Janis Kluge: Western pressure alone won’t cripple Russia’s war machine

On Aug. 6, U.S. President Donald Trump announced a new wave of tariffs—raising them to a total of 50%—against India, citing its continued purchases of Russian crude for refining. The White House said these imports help fund the Kremlin’s war machine. The decision marks the latest escalation in the West’s sanctions campaign against Russia, which began in 2014.

Just weeks earlier, the European Union enacted its 18th package of sanctions targeting the Russian economy. “The EU has just approved one of the most powerful sanctions packages against Russia,” said EU High Representative for Foreign Affairs, Kaja Kallas, at the time.

The new measures are significant—from the formal cancellation of the Nord Stream 2 gas pipeline to an adjustment of the oil price cap on Russian crude, which will be set at $47.60 per barrel starting Sept. 3.

But how powerful is this new EU package in practice? What real impact will it have on Russia’s economy? And what sanctions, if any, could truly bring Putin’s war machine to a halt?

NV discussed these questions with Dr. Janis Kluge, a senior researcher at Germany’s SWP think tank specializing in the Russian economy and international sanctions.
The conversation took place on July 30.

— The EU has approved 18’s package of sanctions against Russia. How will this affect the Russian economy? And how quickly will results be visible?

— I think it's important to consider where we are in the whole sanctioning process. We have seen these sanctions since the full scale invasion, which is three and a half years ago almost. And of course, now with the 18th package, it will not be a game changer. And there are several attempts to tighten the sanctions and there are several attempts to make enforcement better. But this is not a huge qualitative change to before. 

The EU is trying many things, which are important. And I can also point out some things that I think are key in the 18th package. But I would not expect an immediate or very large effect on the Russian economy. 

So, the things that I believe are essential for once is that Nord Stream 1 and 2 actually have been sanctioned. And this is maybe seems like it doesn't make any difference because there was not any gas flowing. But this is very important because Nord Stream was still an instrument that Russia used to divide Europe, to divide Germany. And it cannot do this anymore now because now it's unrealistic. And there was this American businessman who wanted to put it back into operation. And this is now really unrealistic. 

So, I hope that we have, with this sanctions package, ended the Nord Stream 2 saga forever. And this is a key step, even if  it doesn't make any difference right now. It makes a difference in terms of propaganda and influencing and so on. 

And the second important measure is that the oil price cap will be lowered. There is, unfortunately, the oil price cap doesn't work very well at the moment. The enforcement is not very effective.

The EU has been trying, and under the previous administration also the United States, have been trying to improve enforcement. But we've seen that the discount on Russian oil, so sort of the lost revenue that Russia incurs because of the oil price cap, has actually shrunk. This is partially because the oil price is very low. So, right now, the Russian oil price is below the cap anyway. So, it was important to lower it and to see if maybe something more could be achieved with this tool. But, again, I don't expect any short-term effect from this.

I would say that these sanctions, at this point, are more about maintaining and slowly further increasing, wherever possible, the pressure on Russia. But that there are no low-hanging fruits anymore and no measures that are still on the table that could be easily implemented and would make a huge difference for Russia's economy. 

— I have recently heard an interesting comparison that these EU sanctions against Russia are like trying to break the camel's back with a straw. Do you find this comparison relevant? 

— I think it's not too bad, actually. Because sanctions are one instrument in a bag of many different things that the EU is trying to do or that we are trying to do to also help Ukraine to decide this war or decide the war with Ukraine in our favor. And arms deliveries are very important. I would even say this is the most important part. 

At this time, sanctions are very important. And we don't know which individual piece of the puzzle will be decisive in the end. But we have to do whatever we can, even if it's just adding some straws on the camel's back. Because it's our duty to do so, to try it.

And so, yeah, you could say that that's the attempt. I think that in the end, that the Russian camel in the end sort of will run out of gas and that these sanctions will have made a difference. But it's unfortunately not very fast.

And of course, there's always more that needs to be done because the situation is simply so dramatic in Ukraine. 

— What other leverages EU has that could break the Russian economy? 

