up in the hands of a few select individuals. A country privatized through illegal means led to the rule of a few people controlling all economic and political assets in the country. In my view oligarchy is the primary reason why most of ex-soviet union countries have not been able to achieve economic growth, often being pushed to a persistent state of poverty. For a very poignant historical account of Soviet Union collapse and how oligarchy came to power, I really recommend reading Secondhand Time: The Last of the Soviets by Svetlana Alexievich.
Why sanctions might not be effective
It is important to view the persona behind oligarchy as ruthless, greedy, action-oriented, and highly intelligent. Treating Russian oligarchy as if they are passive inheritors of wealth and power is extremely damaging when creating a good policy of fighting back, since it leads to underestimating them. The current economic sanctions unfortunately likely create more opportunities for Russian oligarchs to become even richer and consolidate their power even further.
Russia has one of the highest wealth inequality in the world. In periods of economic turmoil, it is often the case that rich get richer because this provides them the opportunity to acquire assets at bargain prices. All of a sudden foreign-owned factories that were worth $10M can be purchased for $1M. When foreign governments or companies decide to divest of any assets due to sanctions, this only expands oligarchs’ wealth.
What do you do if you know the economy of the country you work for will implode in a few weeks and you own 50% of the assets? First, you will slowly sell your assets to other parties at a slight discount so that you don’t arouse suspicion, then you will buy puts or any other financial instruments that benefit you in a trade when the price will drop precipitously. Moreover, given that you have the power to trade anywhere, and you know a war is coming, you will start purchasing any shares in companies that you know will benefit from the war, such as companies that engage in building military equipment in the US. Remember, that an oligarch is a person who only cares about their own self interest and power. They don’t care about their country, countrymen, or the suffering they create. War and insider knowledge provided them with a lot of opportunities to generate immense wealth by trading on financial markets across the world. ITA ETF (a military ETF in the US) went up 15–17% in the last few days and with highly leveraged options contracts, one can easily generate returns in the hundreds of percent. Although this is not discussed, I think many of these oligarchs generated immense returns on their investments due to insider knowledge of imminent war.
The price of gasoline futures went up by 50% and crude oil futures by 30% since the start of the war. If we consider that many countries in EU import half of their gasoline supply from Russia, it means that the spike in commodity prices can have a positive impact on Russia’s finances. Moreover, it again provides immense wealth generating opportunities by trading on highly leveraged instruments.
Overall, these sanctions will have a detrimental effect on the Russian economy and on the average Russian, but have the potential to make the existing Russian oligarchy much, much richer due to insider trading information, foreign asset divestiture, and rapid rise in commodify prices. Instead, policies focused on seizing assets such as yachts, real estate, planes, financial accounts of all direct and indirect individuals is likely to provide a stronger push against oligarchs. Unfortunately, if this is done over a prolonged period, this will generate assets flight or be layered in a very complex ownership transfer process that makes it harder to identify the owner as a Russian oligarch. Moreover, if it is done at a small scale, it will also be ineffective.
Personally, I think rapid militarization of Ukraine can be a more impactful deterrent lever since if the existing Russian army is pushed back or stalled, it will force Putin to come to the table and negotiate. Overall, I’m not a military expert, but seeing how exposed and inexperienced the Russian army is during their occupation, their low morale, and logistical issues, providing Ukrainian Army with military equipment capable of large scale air bombardments of Russian convoys will lead Kremlin to rethink if they can proceed with the invasion. Russian army is large, but Putin will not be able to stomach if for every one Ukrainian solider he loses one equipment or even one Russian soldier. Ukrainians are clear in their motivation to fight to the end, and Putin can’t afford that kind of war.