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More important in today's business, we have Dr. Richard Coleman, who is going to address us,

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and I'm going to have him since she's been more by his own background,

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because the person who was going to Tucson was a friend of Richard's, which is Andrew Morgan.

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It's on the Andrew six. I want to start again.

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But the issue of economics and of the energy security might not seem to be an obvious part of the change in culture war,

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that they may not see a bit of obvious connection. But of course,

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anyone who studies strategy will know that there are multiple levers of national power and

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a better understanding of things other than simply the military instruments are vital.

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If we're going to get some sense of what in the world is going to be strategic interaction between Russia and Europe.

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I think over lunch, I think you and I are probably moderately optimistic about future what's really going on at the moment.

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But it's those talks called adapting to sanctions, how Russian how Russia responded to Western, for example.

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Richard, thank you very much. And speaking of political hacks, we have some thank you a chance.

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Oh, so I am this is going to be the first time that I'm going to deliver in condensed form a book that I've just finished recently.

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It's currently going through the publication process should be published in June or July.

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And the objectives of the book that I've written is to look at how sanctions that were imposed on Russia in 2014 affected Russia's not just economy,

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but its system of political economy. And that's what I'm going to talk about.

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So that's the first for me where I've tried to sum up what amounts to about 300 pages in about 25 minutes.

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So we'll see how I go. I don't have to apologise in advance.

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I'm going to make broad brush points if of course, there's anything which you think that sounds a bit odd or it needs to be qualified.

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That is Q&A for that. And I'll try to make sure that I leave more time to Q&A.

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And that way I can respond to any questions of detail.

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I also have to apologise because I am not the most gifted of PowerPoint writer.

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So we've got Blindspot background and Black Text and there will be some charts.

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But I don't generally use High Point in recent years and I was surprised in the sense that I thought to myself,

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I'm going to need to practice this for any book which is in such like because this really is rudimentary.

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I criticise students, I think if they get gave one of these to me at the university.

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So what do they do briefly in each instances? Firstly, talk about sanctions and political economy.

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What we might want,

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the literature that's out there suggests we might expect to see countries that are under sanctions and identify what I think is a gap.

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And that gap is that very little of the sanctions literature focuses on how a target country and that's the the

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term used when you're looking at sanctions the target how that target country will adapt and respond to sanctions.

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And I thought that was an interesting thing. That's really what the book's about.

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And my argument is that the system of political economy, that the target country has has a big role in mediating the impact of sanctions.

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The sanctions would affect some countries in different ways depending on the type of system of political economy that they have.

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So I'll describe that very briefly. Even though I've written a whole chapter in the book, I'll have to keep it brief,

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talk about the types of Western sanctions that were put in place and what I'm most interested in,

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how Russia responded, how it adapted to the sanctions that were imposed in 2014.

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And I'll give examples then in the three sectors that were targeted by sanctions, energy, defence, industry, the financial sector.

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Some of these broadly follows the pattern of the structure of the book. But I'm going to try to just give you the key points.

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So we look at the theory of sanctions. Why do countries impose sanctions and how do they affect countries and target countries?

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First things first, when you read through the literature is you need to distinguish between effectiveness on the one hand and impact, right?

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They're not the same thing very often.

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Certainly when commentators, policy officials and such I speak about this, they often conflate these two terms effectiveness.

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First of all, whether or not the sender country, the countries that have put these sanctions in place, all their objectives being met.

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Right. That's effectiveness. Whereas impact we've had, to my mind, refers to the observable changes in the political economy of the target country.

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But impact isn't always lead to effectiveness. You might have an impact on a country cause all sorts of economic and political damage,

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but if that country doesn't do what you wanted it to do, your targets might not be met.

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And similarly, you can also say that effectiveness so effectiveness doesn't always require impact.

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It might be that in some cases, sanctions can be successful, despite the fact that there wasn't really much of an observable impact taking place.

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So I'll get that out of the way with that because as I say, this is something that I come across a lot when reading about the sanctions people did.

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Hence the conflict. These two things. What are sanctions?

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A very famous book on the subject by David Baldwin essentially say they are economic insurance used by senders to help influence targets.

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That's quite broad. That can mean lots of different things.

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But essentially it's based on the notion that there is a relationship,

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direct or indirect, between the economy of the target country and the political,

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the politics or the polity political system of that country,

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and that you can moderate the political behaviour of the target by manipulating, shaping, influencing its economy.

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In very simple terms we can say economic power because it should generate political gain.

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That is essentially what sanctions is a simplified but essentially what it's all about.

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Or is it? Other people have said it's not just about influencing the target.

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Right. It's a mixture of that. That's a primary goal, inducing a change in the behaviour of the target country.

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A country's invaded another country to impose sanctions, to encourage them to withdraw from that country.

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Or a country perhaps is targeted by sanctions because other countries don't agree with its

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domestic political arrangements the way it treats a particular ethnic group or suchlike.

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But that's what we could see as a primary goal. I think that's what most people understand sanctions is trying to achieve.

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But as pointed out some time ago, it's not always the case.

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There are secondary objectives and these are focussed on the domestic audience making it look,

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for instance, to send the country's voters that you're doing something right,

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that you're expressing the moral outrage of a country that for for another country invading somewhere else, for instance,

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or quite simply, just to be sure that you're doing something right, that's a less ambitious goal than the primary goal.

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Doesn't really matter in a sense, if you focus in just on this, whether or not you induce a change in the target country,

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you just want to do it for domestic political purposes to to to generate satisfaction.