— I think that Russia's economy, I think it's very difficult to really break it. The reason is that Russia has so many friends and neutral countries, countries that are cooperating with Russia, that are supporting Russia directly or indirectly. Especially, of course, China. And we don't have enough leverage over a country like China to make it stop doing that. And I think this is a crucial problem. So it is not just in our hands. Of course, everything has to be tried. But yeah, so there is a limit of what our sanctions can do at the moment.

Whenever you say we have to develop sanctions further, it's like we have to do more of this thing that we're already doing. And we have to further decrease our imports of Russian energy. We have to further pressure Russian revenue from other countries as much as we can. And we have to further reduce and limit the things that we are supplying directly or indirectly to Russia. I think that sort of the recipe is not new.

There are sometimes things you could change, like you could switch from blacklisting goods that are going to Russia to whitelisting goods that are allowed and sort of try to have a much more reduced list of things that you are willing to export to Russia. But again, at the moment, the problem is that China is pretty much delivering everything to Russia that it needs. And China is very deeply integrated in Western supply chains. So they basically have all the Western goods in China, and they simply, they're delivering it to Russia. So what the EU has to focus on, and it's not easy and not pleasant, but we have to focus on these third countries. And the EU has to start.

It already started to do that, but we need the instrument of secondary sanctions. The EU doesn't want to call it that way because, you know, we for many years claimed that that's not legal and we don't want to do that. But it's now an emergency situation, and I think we have to do whatever is necessary.

So I think that putting more pressure on companies in third countries, in China, maybe in India, other countries, is very important. And the EU is slowly starting to do that, but I think more of that will be needed. 

— We have also seen these US efforts to put pressure on Russia, and Trump is threatening to impose new tariffs on Russia and secondary sanctions on countries that buy Russian oil. Do you have an estimation of how this might influence the Russian economy?

—  So in principle, the United States always has a bit more possibilities to sanction because they have the US dollar financial system, which makes it a bit easier to put pressure also on third countries. So they have a bigger sword, so to say, in sanctioning than the EU. But the Biden administration has also tried to sanction, you know, you could say they were too careful and for some time they were, but at least now with the farewell package in January, they actually did quite a few things.

I mean, they could have done more, but still, it's not that as also the same thing is true about US sanctions, that not really low-hanging fruits are left and it's not, there's not this one easy measure.

 So the problem, it's clear that for Russia, the key sort of artery that keeps them afloat is the oil exports, because oil, on the one hand, it's 40% of their total exports. It's a third of their budget. So it's very important for the Russian regime to sustain this war, to have oil exports. And it's sort of the one thing that we have not really tackled that much. 

But there are two problems. The first one is that we have to find the right instruments. I think it would be possible to threaten secondary sanctions against buyers of Russian oil, so they would stop buying it. Something similar was done to Iran, and at least initially it worked quite well there.

So I think that this first problem of how to reduce Russian oil exports, it's manageable. But the second problem is then how to replace Russian oil exports. And this is of course the main fear of Europeans, the Americans, because then the oil price will increase. And Russia simply has a very large part of the global oil market. So if you even reduced Russia's exports by a quarter, this would have a drastic impact on world oil prices. So you can sort of predict how the oil price will react if you take away a certain volume of oil. But still, I mean, right now the oil market is very well supplied.

So there is some bigger room and some things could be done. 

But again, it would not immediately lead to the collapse of the Russian economy. 

So what we could do, for example, is to limit oil exports step by step, to give the oil market time to adapt. Because if you take away Russian oil, over time there will be new producers that fill the gap. And for some time the oil price might be a little bit higher, but, you know, it's possible to do it slowly. The problem is that so far nothing was done in that direction, and we have to start at some point. So I think this would make the most sense. 

Regarding these threats from Donald Trump, I'm very skeptical, unfortunately, that he will actually turn against Putin. And he will actually do something that really hurts Russia. I saw that today he criticized India for cooperating with Russia and taking Russian oil. But still, I would like to see some proof that he would do anything. Because so far, the U.S. has really, since Biden stepped down and Trump moved to the White House, the U.S. has really disappeared as a sanction actor.

