Written by Andriy Kolenov
On February 23rd, 2024, the eve of the second anniversary of Russia’s invasion of Ukraine, United States President Biden announced five hundred new sanctions on Russia. Simultaneously, the European Union released two hundred new sanctions and the United Kingdom imposed additional bans on Russian metal, diamonds, and energy.i But will it be enough? Despite the immense steps the West has already taken to hinder Russia’s economy, it grew by 3.6% in 2023.ii This begs the question: have the West’s previous sanctions failed, and will this time be any different?
Past Western sanctions on Russia can be split into three categories: seizing or limiting Russian finances abroad, barring Russian exports, and setting import restrictions. While these measures have done some damage, they have been insufficient. Russia found ways to bypass each sanction via monetary policy, new trade partners, clever shipping schemes, and rerouted trade routes.
Western monetary sanctions aimed to undermine the ruble by discouraging or outright banning foreign investments in Russia, and to erode the central bank’s ability to refinance the ruble. This involved freezing $300 million worth of Russian assets abroadiii and banning Russia’s Central Bank from selling government bonds to Western markets. Moreover, Russia’s largest banks were cut off from SWIFT, a digital banking system which allows banks to conduct international monetary and security transfers.
At first, the actions seemed effective. By March 2022, the ruble had deteriorated from 78.65 to 134 rubles to the US dollar.iv Russia’s central bank swiftly responded by increasing interest rates from 9.5% to 20%.v In the graphs below, the central bank sells bonds increasing their supply, lowering their price, and subsequently raising interest rates. Thus, the increased quantity demanded for Russian bonds creates demand for the rubles needed to purchase them. Higher interest rates also discourage borrowing, thus theoretically slowing inflation and increasing the ruble’s buying power.
The Central Bank also used foreign exchange reserves to buy rubles and forced all Russian exporters to convert 80% of their foreign currencies into rubles.vi Furthermore, President Vladimir Putin signed a decree preventing Russian banks and citizens from purchasing Russian investments owned by foreigners in “unfriendly states”.vii These actions created artificial demand for the Russian currency, thereby increasing its value. Within weeks, the ruble recovered to its pre-war levels and appreciated to 54.20 rubles to the dollar by June. viii
In 2022, the West instituted bans on Russian exports of gold, diamonds, metals, refining technologies, and other goods. It also reduced its imports of Russian oil and gas. EU and UK’s imports of Russian oil decreased from 3.9 million barrels per day (b/d) to 3.0 million b/d.ix Similarly, EU purchases of Russian natural gas fell from 140 billion cubic meters (bcm) in 2021 to 63 bcm in 2022.x
Despite these measures, Russian exports increased by 19% in 2022 as Russia expanded its trade with Asia to compensate for lower European demand.xi While Europe’s share of Russian exports decreased from 40-45% down to 4-5%, China’s and India’s share ballooned from just 16% in 2021 to over 90%.xii Moreover, as Russian monopolies halted production, the diminished supply of Russian oil and gas pushed up global prices. At their peaks in June and August respectively, Russian oil sold at an 80% higher marginxiii and natural gas at a 157% higher marginxiv compared to January 2022. This increased revenues from the previous year: quite the opposite of what the West intended.
Thus, Europe instituted more draconian measures. The EU drastically lowered consumption of Russian oil down to 0.6 million b/dxv and its consumption of Russian gas down to 27 bcm in 2023.xvi Additional precautions were taken to prevent global prices from simply spiking again. In December 2022 the G7 implemented a price cap on Russian oil at $60 per barrel. The price cap prevented Western ships from delivering Russian oil unless they complied with the cap and Western shipping insurance companies—which constitute 95% of such companies—from insuring ships that did not abide by the cap.xvii The graph below demonstrates how a price cap prevents prices from increasing amid contracting supply.
Initially, this cap had some success; Russian oil prices dropped to below $40 per barrel.xviii In response, Russia hastily switched to Chinese insurance companies, built up a “dark fleet” of oil tankers which travel uninsured, provided false attestations to Western shipping companies about the oil sale price, and had foreign companies convert its oil into fuel. As a result, more than three-quarters of Russian oil sold above the price cap at over $80 per barrel.xix Nonetheless, the West’s export sanctions in 2023 proved more effective because they deliberately targeted Russian energy and attempted to restrict sales outside the West. Russian exports decreased by 28.3% in 2023xx and its oil revenue dropped by 2.7 trillion rubles.xxi
Lastly, the West restricted their own exports to prevent Russia from importing weaponry relevant technologies such as semiconductors, microchips, telecommunication, avionic, and maritime technologies. Despite this, throughout 2023, Ukrainian soldiers kept finding Western microchips and semiconductors in captured Russian equipment. In fact, Russia’s imports that year rose by 11.7%.xxii How is this possible?
Russian companies quietly bypassed the restrictions by rerouting trade routes. While European imports to Russia dropped in 2022 and 2023 by around 60%, European exports to Central Asia increased greatly. Kazakhstan’s imports from Europe, for example, grew by 80% in 2022. Likewise, Russia’s imports from Central Asia increased by 80%, especially from Armenia and Kazakhstan. Thus, unless Kazakhstan’s economy grew 80% year on year, which it has not, it has evidently been rerouting European products into Russia.xxiii
By and large, Russia has found ways to soften the impact of every Western sanction. It avoided a ruble crash by raising interest rates and banning investors from dumping the ruble. It softened the effect of export bans and price controls by finding new partners and utilizing stealthy shipping schemes. It bypassed the West’s import restrictions by rerouting trade routes through Central Asia.