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There are also then tertiary objectives. And these are concern with third countries, right?

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Not the target and not the centre. And that's sorry, not the send up here.

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What we're looking at is, for instance, if we take this example in 2014 that the U.S. and European Union countries were not just sticking to Russia,

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they were dissatisfied with that behaviour actually going to other countries.

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This is what happens if you annexe another country, right?

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We will do something to uphold the international system as we see it and some countries may disagree with that, but this is what we're going to do.

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So tertiary objectives are not at the centre, not necessarily even at the at the target, but other countries.

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It's about saying we're going to try and maintain a system here and perhaps deter other

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countries from engaging in objectionable behaviour further down the line in practice.

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That we tend to see countries pursuing all of these objectives simultaneously or over time,

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that their emphasis on these objectives shifting and changing.

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Initially they might think we'll try to change, induce a change in the target countries behaviour,

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but after a while it becomes more important that they show that domestic constituencies that they're doing something.

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This this varies across time and cases. So I just really want to make the point rather that centre countries often pursue more than one.

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And this complicates efforts to analyse what sanctions do to target countries.

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Most of what sanctions? The sanctions,

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which Trump I wasn't familiar with the international relations which do all the sanctions before Russia was perhaps sanctions imposed on it in 2014.

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I primarily interested in the Russian economy.

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So then when I started reading all of the books and the articles that are out there that are concerned with sanctions,

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what I found was that most of them focussed on whether and under what conditions sanctions work.

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They try to come up with sort of probabilistic statements. You know, 65% of the time sanctions will help you achieve certain objectives.

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And that's there that the first sort of strand of literature beyond that gets a little bit more complicated.

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People say, well, under what conditions does it tend to work? Does it tend to work?

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The sanctions tend to work when countries are smaller, when they're larger, when they're democratic, or whether they are authoritarian.

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And but the main strands of the sanctions literature are really concerned with whether it works.

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And that's because this this literature has tended to emerge in line with policy, with the increasing use,

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especially since 1990 of sanctions as a often the primary instrument of statecraft when countries are seeking to influence others.

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So it's a rare strand of literature, in a sense that's grown up and influenced more by policy than, let's say, the other way around.

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And what I do in the book is focus on an area that I.

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Surprised to find it's not really covered much, and that is how sanctions affect the target country.

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Instead of thinking will it work or what types of country will it work and will it not working?

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I want to look at the process. How is it that sanctions have imposed sanctions on a country?

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What do they do in response? Are they static? Do they just sit there and allow sanctions to exert their evil effect on the target country?

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Or do they respond and adjust and do something to mitigate or reduce the impact of sanctions?

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And that was what I've been sort of doing with myself for the last three or four years.

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I've noticed that most of the existing work tends to marginalise what I consider to be the analytical prior question How does that affect country?

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Surely you need to know that first before you're going to understand whether or not sanctions are likely to work.

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Much of the work, therefore, to me and the reporter, has emerged in reverse order.

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And so this is where we are. I'm not going to go too much into the literature there other than to say this and gaps in it.

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Most of the literature doesn't look at the institutional environment of a domestic.

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It targets a country and look at how the economy is organised and it look at how the economy is integrated with the wider global economy.

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We think the sanctions, if you were going to impose a trade embargo or block access to capital,

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you are focusing on the key nodes that the capital of that country, the target country with the global economy.

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Yet much of the literature doesn't really look at these relationships.

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Instead, as I said, I tend to focus on the percentage of cases where sanctions works or doesn't work.

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And that's because they look at it from the point of view of the senders.

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I try to look at it at the point of view of the target. Right. So my book isn't about effectiveness.

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It isn't about whether or not I think sanctions have worked or not works.

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I'll talk about that a little bit at the end. People have views. I just didn't include them in the book.

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But for me, it's how do target countries adjust to reduce the economic pain so that they can then not give the sender countries political gain?

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And what I argue is it's the system of political economy that matters.

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Right. And that certain types of economy lend themselves to be more durable when placed under conditions of sanctions.

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Russia is not new to sanctions. It during the Soviet period for most of the Soviet parent,

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Soviet Union was under one form of sanctions or another from Western countries that have a long experience of dealing with this,

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of finding out ways of subverting sanctions and minimising their effects.

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So that's one thing. This is a country with a deep experience of being under sanctions.

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But for me, what was important was that this type of economy that Russia has,

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it's not the type of open market economy that we have in the United Kingdom, the US, Germany.

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It's something different. And in my book I spent a chapter talking about how likely sexualised the system of political economy.

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I don't know what kind of audience it's going to be.

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It's about whether you are Ioffe specialist or Russian ists or whether your interest was in the economy or politics.

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So I'll keep it reasonably simple, but what I do is argue that Russia,

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the Russian economy is essentially a story of producing large the majority of revenues in the country,

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in the natural resources industry, specifically oil. To a lesser extent, gas and some other areas of natural resources.

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These revenues are then used and distributed by the state to other areas of the economy.

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We revenue dependent sectors. And this can include people who work for the civil service, people who depend on social welfare.

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And you have to keep people who rely on federal budget spending for their income.

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But it might also include people who work in factories who rely on state demand for their jobs, people who work in the defence industry.

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For instance, the 2 million people work in Russia's defence industry and most of their orders come from the Russian government,

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and that Russian government gets its money largely from taxation of natural resources, production and exports.

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So the state in Russia performs a very important role.

