The economic sanctions^[1] Australia has imposed in the wake of Russia’s invasion of the Ukraine are an extension of those applied in 2014 after Russia annexed the Crimea.

As with the US, UK and European Union sanction regimes, Australia’s operate across three areas:

• technological, involving bans on exports of goods for use in oil and gas exploration and weapons production

• financial, involving bans on financial services and financial trading with designated entities

• personal, involving travel bans and limits on commercial relations for designated people

The question is whether they will have consequences for Russia’s economy and so act as a deterrent to further military action.

Certain conditions are needed for sanctions to have coercive power.

• Either there needs to be a large and preferably asymmetric economic relationship between the countries, with the asymmetry favouring the sanctioning country. This might be the case if Russia bought many more goods from Australia than Australia bought from Russia.

• Or the sanctioning country needs to control critical technologies and/or infrastructure that are essential to the targeted country, and the sanctions will cut-off access.

Neither of these conditions hold for Russia and Australia.

Australia’s leverage is negligible

Of Australia’s total A$873 billion^[2] two-way trade with all countries in 2019-20, only a miniscule $1.2 billion^[3] was with Russia. For both countries this figure is negligible, so asymmetry is irrelevant.

Nor does Australia control any critical infrastructure or technology of consequence to Russia which cannot be sourced elsewhere.

Read more: Morrison announces sanctions against Russia, warns of cyber retaliation^[4]

All told, Australian sanctions will have almost zero real-world consequences for Russia, nor do they imply difficulties for Australian businesses, aside from the tiny fraction who have trade and investment ties with the country.

The only states that have both the potential for effective sanctioning power over Russia and the will to use it are the US, the United Kingdom and the European Union acting as a block, due to large trade relationships and critical dependencies.

Europe has more leverage

Russia is highly dependent on fossil fuel exports, which comprised 39%^[5] of total state revenue in 2019. The European Union takes 70%^[6] of its gas exports.

Things are not entirely asymmetric because the EU in turn depends on Russia for about 40% of its gas imports.

Sanctions on buying energy would hurt Russia badly, but also result in a very significant price hike across the European Union and to a lesser extent globally – a cost that has made EU leaders cautious^[7] about using this most potent of sanctions.

The US has more leverage still

The US has significant power over the global financial system^[8] in what amounts to an asymmetric relationship to Russia. This derives from the dominant position of US financial institutions and of the US dollar as the global currency.

This dominance allows Washington to apply sanctions third countries must also enforce, or themselves face becoming financially sanctioned, making these sanctions global in practice – as Iran experienced^[9] to devastating effect.

Yet Russia is far larger than Iran economically, so there will be far greater costs from cutting Russia out of the global financial system, if not so much for the US, then for its allies in the European Union, where European banks have tens of billions in outstanding loans^[10] to Russian entities.

So far, the US is cautious

Repayments of these loans would be threatened by broad-based financial sanctions, especially banning Russia from the global payments system SWIFT^[11] run by the Society for Worldwide Interbank Financial Telecommunications.

While US sanctions announced on February 24 against Russia’s biggest financial institutions^[12] will cause considerable economic disruption and costs, they still do not amount to the full expulsion from the global financial system that was imposed on Iran.

Read more: Ukraine: sanctions can still make a difference – but only if done right^[13]

British sanctions could significantly hurt Putin’s clique of supporting oligarchs in the UK by shutting down “Londongrad”^[14], a term used to describe a city awash with laundered funds from Russian oligarchs.

Freezing the oligarchs’ assets could undermine their support for Putin, but has obvious financial costs to London, and would have to overcome the political influence of Russian elites in London.

Little could deter Putin

Australia cannot hurt Russia using sanctions, and the countries that can hurt Russia have complex calculations to make in calibrating their actions for maximum impact at minimum cost.

That does not mean Australian action is pointless. Australian sanctions exhibit solidarity with allies and add to the international pressure and outcry against Putin’s illegal act of war.

The bigger question is whether any sanctions at all will now deter Putin from following through on his goals, given that the invasion is underway.

References

1. ^{^} economic sanctions (www.dfat.gov.au)
2. ^{^} A$873 billion (www.dfat.gov.au)
3. ^{^} $1.2 billion (theconversation.com)
4. ^{^} Morrison announces sanctions against Russia, warns of cyber retaliation (theconversation.com)
5. ^{^} 39% (www.bbc.com)
6. ^{^} 70% (www.washingtonpost.com)
7. ^{^} cautious (www.afr.com)
8. ^{^} global financial system (www.economist.com)
9. ^{^} as Iran experienced (www.bbc.com)
10. ^{^} tens of billions in outstanding loans (www.economist.com)
11. ^{^} SWIFT (www.investopedia.com)
12. ^{^} biggest financial institutions (home.treasury.gov)
13. ^{^} Ukraine: sanctions can still make a difference – but only if done right (theconversation.com)
14. ^{^} “Londongrad” (www.dw.com)