Rogue One: Why Putin should truly fear the new European sanctions

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In response to Alexei Navalny’s poisoning, The European Union has announced sanctions against several high-ranking Russian officials, notably Alexander Bortnikov, head of the FSB, and Sergey Kiriyenko, Putin’s deputy chief of staff and a key figure in the Russian domestic policy. Casting aside the habitual skepticism towards Europe’s anti-Russian sanctions (“insufficient”, “another futile expression of concern”, or “as if Putin’s cronies ever cared”), let us get to the reality of what this act means on the part of Europe and what ramifications for Putin we can expect.

To begin with, we should disprove those ridiculing Western anti-Putin sanctions and insisting that “they are pointless”. Such assertions show a poor understanding of the nature of Russia’s economic processes and the profound dependence of Putin’s economy on international financial markets. Does it surprise you that the Russian economy hasn’t shown considerable growth in years, with its residents’ real income decreasing or stagnant for seven years on end? Well, it shouldn’t: the vital factor of economic growth over the last few years has been the possibility of borrowing from foreign capital markets. Due to a weak economy and a shortage of confidence, the Russian financial system is incapable of creating cheap long money. Traditionally, Russian enterprises and banks compensated for this deficiency by large-scale external borrowing. Compared to less than $50 bn in early 2003, Russian banks and companies’ aggregate foreign debt had exceeded $400 bn by early 2008 to peak at $700 bn in July 2014. Russian corporations and banks going on a borrowing spree in the West became the key factor supporting the nation’s economic growth.