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It it distributes it sits at the apex of the system,

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moving revenues and funds around the system from the places that make the money to the places that don't but are politically and socially important.

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Right. If you've got large 2 million people working in the defence industry.

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It becomes important for various reasons to keep them in work.

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It means that you maintain a sovereign defence capability for a country like Russia is very important.

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But it also means that there are lots of cities across the country that have people with good reason to be good in parks and jobs and suchlike,

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and that helps the local economies. So I describe this type of system and I describe how the state,

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the federal state in Russia has quite a strong and influential role within the Russian economy.

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Right. Some people call it state capitalist, some people incorrectly, in my opinion, call it something approximating a planned economy.

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But it's fair to say the state does play an important role. Right.

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It's dominant in this one sector, in the natural resources industry, both directly and indirectly.

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It dominates the financial sector. So it's able to allow certain firms and certain people to have access to capital and others to not.

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Right. It's in a very important position where it can divert and direct funds to those areas of the economy that it considers to be useful.

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And because the state is so dominant in some of these strategic areas, Lenin's commanding heights,

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because he's so dominant in these areas, it's able to use a variety of instruments financial institution,

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changes to the law, diplomatic making, agreements with foreign countries that will benefit those areas that it considers

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to be important that those people within the state consider to be important.

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And that's me, very simply, putting a point that tend to be a chapter to make in the book.

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Another important point is Russia's place in the global economy.

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Right in the statistical term should say Russia looks like an open economy. Trade is a share of GDP.

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It's very is very high. Higher than the US, higher than the United Kingdom, I think, as well.

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Right. This is a very open, statistically speaking, economy, sells a lot of oil and gas.

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It buys stuff from other countries. However, the Russian state tends to be dominant in those sectors that link Russia with the wider global economy.

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So that gives it a unique ability to be able to alter the terms of its integration with the global economy.

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Right. To exert control over that in a way that wouldn't be would be much more difficult in a country like the United Kingdom.

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It's very difficult for the state to be able to tell BP or Shell what they need to be doing and what they shouldn't be doing.

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Russia, that's not such a problem. All right.

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Rosneft and the people in the Kremlin have a very close relationship, so it's easier to make sure that their policies dovetail.

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So because of this, because of this unique role that the state plays in the economy,

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I argue it gives Russia greater potential durability under sanctions.

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And that really so it ends up being the essence of my of my argument.

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And I explain how the Russian state was able to adapt, to react to sanctions using the mechanisms that he had.

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And before I talk about that and onto also, I was just going to quickly look at Western sanctions and the objectives that are outlined.

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And there are lots there were primary, secondary and tertiary. Right.

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I'm not going to list all of these here merely to say if we look at public statements by Western media and Western officials over that period,

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they wanted to support Ukraine, affirm a credible commitment to the international order,

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but they also wanted to assess repeatedly inflict economic pain for political gain,

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to induce a change in the Russian government's foreign policy and in particular towards Ukraine.

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Wanted to deter it from acting in this way in other places in the future.

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So by imposing a cost on Russian actions, the Western policymakers were hoping that would make Russia think twice before doing these things again.

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This when I say anonymous here, I have to keep it in my senior official that I masse from the most powerful country of the

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centre countries who said that the objective was even granted in that it was regime change.

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Right. By causing so much pain on the Russian inmates that they would basically choose

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to overthrow the president and replace him with somebody more amenable.

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And whether or not that was reflective of a of a wider feeling within the country in question, I'm not so sure.

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But this was certainly somebody who I thought was well-placed to make such a comment.

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And I was surprised when I heard that the ambitions were that that grand goals of

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objectives will come back later to whether or not any of those were achieved.

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But what I'm interested in is the response, right? What did the Russian government do when put under sanctions?

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And I ask in each of the chapters, each of the sectors that I look at, that it took sort of the form of three main types of policy.

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First of all, securitisation write of economic policy in sectors that previously might not have been considered

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to have been areas that those with an interest in security would have been concerned about.

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But even where that was the case of, say, the defence industry.

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And it became more intense. This securitisation and securitisation justified the Russian government undertaking policies.

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That meant that the state's role grew in those sectors to a greater level than it was, let's say, pre 2014.

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So securitisation, by testing the security threat, by looking at the the threat that the sanctions had for the Russian economy,

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justified the state intervening within the Russian economy to make it more independent,

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to make it more sovereign, and to basically make it more secure.

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But that justifies taking unusual actions that weren't usually.

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Justified. So what is the first thing that we see? We see that in general and we see the different sectors all going to them.

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What else? Secondly, we see Russification of of domestic economic capabilities,

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basically building things and providing services that previously Western countries were providing.

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I said, Look, if they can prevent us from accessing these things that we need to make sure we can supply at least some of them ourselves.

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So we see this, we see an import substitution campaign from which they speak about even before Russia annexed Crimea in February 2014.

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It's as though they knew what was coming. Then they started to develop legislation to promote the production of domestic

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goods and to limit imports in these strategically important areas energy,

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defensive of finance. These are the areas that Western countries impose sanctions in.

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But they also pick some other areas pharmaceuticals and agriculture.

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The third strand of the Russian response was an intensification of state efforts to promote what I call it's a horrible,

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ugly word, but I'm going to use anyway a more plural, directional foreign economic policy.

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Right. To try and have capital and greater capital flows with a wider range of countries.

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Okay. I try to avoid that sort of sort of academic words, but I did slip into that period of action.

