Economic peacefare: Lessons for the future of European sanctions strategy

After a year of economic war with Russia, the effectiveness of the Western sanctions campaign is under intense scrutiny. On one hand, the unprecedented scale of the measures is depriving Russia of its foreign assets and many important technologies. On the other hand, the sanctions’ unintended global consequences may be contributing to the West’s relative isolation in its support for Ukraine. Russia’s economy, meanwhile, seems to be more resilient than many analysts had anticipated. Assessing the effectiveness of the sanctions is therefore a bit like reading a horoscope – there is a story in it for anybody who wants to find one.

One thing is becoming clear though: as the outcome of Russia’s war against Ukraine will likely be decided on the battlefield, the focus of Western support is shifting to fortifying Ukraine’s military-industrial endurance – as well as weakening that of Russia. Sanctions already contribute to this task in one way or another, for example, by depriving the Kremlin of revenue it needs to wage war. But Western sanctions strategy now needs to evolve more broadly to reflect this shift – and target its measures towards the ways Russia gets its hands on war materials and their components.

Moreover, Europeans need to consider the longer term. Economic deterrence will remain at the centre of any sanctions strategy. But the European Union and its member states should take lessons from the failures of that deterrence in this war – and start sharpening their economic tools for the next major conflict. Indeed, this preparation in peacetime for wartime sanctions should become a key objective of European industrial strategy.                                                        

The technology gap 

Leverage is fundamental to the effectiveness of both economic deterrence and wartime sanctions. The Kremlin’s military-industrial complex suffers a significant technology gap and a high level of dependence on Western components. Russia’s strategy following its illegal annexation of Crimea in 2014 was to phase out foreign imports (especially those coming from NATO members) for military equipment. However, an RUSI investigation of Russian weapon systems recovered from Ukraine found at least 450 vital foreign-made components, mostly originating from US microelectronics companies. Vladimir Putin has since switched to a war economy with the goal of churning out the necessary military equipment at scale – but Russian forces remain dependent on advanced and dual-use Western technologies.

This indicates that the current sanctions regime is yet to fully exploit the technology gap. One way the Kremlin continues to get its hands on Western components is by repurposing basic consumer electronics such as fridges and toasters for military use. Another and more worrying way is direct military sales from Iran, North Korea, and China, especially if the US government is right in its assessment that China is considering lethal aid – such as artillery and ammunition – for Russia. This kind of support seems unlikely on a large scale, given the economic costs Beijing would probably incur. But Putin and Xi Jinping’s “friendship without limits” ensures it cannot be discounted. So, keeping China from arming Russia should remain a priority for the West.

In the meantime, the Kremlin continues to learn sanctions-busting tricks from pariahs in Tehran and Pyongyang – and troves of Western technology from Russian equipment still litter the battlefields of Ukraine. There is also increasing evidence of military equipment shipments through hubs in Turkey and dual-use goods through China and Hong Kong.

Plugging these holes in the Western sanctions regime is a matter of urgency. The US has tightened its export controls around hundreds of basic consumer appliances. It has also increased diplomatic and coercive pressure on companies and governments in Turkey, Oman, the United Arab Emirates, and Central Asia. In Europe, measures against Iranian entities supplying Russia with military equipment could soon be followed by new powers to sanction foreign companies and states that are unwilling to clamp down on sanctions circumvention in their territories. But the implementation and enforcement of these measures will inevitably remain a never-ending game of whack-a-mole.

Economic deterrence therefore needs not only to be bold and credible on its sanctions threats, but should equally offer opportunities for cooperation. With respect to China, for example, the quickly diminishing prospects for better relations based on behaviour-change in Beijing are undermining the West’s overall economic deterrence: why should China change its approach if it believes relations will deteriorate anyway? Robust deterrence and preparedness can and must go hand in hand with a positive vision for interdependence with China, as European Commission president Ursula Von der Leyen recently outlined.

Peacetime economic security: keeping the advantage

Nevertheless, the economic war with Russia demonstrates that the sharpest swords in the Western armoury are key dual-use technology advantages. A European economic security doctrine needs to ensure that these advantages are not only maintained – but also strengthened with industrial policy and strategic technology control tools.

One way to maintain technological advantages to support deterrence is by cutting off rivals from access to key technologies. This may prove ineffective or even counter-productive with regards to Russia, given the leverage vital technology inputs could bring. And China’s strength in innovation and its military-civil fusion agenda require a careful and managed approach.

Washington, for example, is effectively trying to cut off China’s access to advanced semiconductors – since, together with Japan and the Netherlands, the US controls a major chokepoint in producing them. The recent export controls announced by these three states on semiconductor manufacturing equipment to China were a means to stall Beijing from developing advanced supercomputing, artificial intelligence, and quantum capabilities, which Washington says could translate into decisive military and economic advantages.

Conversations with US strategists indicate they know they are taking a gamble – should China manage to indigenise the technology, the chokepoint leverage would be lost. But, because of the complexity of advanced semiconductor manufacturing equipment and the deeply established Western innovation ecosystems therein, that gamble may well pay off.

A European economic security strategy which monitors technology channels with China carefully and, where necessary, restricts transactions, trade, or engagement is vital in a world in which the potential of economic warfare is only growing. It will be necessary to strengthen the screening of foreign direct investment in strategic sectors and control sensitive exports as part of this; but industrial policy should equally be supportive of this strategic task by not only limiting EU dependencies (such as those identified by the European Commission), but also shoring up and ringfencing Europe’s existing technology advantages and inter-dependencies that it may be forced to use for deterrence or even warfare (such as semiconductor manufacturing equipment, medical equipment, industrial robotics, special-purpose machinery, and aviation parts).

This requires nothing short of a leap in European economic security thinking. But economic deterrence and economic warfare are two sides of the same coin. If Europeans are serious about the first side of the coin – which they should be given the dramatic costs of the failure of deterrence with Russia – then they also need to be serious about the second side. Technology chokepoints and interdependencies by themselves do not prevent or resolve conflicts, but they add to a balance sheet of gains and losses. This underlines the need to promote and protect key trade and technology advantages in peacetime to prepare for sanctions in wartime.