By Invitation | Russia and Ukraine
Dmitri Alperovitch on the risks of escalation
The West must tailor its sanctions to forestall economic devastation and a spiralling conflict
Feb 23rd 2022 (Updated Feb 25th 2022)
Editor’s note: Since this article was published, Vladimir Putin, Russia’s president, ordered a “special military operation”, declaring war.
Four months after Russia began its build-up of troops on Ukraine’s border, the conflict between the two countries is entering its next—and most critical—phase. On February 21st Russia’s President Vladimir Putin delivered a fiery speech in which he recognised the independence of two separatist regions in eastern Ukraine, claiming that “modern Ukraine was entirely and fully created by Russia”. Mr Putin then ordered additional Russian troops into those regions in a move that a senior official in the White House condemned a day later as “the beginning of an invasion”.
The response from the West is under way. On February 22nd the British government announced sanctions against a handful of small Russian banks and three Russian oligarchs; Germany announced that it was suspending certification of the Nord Stream 2 gas pipeline, which, once operational, was to carry natural gas from Russia to western Europe. In Washington, the White House also unveiled a limited set of sanctions against the two separatist regions. Pressure is building in Congress for the introduction of a more extensive sanctions package.
But as the world awaits Russia’s next move, America and its allies need to look beyond a probable Russian invasion to the possible scenarios that follow from any war and the subsequent imposition of Western sanctions. At this important moment America must tailor its response carefully to avoid initiating a pattern of escalation that could result in a potentially devastating hot war with Russia.
The White House has already threatened extensive economic sanctions in response to further Russian actions. As Vice-President Kamala Harris confirmed at the Munich Security Conference in recent days, America and its allies are prepared to “impose significant and unprecedented economic costs” on Russian financial companies. In addition to these sanctions, the Washington Post reports that the Biden administration has threatened to use a novel export-control tool—known as the “foreign direct-product rule”—to ban global exports of semiconductors to Russia when made with American technology or software.
Make no mistake about this: the proposed combination of sanctions on top Russian banks and implementation of export controls on semiconductors would be likely to severely debilitate the Russian economy. And although many in the West may initially cheer this outcome as righteous punishment for Russia’s blatant violation of Ukrainian sovereignty, these measures will probably trigger significant Russian retaliation against America. That prospect all but guarantees that the conflict will not come to an end with an invasion of Ukraine.
Faced with a potentially existential threat to its economic well-being, and seeing itself as having nothing more to lose, Russia will have several tools at its disposal with which to respond. In the economic sphere, Russia can limit the export of strategic resources to the West, including grain, fertiliser, titanium, palladium, aluminium, nickel and timber—to say nothing of possibly calamitous limits on oil and gas exports. Consider that Russia is the world’s biggest exporter of fertiliser, without which food prices around the world would rocket. Over 70% of neon gas—used in the sophisticated laser-etching technology needed for manufacturing most semiconductors—comes from Ukraine. Russia could easily stop its supply in the event of war. Mr Putin could also take additional measures simply to make life difficult for Westerners, including banning overflight rights for Western airlines on routes to Asia.
The purpose of these measures would be to inflict swift and significant economic pain on America and Europe by exacerbating already spiking inflation—now about 7.5% in America—while simultaneously placing even more stress on Western supply chains. Already these have been pushed to breaking point by the fallout from the coronavirus pandemic.
Of course all of these measures will be enormously expensive for Russia itself. But in the face of severe economic sanctions—and while still having access to $630bn in foreign reserves that can buoy the Russian economy for a few months at least—Mr Putin will probably try his luck and hit back.
It is not impossible that this gamble will pay off. In America these measures would be likely to inflict economic hardship on already weary American consumers. They would disproportionately affect working- and middle-class Americans who have suffered the most from the economic fallout caused by the coronavirus pandemic. Coming in a rancorous mid-term campaign season, this deepening economic pain would not be easy for politicians to brush off. In fact, Russia may be counting on such political pressure to compel Congress into easing sanctions.
Even that may not be the end of the story. If America and its allies stay the course on economic sanctions, Russia could further escalate the conflict in other ways. Carrying out cyber-attacks against American and European financial institutions and energy infrastructure is one. Having already exhausted the power of economic sanctions, America and its European allies would have few choices other than to respond to these attacks with offensive cyber-strikes of their own. This pattern of tit-for-tat cyber retaliation could place Russia and the West on a worrying path. It could end with the conflict spilling out of cyberspace and into the realm of a hot conflict. This outcome—a hot conflict between two nuclear powers with extensive cyber capabilities—is one that everyone in the world should be anxious to avoid.
The purpose of carefully examining these potential post-invasion scenarios is not to argue that America and its allies should impose no costs on Russia for an invasion. Rather it is to drive home the point that these countries, in implementing an appropriate sanctions package, will need to be extremely mindful to avoid triggering a situation of uncontrolled escalation with a major nuclear power—and one that also happens to be a global supplier of critical materials. There is no doubt that Russia should pay a significant price for invading Ukraine, but immediately slapping Russia with the full range of economic penalties risks leading to a spiralling situation that could precipitate significant economic blowback in America and Europe.
At the moment when the Biden administration has rightly made it clear that its top priority is avoiding a hot war with Russia, Western allies must be careful to craft a response that forestalls that unimaginably horrible outcome. ■
Dmitri Alperovitch is a technology executive and the chairman of Silverado Policy Accelerator, a geopolitical think-tank.