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But what we see after 2014 is more intense efforts to cultivate closer ties.

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Most people focus on China, maybe Asia a bit more widely, but it was broader than that with Middle Eastern countries, with Latin American countries.

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We see Russian officials and Russian and heads of Russian state owned firms flying around the world,

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trying to have closer relations with these other countries,

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and in particular to replace Western sources of capital and technology and markets for their goods.

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So that's the broad response. How long will that? Five, 10 minutes. I think we started at ten past in quayside,

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so I thought half an hour of talking and then you can ask quite a bit because I don't really support people.

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People are always more excited about speaking. Okay. So the three sectors, very briefly, energy was the first one right before 2014,

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the energy sector in Russia had become a much more outward looking, modern cooperative sector of the Russian economy.

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So joint ventures have been formed with Western majors, Statoil, Exxon, BP Partnership,

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Shell for exploration and production in the Arctic offshore and on Russia's tight oil formations.

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Why Russia has the largest client oil formations in the world.

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Potentially, they just don't exploit them very much at the moment.

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And Russia, prior to 2014,

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had seen a very important role for the West in helping exploit these areas in Key West and know how technology and capital to bear.

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And it was precisely these areas that sanctions, targeted sanctions,

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basically said you couldn't transfer technology for the exploitation of these areas,

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that the Russian source, that sort of new frontier of energy production that will replace their existing energy areas of energy production.

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Currently, most Russian oil extraction and gas extraction takes place in Western Siberia.

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In the future, it's likely that they'll either take place in different types of formation in Western Siberia,

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or it'll take place offshore and sanctions are targeted preventing all of those types of extraction.

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However, as will seen, this ends up being very, very important. There wasn't complete unity, the US said.

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These sanctions apply to all projects under way straight away. The EU said any projects that are already underway don't have to stop.

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Right. It's the grandfathering clause that we'll see that has a big impact on how energy sanctions played out in Russia.

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Elsewhere, there were some other interesting exceptions. Japan chose not to impose sanctions on the energy industry.

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The Japanese government did on defence, I think by Russian weapons, noted myself a minute.

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So that was a very easy thing to do. And they did in finance as well,

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but not in energy because the Japanese were very energy deficient country and have always had a longstanding

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interest in being involved in Russia's energy deposits and they chose not to impose sanctions on that area.

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And given Japan's role as a producer of technology in the world,

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that was significant and the various legal loopholes existed as well, which were exported later.

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We can get into those in Q&A.

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But all those three things that I spoke about securitisation, Russification and diversification all take place within the energy industry.

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The state uses its position at the apex of the system of political economy to use state public funds or

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national wealth funds from the central bank funds to provide liquidity to provide money and capital.

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Two firms that were targeted by sanctions.

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This was especially important at the end of 2014 when Russia's largest energy company, Rosneft, which was suffering from a lack of access to capital,

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the government was able to use public resources to to help it to moderate the impact of sanctions.

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There was an import substitution campaign, quite an extensive one in the energy industry,

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building new ships that would enable the exploitation of offshore deposits, new oil rigs about rectifying the oilfield services industry.

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Right. Making sure that those kinds of services were provided by Russian firms, not by foreigners,

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and that so foreigners couldn't cut off the supply of these services in the future.

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Money was given and incentives were put in place to promote the production of domestic equipment.

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Right. Instead of buying these these sources of technology from abroad, try to produce some within Russia.

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On top of that, there is also efforts at diversifying Russia's energy ties with other countries.

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Since 2014, Rosneft, who signed deals with Indian companies, Chinese companies in particular, but also Saudis,

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the Saudi government and other countries across the world in an effort to both expand its markets but also to acquire new sources of technology.

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These firms have also engaged in joint ventures and have had projects that

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have been co-financed by Chinese and Indian backers rather than Western ones.

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So all these three sort of broad areas of response that I've described took place in the energy industry.

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And I'll quickly look at some of the some of the data that shows how they try to get ahead

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of targets of specific types of oil equipment that they wanted to produce themselves.

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They said, look, we're reliant on imports for, you know, a large proportion of all of these high tech areas.

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So they set their targets, they set Russian industry targets and provided money to replace some of these items.

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That's a process that's still underway. Some of these are making some progress. Some of them are a bit slower.

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But that, you know, we have a very clear, sophisticated, determined plan as to what they wanted to do,

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but they also acquired equipment for different countries.

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So instead of just thinking, well, we'll try and produce ourselves, they recognise that this is going to be something that's quite difficult.

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So then they started to require oil and gas equipment from other countries.

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And this is my black and white. Let's see, you ask me to make sure my my figures were not very good, I think, from a distance.

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But what this basically says is that after 2014, the EU's role in the supply of oil and gas equipment declined and patience increased.

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Right. No surprise that they started to source supplies of oil and gas equipment from other countries.

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Now, some of that equipment could well have been Western equipment that's simply been rerouted through through China.

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I also noticed more evidence for that. The biggest increase was in former Soviet countries.

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Kazakhstan and Belarus suddenly started exporting and lots of oil and gas equipment that they didn't before.

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Along with mussels and prawns and things like this.

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So we know that we we can, you know, strongly suspect that there's evidence there of trade diversion taking place.

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But it supports my point, this evidence that they diversify their sources of supply.

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It wasn't coming directly, at least from from Western countries,

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and they made efforts to build their own in terms of the impacts on oil and gas production.

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It wasn't intended to be in the short term. It's supposed to take place over the long run.

