Review of Maximilian Hess, “Economic War: Ukraine and the Global Conflict between Russia and the West” (London: Hurst & Co., 2023).
Barcelona (Special to Informed Comment; Feature) – The war in Ukraine is being fought at two different levels. The first one is the military confrontation, where developments are measured in numbers of casualties, kill ratios, and square kilometers changing hands from one belligerent to the other. The second level of the conflict is economic, and here the key aspects are GDP growth, the value of foreign assets seized or companies under sanctions, and the prices of gas and oil. Needless to say, both levels are deeply interconnected. However, for the purpose of this review, it might be useful to look at them separately at first.
The military situation in Ukraine can be best described as one of stalemate when looking at the conflict maps. Ukraine’s commander-in-chief, General Valery Zaluzhny, admitted as much on November 2023, when he said that “there will most likely be no deep and beautiful breakthrough.” During 2023, the frontline barely moved and, on the few occasions it did, the changes came at the cost of enormous human losses. The battle of Bakhmut, which continues around the city after Bakhmut itself was taken by Russian troops following almost seven months of fighting, is paradigmatic of these dynamics.
If the war is slightly tilting in any direction, the current situation would suggest it is in Russia’s favor. Some analysts point out that, while the conflict maps show stability, Ukraine might be slowly exhausting its limited supplies of soldiers, weapons, and ammunition. The recent struggles in both Washington and Brussels to approve supplies for the Ukrainian armed forces lend further credibility to this thesis.
On the economic front of the war, which has pitted Russia against Ukraine and its Western supporters, it is similarly difficult to reach any definitive conclusion on who is coming out on top. What is clear is that neither the West nor Russia achieved their maximalist goals in the economic struggle. Russia did not financially collapse in the face of incremental Western sanctions and Europe had less trouble than expected to surmount last winter’s energy crisis despite Moscow’s resort to cutting gas supplies.
This economic dimension of the war, which in recently published books has received less attention than the military and political dynamics of the conflict, sits at the core of “Economic War: Ukraine and the Global Conflict between Russia and the West”, authored by political risk analyst and consultant Maximilian Hess. Hess does not look for winners or losers in the current economic war but provides a broad context to understand what is at stake on the economic front. Hess devotes half of his book to the prelude of the current military and economic war, covering the period that followed Russia’s annexation of Crimea in 2014 and the establishment of two Russia-supported separatist republics in the regions of Donetsk and Luhansk.
After the pro-Russian Ukrainian president Viktor Yanukovych was toppled in the context of the Euromaidan protests in 2014, his successor Petro Poroshenko took a more pro-European course. Changes in geopolitical orientation notwithstanding, corruption continued to be rife. As Hess notes, “the revolution and subsequent conflict recast the networks of Ukraine’s politicians and oligarchs” but “failed to break the system that enabled them to rotate in and out of business and politics.” Meanwhile, the Obama administration imposed sanctions on Russia for its expansionist behavior but Western European countries limited their extent. In 2017, the Trump administration would also tone down US sanctions.
Germany, with its heavy reliance on cheap Russian gas for industries and households, was the main European proponent of retaining economic ties with Russia after the annexation of Crimea. Hess is very critical of Germany’s political leaders during that period. He argues that Berlin pursued economic interdependence but failed to realize “Putin did not oversee a democracy or have to answer to economic pressures from his own business community” after Putin disciplined unruly oligarchs. With the benefit of hindsight, it is obvious that Europe’s energy dependency on Russia was an enormous mistake.
Even so, countries like Germany were probably not betting so much on the liberal ideal of trade driving cooperation in the political realm but rather on the high loss of revenue Russia would suffer if it stopped selling gas to Europe. After all, the Soviet Union had been a reliable provider of gas to West Germany during the Cold War. Back in 2019, German economist Michael Wohlgemuth argued that Moscow was more dependent on its gas exports to Germany than Germany was on Russian deliveries. This certainly did not stop Putin from attacking Ukraine, but the numbers supported Wohlgemuth’s analysis. In 2021, Russia exported 203 billion cubic meters (bcm) of gas via pipeline. Among these exports, almost 146 billion cubic meters (bcm) were going to EU customers and around half of this volume, to Germany.
Hess explains that, although the sanctions imposed on Russia in the wake of the annexation of Crimea had very limited effects, the Kremlin’s reaction to them “asserted firmer control over Russia’s economy and increasingly sought to undermine the West’s influence both at home and abroad.” As part of these efforts to increase its global geoeconomic power, Russia looked to Latin America (especially Venezuela), Africa and Asia.