They have, you know, their sanctions are still in place, but the enforcement is not as active anymore. And there were no new sanctions. So I first want to see some action before I believe his deadlines.

And the thing is that he's talking about secondary tariffs. Like 100% tariffs or even 500%, you know, about this Graham Senate bill. But that's not realistic. The U.S. just realized in a painful way this spring that they cannot deal 100% tariff on China because it will hit their own economy way too much. So they had to lower it. You know, remember then they had this escalation with tariffs in April.

And in the end, they stopped escalating because they realized, oh, this is really dangerous for the U.S. too. So they will not impose 100% tariff on China. I don't think that's a realistic possibility. And China knows that. And that's why China will not stop importing Russian energy. China might even continue, even if the U.S. would do that, China might still want to continue.

But still, whatever creates additional pressure on the buyers of Russian energy is good. I just don't think that Trump will come through with these very radical things. And whenever he speaks about Russia sanctions, you really notice that he hasn't thought about it at all. He doesn't really know how they work. And he doesn't really know what the U.S. could do or couldn't do. And I'm afraid he overestimates his own power or the U.S.'s power to really cripple the Russian economy. Because it's not easy. It's difficult. It takes effort, thinking, perseverance. And so I'm not too optimistic at the moment. But I would say that the signs in the last weeks have been very positive. 

— Which percentage of the tariffs do you think the U.S. might use instead of 100? Like, you know, 20 percent or 30? What would be bearable for them? 

— The thing is that these I would say for Trump trade policy, these negotiations that he had with several countries now is more important than Russia.

And he has now, he's trying to make deals, made a deal with the EU. He's trying, he's negotiating with China. He's, you know, just imposed a tariff on India. It's more, this is more important to him than Russia. So he will not change the trade conditions drastically because of Russia, I think, at this point. So in the case of India, he imposed a 25 percent tariff. And he justified it with, you know, the fact that they're importing Russian oil. But it looked more like a justification and less like really a consequence of it. 

And so while, of course, you know, it says it could deal with the 30 percent or maybe even 50 percent tariff on Chinese goods, it's possible. I think that Trump will not set the tariff depending on what Russia does. He will set the tariff depending on the deal that he's negotiating with China at the moment. 

— How would you describe the state of the Russian economy today?

—- The Russian economy is, was quite overheated in the last couple of years. And at the moment it's cooling down rapidly. It's not clear yet if this will be what is called a soft landing, meaning that, you know, the economy cools down and then moves into a new neutral state, or if it will be a more intense, you know, crisis. There are, this is still unclear.

Both could happen. 

At the moment, the situation is difficult for Russia because several things are combined. On the one hand, you know, they had this inflation problem, so they really had to increase interest rates and this led to a cooling down of the economy. The second problem is that, you know, the labor scarcity is so intense that it's still difficult to fight inflation. In fact, if you saw inflation can come back at any point, that's also a problem. And then the third problem is that the oil price generally in the world, not because of Russia, just generally came down over the last couple of years. And this makes things harder for Russia. This hits the Russian budget and sort of these external conditions are also not great. So all of this happens at once. 

And, you know, so I would say that the Russian economic situation is still worsening at the moment. I think that it's not a recession yet. They might have growth in the second quarter, so it's not what we would call a recession. If you have two consecutive quarters of negative growth, then you would have a recession. Probably not yet, but it's a problem for them that the economy is not growing anymore because all the spending plans are based on growth, the plans of the businesses to repay their loans, you know, – it's all planned with growth.

And if the growth is not there anymore, you will have a much more difficult situation and financing the war will be more difficult. It will still be the priority in Russia. And, you know, they have to, they will increase taxes and they will do all, you know, a lot of unpleasant things they haven't done yet.

I mean, they have increased taxes, but they can do it even more. It doesn't mean that they will run out of money for the war, but within Russia it will get more difficult. There will be probably more political conflicts about resources because they are becoming scarcer.