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But nevertheless, for the Russian government,

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they could point to the fact that production and exports grew throughout the entire period when Russia was on the sanctions until the end of 2016,

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when they took part in this agreement without putting them in production, only their lead output started to decline a little bit.

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But that was something that the Russian government chose to do to try to support prices.

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What we also see is that investment in the oil and gas industry after 2014 grew faster than it did elsewhere in the economy,

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which all things being equal, means that probably the share of oil and gas and energy in the Russian economy will get bigger,

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not smaller, because they are investing in future production.

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So it's not as though the companies were looking at sanctions, thinking, Oh my God, this is dreadful.

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How are we ever going to make a buck? They invested more, not less. And here's the very interesting one.

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Joint ventures. And that took place between what were agreed between Western energy companies and Russian oil companies before 2014.

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The ones that involved American firms were stalled. Only one involved European firms have carried on because of this grandfathering clause.

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New deals have been signed because of legal loopholes.

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Some companies, for example, said, well, sanctions can't get shale oil, so we'll just designate shale oil as a limestone deposit.

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Right. And so now we can still do business here.

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And so European firms have tended not to implement, at least in the energy industry, sanctions in the way that us.

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Have been forced to use the fact that Treasury organisation,

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organisation in charge of enforcing sanctions have been much firmer than the European Union have.

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So that's defence, right? Look, I'm sorry, that was energy that when my point being the Russian government used its position,

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its control over these oil companies and gas companies,

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its ability to divert financial flows from the public purse into the into these organisations,

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it's all these instruments that it's disposal to moderate the impact of sanctions.

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Well I didn't speak about that and I should have done was of course the the

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gas deal that was signed with China a month or two after Crimea was the next.

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I have been negotiating this deal for a long time and couldn't come to an agreement,

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but within two months they decided that they thought it was politically expedient to sign this deal.

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And that's very important. That gas pipeline is being built over a thousand kilometres of sea.

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This would be would have been built.

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It looks as though it should start delivering gas roughly on schedule, despite the claims of some that it's never going to happen.

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It looks as though it will be happening, expensive as it is.

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The Chinese government also stepped in with extra funding for the Yamal liquefied natural gas plant in the in the Arctic Circle.

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And that, as we may have seen in the news, recently, delivered gas to the U.S. via the United Kingdom.

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And this was that was a project that was owners were targeted under sanctions and the technology used there was time to do that.

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The Chinese stepped in with the capital to make this project.

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Go ahead. If this industry before 2014 was not like the energy industry wasn't as it didn't have as close links,

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certainly not joint ventures with Western countries.

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However, some changes had taken place under the at the time Defence Minister such a course that

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the Russians had agreed to buy some weapons systems from Western European countries,

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some armoured vehicles, some ships.

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But what they did was rely on Europe in particular European countries for components used in the production of weapon systems,

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not final weapons systems themselves, but components that are used in the production of the particular electronic components.

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And Russia also relied a lot on supplies for particular items from Ukraine.

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Ship engines, helicopter engines that were used to produce final weapon systems,

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but sanctions both imposed by the West and also by Ukraine in response to the fact that they

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had a slice its country taken off it and prevented the sale of most of these weapons systems.

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So still happened. The Italians continue to sell armoured vehicles to the under this grandfathering clause.

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Again, the French backed down in the crash. They could have sold the Mistral ships in principle.

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Sanctions didn't prevent them, but they made the decision that for political reasons it'd be a good idea to sell it to somebody else.

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The Egyptians in the end of the sanctions. So the sale of particular dual use items and some weapon systems for after 2014.

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And so what did the Russians do against securitisation, although this was always an industry that had been securitised.

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But here the focus was especially on import substitution, in particular in replacing the items that were previously supplied by Ukraine.

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So Russia undertook a sort of a crash import substitution program, building brand new factories to build helicopters and ship engines,

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but they haven't been producing that benefited produce before these leaks went back to the Soviet period.

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Some of these factories are already underway providing helicopter engines, for instance.

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Some of them are about to come online and provide ship engines, for instance.

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And so import substitution was very important. They also diversified their supplies of of of electronic components.

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I'll show you an example of that in a moment. And it was boasted by at the time, Russia was already in the midst of a rearmament program.

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So they were able to use large number, a large volume of public funding to support precisely those enterprises that had been targeted by sanctions.

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So that was helpful to have big increase expansion of domestic demand.

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And again, the Russian government used banks, state owned banks,

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to channel capital to these enterprises that might have been suffering under sanctions.

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And so I argue in this chapter that it was causing disruption, particularly Ukrainian ship engines.

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That meant that Russia's plans to acquire several frigates as part of its relevant program had to be put off.

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Right. Those frigates either weren't delivered or will be delivered at some point in the future.

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And so certainly some disruption. But it wasn't decisive.

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They continued to rearm and procure more weapons than they had done in the entire post-Soviet period.

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And a couple of examples, diversification here. Again, these these things are these colours all very helpful.

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But what we see here is that the sales of electronic components by EU countries collapses after 2014 as a share of total collapses,

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perhaps a bit higher, declined significantly and is replaced by Asian countries.

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Figure one example in 19,013 year before sanctions put in place the number.

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One supplier of electronic components to Russia was China. That was still the case in 2017.

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But number 23450 EU countries 2016, none of those EU countries are in the top five anymore.

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Number two is a country that in 2030 had occupied 31st place.

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Indonesia is now Russia's second largest source of electronic components that would be used in the future.

