“Reverse” Sanctions?

President Biden has been credited in the media and in democratic circles for having responded swiftly and effectively to Russia’s invasion of Ukraine.  While it is true that the sanctions plan that his administration has orchestrated against Russia was one of the few available arrows in his quiver that didn’t risk a wider conflict, it is becoming quite apparent that the sanctions are not effective, or at least not as intended.

A few weeks after the start of the war Biden boasted that “sanctions are working”, with the ruble in free fall worth not much more than an American penny. However, six months later, the ruble has more than doubled in value since mid-March and is now worth more (61 to the Dollar) than it was worth before the war (83 for one Dollar). In addition, Russia’s income on its Crude and Gas exports are higher than before, with a lower level of sales more than compensated by higher prices. If Russia were a corporation, it would be having a great quarter, with stable income and a fraction of Cost of Goods Sold.

So who is suffering from these sanctions? Very simple: Europe. While one should remember that Europe’s ills are mainly of its own making, with a disastrous energy policy that relied on Russia being their friend forever, it doesn’t take a sophisticated econometric model to understand that in the zero sum game of trade economics, Russia is not losing, rather it is actually winning, while European consumers and factories have to pay for its gas up to ten times the cost of last year. This is ravaging energy-heavy industries such as steel and ceramics for example, and in a way all heavy industry which is dependent on energy. We are now hearing of factories in the continent that will not reopen after the August break, as in many industries production cost is now higher than prices. Producing means losing money. If this vicious circle is not corrected, look for industrial production to take a nosedive in the fall, with all the economic and social consequences. Requests for layoffs are already being made.

The sanctions on Russia have become sanctions on Europe. There may not be a quick fix, but it is obvious that Biden’s sanctions have failed miserably. Time for a change, before the European united front fractures and populist parties gain.