But the most important partnership was arguably the one established with Saudi Arabia, the only oil exporter bigger than Russia. Riyadh and Moscow had engaged in an oil price war during the oil glut at the beginning of the Covid-19 pandemic. However, by 2022 Putin had secured an alliance with the Saudi leader Mohammad bin Salman to reduce oil production and ensure higher and more stable oil prices. Thus, Putin felt that Russia’s energy flank “was secure ahead of the all-out economic war that would ensue when its forces attacked”, explains Hess. Russia’s total gas exports fell around 50 percent in 2022, and a further 25 percent in 2023. Although gas prices in 2022 reached historical heights and helped Russia offset the effects of the loss in export volume, in 2023 the prices returned to levels similar to those in 2019 or 2020. It has been oil, not gas, that has sustained Russia throughout the war.
Since the invasion of Ukraine, Moscow has often been selling its oil at a discount price. The reasons behind this are the limited number of countries willing to buy Russian oil and the oil price cap imposed by the G-7 and the European Union. The oil price cap prohibits G-7 or EU-based finance companies from providing services to Russian oil companies selling their oil above $60 a barrel. Still, China and India, the latter moving in 2022 from barely buying Russian oil to being the second largest importer after Beijing, have kept Russia’s oil exports afloat.
Hess identifies some key weaknesses in Russia’s position in the economic war against the West. Moscow underestimated the willingness of the EU to stop buying Russian oil and introduce major reductions in its gas imports. Also important, Russia has suffered greatly from the power of the dollar, which allows US sanctions to have a much greater impact than the US share of the global economy would allow. Too often missing in Hess’ “Economic War”, however, is the fact that the West’s economic war against Russia is not supposed to be an end in itself but a means to achieve political results, which so far have been lacking.
A political success would arguably mean either a significant weakening of Russia’s war effort or forcing Moscow to negotiate an end to the war on favorable terms for Ukraine. In one example among many, President of the European Commission Ursula von der Leyen announced in December 2022, when the oil price cap on Russia was introduced, that “the decision will hit Russia’s revenues even harder and reduce its ability to wage war in Ukraine.”
Hess fails to engage with literature that adopts a critical approach towards the effectiveness of sanctions. To understand why sanctions on Russia have had only modest effects on the country’s war capabilities, it useful to search elsewhere. Nicholas Mulder, the author of “The Economic Weapon: The Rise of Sanctions as a Tool of Modern War”, explained in an op-ed that “both the deterrent and the compellent effect of US sanctions have fallen dramatically amid rampant overuse.” Writing about the current sanctions against Russia, Mulder has noted that “the lure of cheap raw materials from Russia is spurring sanctions avoidance on a previously unseen scale.”
The use of economic sanctions in modern times, from post-revolutionary Cuba to Saddam Hussein’s Iraq, has consistently impoverished civilian populations but has a poor record in forcing policy changes. Sanctions, as seen in the case of Iran, have also incentivized circumvention tools that are certainly suboptimal but keep sanctioned regimes going, especially when the state has a reliable coercive apparatus to deal with protests over decreasing living standards. Sanctioned states also tend to cooperate with each other. Iran, with a long experience in dealing with sanctions, has provided drones and drone components to Russia for its use against Ukraine.
Hess concludes his book by noting that “Russia cannot win the economic war with the tools at its disposal. The West, however, could still lose it.” The important question, nonetheless, is whether Russia needs to win the economic war to achieve military successes in Ukraine, or, at least, to prevent Ukraine from recovering territory. Everything seems to indicate that not losing the economic war is more than enough for Russia to fulfill limited military objectives and could even be sufficient to make major advances if external material support for Ukraine decreases. Soon before the EU passed the 12th package of sanctions against Russia in December 2023, the Centre for Research on Energy and Clean Air (CREA) published a report on the effects of the oil price cap on Russia. The report noted that “the impact of the price cap has been limited due to inadequate monitoring and enforcement.” It added that “the sanctions have not reduced the Kremlin’s resolve for war.”
Hess’ “Economic War” offers the lay reader an accessible but detailed account of the economic war between Russia and the West. The book is particularly valuable for its long-time approach, which allows Hess to carefully explore connections between the post-2014 and post-2022 contexts. “Economic War”, however, would have benefited from a stronger focus on the close relation between the economic war and the political/military war and a more skeptical approach to the power of sanctions to alter state behavior.
 Maximilian Hess, Economic War: Ukraine and the Global Conflict between Russia and the West (London: Hurst & Co., 2023), p. 20.
 Ibid., p. 62.
 Ibid., p. 2.
 Ibid., p. 127.
 Ibid., p. 201.