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We have to use capabilities for use in weapons production.

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What is it that Dutch electronic components that are going around the world and finding their way to Russia?

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I'm not sure. But certainly Indonesia has suddenly become a very important player in Russia's electronic components market.

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And this just illustrates the extent to which defence procurement spending rose.

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This is adjusted for inflation here as well. So it deflated this ruble terms.

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We can see after sanctions it wasn't, I think, in response to sanctions, but it certainly helped moderate the impact of sanctions.

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A defence spending group will look at the impact on exports, basically continue to re-equipped their armed forces at post-Soviet record rates.

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Right. Some items it was slow in the Navy in particular because ship engines were affected by breakdown of relations with Ukraine, but also Germany.

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But Russia continued.

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This is in ruble terms, arms exports under sanctions in rubles as they grew, partially because the ruble depreciated basically the dollar,

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but also because Russia continues to be the second largest exporter of weapons in the world and is signing lots of deals.

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It wasn't materially affected by sanctions being put in place.

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So final factor, so we can see so far energy and defence.

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The Russian government was able to use the resources at its disposal to forge new relationships with foreign countries,

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to bolster domestic capabilities and to increase the control of the state in those sectors.

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These things happened in the financial sector as well.

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Russia's always been in the post-Soviet period extremely dependent on foreign capital flows.

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The domestic financial system is quite small.

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It's got a small domestic deposit base, not enough savings, not a great big pension fund market or anything like that.

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So whenever Russia Russia's going through a period where it is investing a lot,

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very often it's foreign capital that supplies the foreign foreign banks that supply the capital.

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And it tends to be correlated with oil production in. When oil prices are high capital flows into Russia, when it goes down,

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it flees and sanctions targeted precisely this vulnerability to foreign capital.

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They said some banks or some firms outside the financial industry would not be able to access capital or at least long term capital.

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So this was, you know, showed an awareness amongst Western policymakers that this was an Achilles heel, as it were,

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and they were hoping to induce a sudden stop or indeed a reversal of capital flows from going into Russia to make them come out.

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Of course, the Russians responded with the same three pronged response.

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Securitisation financial sector had never previously, as I just mentioned, in things like the national security document and suchlike.

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But after 2014 it is Russian government that becomes very interested in the rapid construction of a national payment system,

389
00:38:33,160 --> 00:38:37,840
so that if Russia were excluded from the international electronic payment system is not swift,

390
00:38:37,930 --> 00:38:41,800
that they would have their own, that they wouldn't have to resort to using fax machines.

391
00:38:44,350 --> 00:38:50,620
They started to show an increased awareness of the importance of reducing debts,

392
00:38:50,620 --> 00:38:56,200
particularly much state owned companies that go to other and Western countries in particular.

393
00:38:56,380 --> 00:39:00,700
And there was an emphasis on financial sovereignty, bringing Russian money back repatriation.

394
00:39:00,970 --> 00:39:06,970
The offshore ization is the way they think about that, about bringing capital held elsewhere,

395
00:39:07,000 --> 00:39:17,380
bringing it back home under the under the guise of helping Russia become a more secure and less vulnerable economy.

396
00:39:17,620 --> 00:39:22,300
Russification So promoting the use of domestic capital, domestic resources,

397
00:39:22,720 --> 00:39:28,510
using the central bank to lend to strategically important firms so that they wouldn't have

398
00:39:28,510 --> 00:39:34,030
to go to the West or to Western banks will come up with new ways of accessing capital.

399
00:39:34,210 --> 00:39:37,480
In foreign capital, controls were imposed in 2014 and 15.

400
00:39:37,750 --> 00:39:41,410
Basically, the heads of Russia's largest companies were given into a room and told,

401
00:39:41,770 --> 00:39:45,190
bring the money back home and let us have your dollars in very simple terms.

402
00:39:45,280 --> 00:39:49,569
Right. You need to help us. At the moment, you are all very rich. We allow you to become very rich.

403
00:39:49,570 --> 00:39:56,410
But right now we need your foreign currency and so bring it home if you could be so kind.

404
00:39:57,130 --> 00:40:03,100
As I said, it was a tactical amnesty, didn't really work at the time and are having a second bite of that particular cherry at the moment.

405
00:40:03,760 --> 00:40:08,710
There is also an effort at making the banking system sanitised about making it work better.

406
00:40:09,010 --> 00:40:13,510
That's not a direct response to sanctions, but it was something that was seen as helping and promoting the financial.

407
00:40:13,630 --> 00:40:19,000
Health of the country so long we Russification securitisation we see diversification.

408
00:40:19,300 --> 00:40:28,120
Now Russian firms and the Russian government signed deals with the Chinese government, with the leaders of the BRICS countries about creating new,

409
00:40:30,070 --> 00:40:34,360
new sources of capital, new development banks in which Russia is shareholder,

410
00:40:34,570 --> 00:40:38,740
but which Russian firms could access as well and which they have access since 2014.

411
00:40:39,430 --> 00:40:44,680
So even in the financial sector and thus that's just official, if we then look at what companies have done,

412
00:40:44,680 --> 00:40:53,200
we see lots of Russian firms have been more active in trying to float bonds or bonus bonds on Asian markets and Middle Eastern markets.

413
00:40:53,200 --> 00:40:56,680
The Saudis, for instance, invested in the Russian Direct Investment Fund.

414
00:40:57,100 --> 00:41:03,250
And after 2014, I think that was $5 billion in the form of a single interest in investing more.

