African Reserves Loans

Sanctions fatigue is the next hurdle to confronting Putin

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The momentum behind Western sanctions against Vladimir Putin is waning. Even as the European Union toasts its toughest restrictions yet against the Russian war machine – including a partial ban on oil imports – concessions are mounting, ranging from exempting crude oil to removal of Putin’s favorite cleric from the sanctions list.

The Hungarian Viktor Orban, an admirer of Putin, clearly plays a big role in the break-up of the united front. But the risk of fatigue and low morale goes far beyond Budapest. The cost of hitting Putin where it hurts – energy – worries many leaders at a time of high inflation and an economic downturn, as does the grim spectacle of Russia’s advance regaining momentum after 100 days of fighting.

Along with differences of opinion seeping inside and outside the EU over what an endgame might look like, this doesn’t bode well in the short term. Estonian Prime Minister Kaja Kallas, who must now reassemble her governing coalition after its collapse last week, is keen to continue to tighten the screws on Moscow. But she acknowledges that everything will get “harder” from here – with little chance of a gas embargo in the next round of restrictions.

It’s time for a different approach – or a ‘pause’, as Kallas’ Belgian counterpart Alexander De Croo puts it.

There is no easy solution to sanctions fatigue. The “financial weapon” is an imperfect tool that is subject to uneven application and unintended consequences. The unprecedented scale of sanctions against Putin’s inner circle, as well as Russia’s financial system, airlines and trade, will contribute to an estimated 10% drop in Russia’s gross domestic product this year. But that did not deter or dislodge Putin.

Worse, there have also been counterproductive effects. Rising energy prices filled Putin’s pockets while impoverishing importers. Russia’s oil and gas revenues will be around $285 billion this year, according to Bloomberg Economics estimates. Add other raw materials, and it more than offsets $300 billion in Russian foreign reserves frozen under sanctions.

And while seizing the yachts and villas of wealthy oligarchs feels good, it is shocking to see Western companies leaving Russia selling assets to these billionaires who are effectively too big to sanction.

While the long-term answer here will be to go harder and faster against Russia, it will be vital to bolster economic defenses at home first. Barclays Plc estimates that a total embargo on Russian natural gas could reduce eurozone GDP by 4% compared to a reference scenario; without additional economic support for households, Orban’s rhetoric – which tastelessly likens energy sanctions to an economic “nuclear bomb” – will spread.

Already, an April YouGov survey revealed that European public opinion was somewhat divisive: more than 30% of respondents in seven countries, including Spain and Italy, advocated investing in trade and diplomacy with Russia, rather than in defense and security.

Without light at the end of the economic tunnel, the public mood could change. If this war drags on and becomes a test of morale, the West and the EU have the advantage in terms of resources and human capital, as noted by Miguel Otero Iglesias of the Royal Elcano Institute. But with this comes a need to protect the most vulnerable in society; budget support should be “inevitable”, he rightly adds.

Pandemic-like support measures should inspire Europe’s next policy steps, whether through the joint borrowing structure of the EU recovery fund or the ‘SURE’ loans offered to member states to protect the use. Unity will truly be strength in a time of rising interest rates and fragile public finances, especially as Putin begins to limit gas supplies to countries that don’t play by his rules.

It is easy to assume, as some have, that the dividing line in this conflict is between those who want to accommodate Putin and those who side with Ukraine. It is neither precise nor useful. The trip to Italy is particularly instructive: before Putin’s invasion, Mario Draghi was thinking about deeper gas ties with Russia. He has since backed an oil ban and supported sending heavy weapons to Ukraine despite domestic political resistance.

Yet he also called for a joint response to rising energy costs and urged the United States to think “carefully” about what a ceasefire might look like. As sanctions fatigue threatens to set in, it is Draghi’s approach, not Orban’s, that should inform the West’s next steps.

More from Bloomberg Opinion:

• Putin’s unconditional surrender is not the right goal: Ian Buruma

• Putin’s gas strategy only offers Germany bad choices: Javier Blas

Africa becomes collateral damage of the war in Ukraine: Bobby Ghosh

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

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