by Priyanka Boghani

When Russia annexed Crimea from Ukraine last March, the United States and European Union responded with an economic weapon — sanctions.

The first few rounds, applied in March and April of 2014, targeted Russian and Crimean officials, as well as businessmen seen to have close ties to President Vladimir Putin — his “inner circle” — with travel bans and asset freezes.

Since then, the West has steadily expanded its sanctions against Russian entities, targeting major businesses and parts of Russia’s financial, energy and military industries.

FRONTLINE talked to Anders Åslund, senior fellow at the Peterson Institute for International Economics, on Jan. 8, 2015 about the effects and consequences of Western sanctions on the Russian economy. Åslund served as an economic adviser to the Russian and Ukrainian governments in the 1990s.

Which round of sanctions do you think really had an effect on the Russian economy? How would you measure that?

The sanctions the U.S. imposed came in two big chunks. The first concerned Crimea, and they were only personal sanctions for Crimean and Russian leaders involved in the Crimean drama.

Then, the important sanctions were imposed on July 16, which are called sectoral sanctions.

We can see that no money has been going into Russia after July. No financial institutions dared to provide Russia with any financing more than a month after that. And that we know from talking to banks. …

The point is that the [July] financial sanctions have worked out as far more severe in their effect than anyone seems to have believed.

Would sanctions alone have damaged Russia’s economy without the current plunging oil prices?

There are three major causes for Russia’s economic troubles. The first cause is the corruption and bad economic policies that Putin pursues, which on their own would lead to stagnation, or at most 1 percent growth.

The second element is the falling oil prices. The oil prices have now fallen so much that Russia’s total export revenues this year will be two-thirds of what they have been before. That means that Russia will have to cut its imports by half. This is a big blow.

This is then reinforced by the financial sanctions, so that Russia cannot mitigate this blow by borrowing money. By ordinary standards, Russia is perfectly credit-worthy with a public debt that is only 10 percent of GDP. But if you don’t have access to financial markets, then it doesn’t matter how credit-worthy you are, because you’re not credit-worthy so-to-say.

[Editor’s Note: On Jan. 9, Fitch Ratings cut Russia’s credit rating to BBB-, one step above junk.]

What has been the impact on the Russian public so far?

The big impact is that the prices of buckwheat have increased as much as 70 percent. Basic food stuff has increased sharply. We’re seeing consumer panic in Russia because of the falling exchange rate. And the falling exchange rate is mainly because of the oil prices, but it’s also the financial sanctions. People are fearful of the situation and we’re seeing that the exchange rate is jumping up and down. It’s moving either way every so often by 5 percent in a day. The worst we’ve seen is it has gone down by 10 percent in a day.

There’s fundamental financial instability in Russia now, and this will have a big impact on the banking system. We’ve so far seen one medium-sized bank going under and two of the big state banks have needed recapitalization. We will see more of that.

And this of course will hit the GDP. My guess is we’ll see a decline in the order of 10 percent this year.

One of the initial rounds of sanctions targeted members of Putin’s so-called inner circle, including Gennady Timchenko [founder of commodity trading company Gunvor], Igor Sechin [chairman of Rosneft, Russia’s leading petroleum company], Arkady and Boris Rotenberg [magnates with majority stakes in construction firm Stroygazmontazh, and banks SMP and Investcapitalbank] and others. Were these sanctions largely symbolic, or did they do some real damage?

I think they’ve done real damage. These people… many of them are billionaires. They’re used to living in grand style, and now they are not allowed to travel to Europe and the U.S.

It’s particularly [the fact] that they’re not allowed to go to Europe that hurts them.

[Gennedy Timchenko] lives in Geneva. What I hear is that he moved back to Moscow because it became so impossible. Another of them — Boris Rotenberg — lives in Finland. Both Timchenko and Rotenberg are actually Finnish citizens.

A recent Bloomberg investigation found that companies linked to Timchenko and Arkady Rotenberg actually received more state contracts after being sanctioned. Does that mean the strategy of targeting Putin’s “inner circle” has in some way backfired?

Putin indeed has given Timchenko and Rotenberg more contracts through Gazprom. It now looks as if Putin is making the same mistake as [deposed President] Viktor Yanukovych did in Ukraine, giving ever more to his friends and very little to the others. Putin has been very good previously at distributing widely, but now he has tightened it so that it only goes to his close friends, and that is not likely to be popular.

And what do you think that could lead to, in terms of sentiment?

The elite [who aren’t part of his inner circle] are utterly alienated from Putin now. I don’t think they will rise in any way against Putin, but they will take money out of the country as fast as they can, so it will further destabilize the country.

The question is what will happen in the big industrial cities outside the most wealthy cities — Moscow and St. Petersburg. It would be surprising if we don’t see some social unrest down the road, because these are big blows to ordinary people.

Are further sanctions possible? What would next steps look like?

My view is that the sanctions are so severe that it’s simply not necessary to reinforce them further. It’s also easier to keep the Western front together. The U.S. has, in this case, been very careful to keep a united front with the whole of the European Union. The administration has thought that it’s more important to keep unity with the E.U. than impose even more severe sanctions. I think that policy has borne fruit now.

Have sanctions been seen as a success from the U.S. government’s perspective?

I would think that one could strongly argue that, because what’s happened is that Russia cannot get international financing from any source. Russian international reserves declined last year by $135 billion. We haven’t gotten the final number, but that’s the order. There has been a huge outflow of reserves from Russia. And of course, the Russian economy is now in a serious financial crisis, which is, to a considerable extent, caused by the financial sanctions.

Are Russians trying to get around the sanctions? Is that even possible?

They clearly are trying to get around it. They’ve been trying to get money from China. But it’s very striking that the Chinese are not providing financing for Russia, because like everyone else they’re afraid of the American financial regulators. …