415
00:41:03,970 --> 00:41:12,880
We saw the privatisation of the so-called privatisation of parts of Rosneft in 20 1516 initially that involved the Qatari government.

416
00:41:12,970 --> 00:41:17,140
Then later the Chinese or a bank with links to the Chinese government.

417
00:41:17,710 --> 00:41:25,390
So we see in the financial sector exactly the same elements of response as we see in the defence and the energy industry.

418
00:41:26,480 --> 00:41:33,400
And did this work? Well, here, if we look at capital flows, this is money coming in, going out of the country.

419
00:41:33,490 --> 00:41:35,410
We look at the 2008 nine crisis.

420
00:41:35,410 --> 00:41:45,640
We can see it was very sharp fluctuations in capital flows that and if we go back to 2013 and if we look, this is when sanctions are imposed, right.

421
00:41:45,850 --> 00:41:50,770
We can see that's not as severe as what happened the year before. This is when Rosneft signed a deal with BP,

422
00:41:50,910 --> 00:41:55,059
when it was a financial crisis in Cyprus that exerted those two things are much

423
00:41:55,060 --> 00:41:58,930
stronger effects from Russia of capital flows into Russia than sanctions did.

424
00:41:59,110 --> 00:42:04,720
That's here. We can see the size of these fluctuations declines over time.

425
00:42:04,750 --> 00:42:11,889
This is the impact of imposing informal capital controls and of sourcing and of exerting

426
00:42:11,890 --> 00:42:16,600
greater control over the financial system to stop people from sending their money abroad.

427
00:42:17,020 --> 00:42:21,790
And what else happens? They risk the perception of risk.

428
00:42:21,940 --> 00:42:27,639
Now, this is at the end of 2014, sanctions were imposed. Here we can see the perception of risk.

429
00:42:27,640 --> 00:42:33,040
But that wasn't just because of sanctions. That was largely because the price of oil had gone down and Russia's economic prospects with it.

430
00:42:33,370 --> 00:42:40,120
But as we can see, since then, after these measures were put in place and as oil prices recovered, the perception of risk is now.

431
00:42:41,110 --> 00:42:47,320
And it's gone down since I wrote this book last summer. They're now at much lower than pre-crisis levels.

432
00:42:47,720 --> 00:42:56,020
Okay. So financial sanctions had, I think, some impacts early on at the end of 2014, but that impact has subsided dramatically since.

433
00:42:56,830 --> 00:43:01,540
You would think that if you had a country that then was placed under financial sanctions,

434
00:43:01,540 --> 00:43:04,630
that they would have difficulty financing investment in the country.

435
00:43:04,780 --> 00:43:10,600
And sure enough, we saw that investment declined during this period when Russia was under sanctions.

436
00:43:10,720 --> 00:43:14,410
However, several points for the observer, it was already in decline before sanctions.

437
00:43:14,620 --> 00:43:22,570
That was to do with the domestic sources of an economic slowdown, and it has recovered modestly since.

438
00:43:23,200 --> 00:43:30,880
And what a lot of survey data show is that Russian firms demand for capital has been quite high.

439
00:43:30,940 --> 00:43:36,880
So but they've not been able to find it. So for some firms, they wanted capital Bitcoin accessing.

440
00:43:37,310 --> 00:43:40,330
But the difference in again, going back to the system of political economy in Russia,

441
00:43:40,750 --> 00:43:46,660
the firms that can get it are the politically well-connected ones, the large ones in sectors I be socially and politically important.

442
00:43:46,870 --> 00:43:54,060
The ones that can will be those small medium sized enterprises in non-strategic industries, probably the ones that people in the West would think of.

443
00:43:54,070 --> 00:43:59,860
What are the modernisers resigned. They're the ones who have the access to capital and have greater difficulty getting hold of it.

444
00:44:00,130 --> 00:44:06,520
The larger firms that are strategically important have still enjoyed access to capital.

445
00:44:06,820 --> 00:44:13,010
Final slide that you really what final picture finance the impact on foreign direct investment.

446
00:44:13,510 --> 00:44:18,550
These are gross inflows here in orange. What we see here, this is when sanctions were imposed.

447
00:44:19,180 --> 00:44:26,200
If I updated this, which I should have done, I know the data are actually for the gross inflows in 2017 somewhere up here.

448
00:44:26,830 --> 00:44:33,070
So what does that suggest? They suggest that gross inflows are foreign direct investment largely being unaffected by sanctions.

449
00:44:33,400 --> 00:44:38,800
A large proportion of that is Russian investment coming via Cyprus in the British Virgin Islands and then suchlike.

450
00:44:39,100 --> 00:44:45,850
But it also includes foreign investment and it hasn't exhibited a particularly different pattern in the pre sanctions.

451
00:44:46,150 --> 00:44:54,970
What has been a changes in net foreign direct investment and what Russian owners of foreign assets abroad, the returns of inflows entering Russia?

452
00:44:55,150 --> 00:45:04,540
Not much difference at all. So conclusion to sum up three main points that I make in the book, what was the impacts over that three year period?

453
00:45:04,930 --> 00:45:07,180
Basically, such as course of initial disruption,

454
00:45:07,420 --> 00:45:13,420
but the impacts on targeted sectors declined because of the Russian strategic response, because the state was able to.

455
00:45:13,490 --> 00:45:19,400
Use its position and exploit the type of economy that's been built in the last 25 years to do that.

