Russian President Vladimir Putin chairs a meeting with members of the government via video link at the Kremlin in Moscow on July 25.SPUTNIK/Reuters
When Vladimir Putin invaded Ukraine, it was widely assumed that the Russian president would enjoy overwhelming military superiority against his neighbour – even as, in a sanctions fight with the West, he found himself in a position of overwhelming economic inferiority. The Russian invasion of Ukraine would be a lopsided military contest – but Western sanctions on Russia would be a one-sided economic contest.
Both of these assumptions have turned out to be wrong.
Even before Western assistance began arriving in large quantities, Ukrainian stubbornness and resilience on the battlefield had stymied Mr. Putin’s military plans. Five months on, and roughly 80 per cent of Ukrainian territory is still very much under Ukrainian control.
But the expectation that the West would crush Russia with sanctions has also proven false. Russia is not as militarily strong as feared; neither has it been as economically vulnerable as hoped. In fact, Russia is now on the economic offensive, using gas as a weapon against Europe.
How can this be? The European Union together with the rest of the G7 make up roughly half of the world’s economic output. Russia’s gross domestic product is smaller than that of the smallest G7 member, Canada.
But Russia exports large quantities of four foundational commodities: oil, natural gas, food and fertilizer. For Russia’s traditional customers, particularly importers of the last three of those commodities, there are not always quick or easy substitutes.
As a result, Russia has Europe – and not only Europe – over a bit of a barrel. And a bushel. And a lot of BTUs.
It’s why the West has to carefully calibrate its sanctions strategy. Sanctions are not a public relations exercise, or virtue signaling. They make sense where they impose significant costs on Russia; they make considerably less sense when their main impact is collateral damage.
Even Canada, which only had a small amount of pre-war trade with Russia, has discovered that when sanctions are poorly aimed, they can harm us more than them.
For example, Canada imposed a 35 per cent tariff on fertilizer imports from Russia in March. The fly in the ointment is that farmers, particularly in Eastern Canada, rely those imports to boost crop yields. In the absence of cheap and easy substitutes, the 35 per cent tariff risks raising costs for farmers, who are already under pressure from high energy prices.
The world needs higher food production and lower food prices; all else equal, these sanctions will tend to deliver the opposite.
It’s why multiple agricultural organizations are calling on Ottawa to reconsider. Note that our allies, including the United States, have not imposed the same sanctions.
In fact, the U.S. Treasury Department recently underlined that exports of food and fertilizer from Russia are not subject to U.S. sanctions, and that banks and other financial institutions facilitating such sales are not at risk of punishment.
On the one hand, that means these Russian exports will continue. On the other hand, it means that global food prices will be lower than they otherwise would be if Russian food, and the inputs the rest of the world needs to grow food, were to be cut off. Mr. Putin is counting on the united Western front against him cracking – and to the extent that Western policies against Russia lead to inflation and high food and energy prices, particularly in Europe, Mr. Putin risks being proved right.
And on energy, Mr. Putin has the whip hand against Europe. The EU, particularly Germany, put itself in a terrible position by making itself dependent on cheap Russia gas. It’s possible for Europe to kick its addiction over time, but going cold turkey, right now, risks an energy-shortage recession. That could lead to governments voted out of office and a fracturing of the NATO alliance – which is precisely why Mr. Putin is now squeezing gas deliveries to Europe, to prevent the continent from building up a surplus of fuel big enough to get through the winter while thumbing its nose at Russia.
The good news is that Western sanctions on exports to Russia, such as high-tech products and components, are having an impact. But any hope that Moscow’s ambitions could be beaten back by sanctions alone has been proven false. Smart and targeted sanctions can hamstring Russia and help Ukraine. But in the coming months, it is Western military aid that is likely to prove far more useful, and decisive.
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