Overall the economic situation it's still not bad. Russia still has sort of full employment and inflation has been coming down over recent months. 

But there are some serious risks.  And the most serious risks are in the sort of in credit and lending because last year many companies have taken out loans at very high interest rates and expecting that inflation will continue and that they will get, you know, all of these customers this year and now suddenly the customers are not there, inflation is not there, they cannot raise their prices, while they have to pay more and more for their own personnel. So they are being squeezed and this will definitely lead to some bankruptcies and, you know, that there will be some trouble. But, again, it's not clear yet if it will be, you know, a big crisis or just sort of a cool down.

That is also more or less intended by the central bank. 

— How many years would you give Russia? I mean, how many more years they can lead this war at this scale with this situation in their economy?

—  So I think that there are two parts of this question. Because there are certain aspects of Russia's ability to fight this war that are connected with the economy.

One is the ability to recruit new soldiers. It's very costly. They have low unemployment. So it's getting more and more difficult to recruit new soldiers. So far they have still been able to recruit a lot. So it's still going at 1,000 plus each day. But still every day the price they have to pay to recruit these soldiers is increasing. So this is like an open question. How much will they have to pay? Because the Russian regime at the moment, what they are doing is they're giving the people a lot of money. So if you die in the war, it's your own fault because you wanted the money. The Russians will not blame Putin, but they will blame their neighbor that went to fight because he wanted to get rich. So it's his own fault. And this is very important for Russia's domestic stability. That sort of it's, you know, you can choose if you go or not and you do it for the money. That's less risky. So this is the recruitment side. 

And there is, of course, there's a risk that it will not be enough anymore. This might mean that Russia has to do another round of forced mobilization, which is extremely unpopular and will lead to Russian men wanting to leave the country. Russia would have to close the borders as well for men. So, I mean, it would be a big change in domestic policy if they would have to go for that again. So they would pump a lot of money into this to avoid it.

The second sort of bottleneck is the production capacity of the military industry. As you know, the Russians have relied on refurbishing old Soviet material to keep the goods flowing to the front line. So especially armored vehicles, fighting vehicles, tanks, artillery. They were relying on these old reserves and they are running low. And this means that they either have to produce it from the ground up. So to have completely new tanks, which is much, much more expensive than refurbishing old ones. Or they will have to adjust their tactics in the war to do with fewer tanks and fewer artillery pieces. So maybe even reduce the intensity of the war or focus more on drones and missiles. Because then they have this bottleneck.

So this is also, of course, related to the economy. But these are more questions. It's not a question necessarily of money. Because it's a question of how many people can you find and how many tanks can you produce. And this is a question about how much capacity you have at your factories. Because it's not that easy to simply increase the capacity and double it or triple it, especially under sanctions.

So these are, I think, the most relevant limitations.

 But the question you're asking is more about the macroeconomic situation and how long that will be stable enough. And how long maybe Russia has enough money, the government has enough money to finance all this.

And I usually rephrase the question because I'm often asked how much time Russia still has. And I think that maybe one different way to ask this question is how much would Russia have to change to be able to continue. How much does Putin have to squeeze the Russian people for money, for fathers and sons? How much does he have to take away from the Russians to continue his war? And how much more autocratic will the regime become because of this? Because there are still things that he can do.

And there are ways in which this political system in Russia can change and become even more autocratic and totalitarian. And if that happens, it might still be a few years that Russia can continue. 

The economy as such will not collapse. It will just mean that the people will have less income. And they will be probably less happy. But they will still probably be under control of the police state and secret services.

Unless there is some sort of social movement against Putin or against the war, which is nowhere to be seen at the moment. Putin can squeeze the country and try to get more out of it. And I think he's ready to do that in case he needs it for the war. So I think that Russia can still continue this war, unfortunately, for several years.

But it will probably drastically change Russia and make many Russians much worse off. And it will affect Russians much more than it is right now. Because, to be honest, right now many Russians are living a life as if the war doesn't exist. And, of course, they cannot make holidays in Europe. Well, they can, but it's more expensive and difficult. But other than that, they sometimes just choose to ignore it.