456
00:45:19,760 --> 00:45:26,120
What was the strategic response and how did it work? As I've been arguing, they were able to use a range of tools and resources,

457
00:45:26,510 --> 00:45:31,270
many of which were readily available due to the specific characteristics of Russia's system.

458
00:45:31,310 --> 00:45:32,210
Political economy.

459
00:45:32,630 --> 00:45:41,180
Countries like the United Kingdom or the US would have to undergo extremely special changes in legislation to make these sorts of things possible.

460
00:45:41,330 --> 00:45:45,140
But for Russia, it was easy when you own most of the strategically important sectors anyway.

461
00:45:45,380 --> 00:45:48,950
You can make these things happen and you can channel resources to them,

462
00:45:49,550 --> 00:45:53,960
and that enabled them to cushion these targeted sectors from the worst effects of sanctions.

463
00:45:54,470 --> 00:45:59,150
Final point that I make, I have a question that I asked Did sanctions reshape the structure of Russia's

464
00:45:59,150 --> 00:46:02,750
domestic political economy and its relationship with the global economy?

465
00:46:02,990 --> 00:46:05,900
I argue, yes, it did. What this started the process.

466
00:46:06,140 --> 00:46:10,460
Three years is not all the time in the grand scheme of a country's integration with the global economy.

467
00:46:10,670 --> 00:46:16,250
But what we have seen in the last three and a half years is Russia making greater efforts to trading with other parts of the world.

468
00:46:16,550 --> 00:46:25,040
Their share of Russia's trade has grown, their share of capital flows has grown, and Russia's state involvement in strategic sectors has increased.

469
00:46:25,610 --> 00:46:33,620
Right. All of those things have happened. And I think a large proportion of why that happened is due to the response to sanctions.

470
00:46:33,920 --> 00:46:39,140
I also think that this has made Russia a less vulnerable, more economically secure economy.

471
00:46:39,320 --> 00:46:43,820
That's not necessarily good for its economic development, for those who want market reform and for,

472
00:46:43,820 --> 00:46:47,720
one, those types of policies to be implemented, this doesn't necessarily help.

473
00:46:48,830 --> 00:46:52,490
So I'm not suggesting that this is going to generate 10% annual GDP growth.

474
00:46:52,710 --> 00:46:57,710
Right. But what I am saying is, is that as far as the you know, the political economy is concerned,

475
00:46:58,310 --> 00:47:04,790
I think it's reduced Russia's vulnerability to to sanctions considerably and increased state control.

476
00:47:05,660 --> 00:47:11,870
And I said it briefly mentioned effectiveness. We're thinking about were these sanctions effective from the centre countries point of view?

477
00:47:12,410 --> 00:47:15,750
I personally don't think primary objectives have been achieved.

478
00:47:15,770 --> 00:47:19,370
Some people say, well, they could have invaded industrial Kiev.

479
00:47:19,730 --> 00:47:23,930
I think that sort of requires you to think that's what they were planning on doing in the first place.

480
00:47:24,530 --> 00:47:32,180
I have my suspicions that that wasn't the case, but we'll never know whether or not it deterred Russia from any more sort of grander ambitions.

481
00:47:32,960 --> 00:47:39,440
But certainly as far as returning Crimea and not being militarily involved in the in the Donbass is concerned.

482
00:47:39,950 --> 00:47:42,020
We've failed on both of those measures.

483
00:47:42,290 --> 00:47:47,989
However, secretary objectives, have we shown our domestic electorates that we're doing something for the time now?

484
00:47:47,990 --> 00:47:51,620
And that's very important. We can't underestimate the importance of that.

485
00:47:51,830 --> 00:47:57,590
For most people, we want that concerned with foreign policy and we'll just think we're doing something and the right thing.

486
00:47:58,520 --> 00:48:03,050
Final tertiary objectives. What does the signal send to the international community?

487
00:48:03,770 --> 00:48:04,759
What about you in the book?

488
00:48:04,760 --> 00:48:10,430
Is that actually what we might have done is ended up sending the wrong signals to the international community for these sanctions.

489
00:48:10,430 --> 00:48:15,620
I don't think have inflicted much in the way of economic pain, haven't caused much in the way of political gain.

490
00:48:16,520 --> 00:48:18,560
And if anything, it's made us look a little bit weak.

491
00:48:18,860 --> 00:48:25,490
I think we've grown far, very close to the EU had in place there was already even when they look like they were unified,

492
00:48:25,820 --> 00:48:30,500
that there was transatlantic unity, there was agreement and I think that's going to get even worse.

493
00:48:30,830 --> 00:48:34,070
And so that hasn't really shown a great deal of credibility to third countries.

494
00:48:35,660 --> 00:48:42,620
And I also think that if you look at the way in which Russia has been able to respond and can point to the fact that it hasn't,

495
00:48:42,980 --> 00:48:48,320
as some people said it was in 2015, on the verge of collapse or collapse or anything like that.

496
00:48:48,470 --> 00:48:54,620
They actually managed to do reasonably well. That doesn't present such a bad example to other countries that might be find

497
00:48:54,620 --> 00:48:58,550
themselves in a similar position in future Russia show of how you go about doing it.

498
00:49:00,470 --> 00:49:04,660
And then I was going to finish with some implications for the new sanctions. Maybe we'll leave that for Q&A because only temporary.

499
00:49:04,670 --> 00:49:07,810
Reporter And you're sure you have my voice? Enough.

500
00:49:07,820 --> 00:49:08,240
Thank you.