That is not to say Western sanctions had no impact. Russia’s GDP shrank by 2.1% in 2022.xxiv Despite maintaining high interest rates, Russia averaged an inflation rate of 10% since the war’s onset.xxv However, if the West wishes to cripple Russia’s economy to the point where Russia can no longer afford the war, serious structural changes are needed.
Firstly, future sanctions absolutely must involve Global South countries where the West has influence, such as India, Turkey, and Kazakhstan. Otherwise, Russia will simply keep finding new markets to redirect their exports to.
Secondly, secondary sanctions must be applied on countries helping Russia dodge sanctions or incentives given to them to cease such activities. The entire Eurasian Economic Union, a Russian-led trading bloc, must be restricted.
Thirdly, there must be established an EU-wide authority to oversee sanction compliance, preventing certain European governments such as Italy and Hungary from documenting record trade with Russia despite the new laws.
Lastly, Europe needs to completely halt purchases of Russian oil and gas, and there needs to be greater enforcement of the oil price cap as Russian ships keep bypassing the system. The cap could also be raised considering it costs a Russian monopoly $20-$25 to produce a barrel.
These measures are the only way to stop Russia from financing a war that is killing hundreds of thousands and potentially to prevent World War 3.
Works Cited
i “Biden Announces More than 500 Sanctions on Russia after Navalny’s Death.” NBCNews.com, February 23, 2024. https://www.nbcnews.com/politics/white-house/biden sanctions-russia-navalny-rcna140158.
ii Russia full year GDP growth, 2024. https://tradingeconomics.com/russia/full-year-gdp growth#:~:text=April%20of%202024.-
,Full%20Year%20GDP%20Growth%20in%20Russia%20increased%20to%203.60%20per cent,macro%20models%20and%20analysts%20expectations.
iii Zhdannikov, Dmitry, and Victoria Waldersee. Grabbing $300 billion of Russian assets is no panacea, west cautions in Davos. Accessed April 2, 2024.
https://www.reuters.com/world/europe/belgium-pm-says-mechanism-is-needed confiscation-280-billion-euros-russian-2024-01-17/.
iv “US Dollar to Russian Ruble Exchange Rate Chart.” Xe, 2024.
v Ebel, Francesca. Russian central bank hikes interest rates to 12 percent as ruble … Accessed April 2, 2024. https://www.washingtonpost.com/world/2023/08/15/ruble-russia-interest rate-increase/.
vi “Russia’s Economic Collapse: How Sanctions & War Are Crushing Putin – TLDR News.” YouTube, March 3, 2022. https://www.youtube.com/watch?v=4QgACw5Hms0.
vii Strizh, Vasilisa, Roman A. Dashko, and Valentina Semenikhina. “Update: Russia to Permit Certain Transactions with Securities of Non-Russian Issuers.” – Publications, November 15, 2023. https://www.morganlewis.com/pubs/2023/11/update-russia-to-permit-certain transactions-with-securities-of-non-russian
issuers#:~:text=Decree%2081%20generally%20prohibits%20any,commission%20on%20c ontrol%20over%20foreign.
viii “US Dollar to Russian Ruble Exchange Rate Chart.” Xe, 2024.
ix “Average Russian Oil Exports by Country and Region, 2021-2023 – Charts – Data & Statistics.” IEA, February 4, 2004. https://www.iea.org/data-and-statistics/charts/average russian-oil-exports-by-country-and-region-2021-2023.
x “Russia’s Gas Export Strategy: Adapting to the New Reality – Center on Global Energy Policy at Columbia University Sipa: CGEP.” Center on Global Energy Policy at Columbia University SIPA | CGEP, February 21, 2024.
https://www.energypolicy.columbia.edu/publications/russias-gas-export-strategy-adapting to-the-new-reality/.
xi x “Russia Exports.” Trading Economics. Accessed April 2, 2024.
xii Soldatkin, Vladimir, and Olesya Astakhova. Russia exports almost all its oil to China and India – novak | reuters. Accessed April 2, 2024.
https://www.reuters.com/business/energy/half-russias-2023-oil-petroleum-exports-went china-russias-novak-2023-12-27/.
xiii “Urals Oilprice – Chart – Historical Data – News.” Trading Economics. Accessed April 2, 2024. https://tradingeconomics.com/commodity/urals-oil.
xiv “Russian Natural Gas Monthly Price – US Dollars per Million Metric British Thermal Unit.” IndexMundi. Accessed April 2, 2024.
xv “Average Russian Oil Exports by Country and Region, 2021-2023 – Charts – Data & Statistics.” IEA, February 4, 2004. https://www.iea.org/data-and-statistics/charts/average russian-oil-exports-by-country-and-region-2021-2023.
xvi McWilliams, Ben, Giovanni Sgaravatti, Simone Tagliapietra, Georg Zachmann, and Zsolt Darvas. “The European Union-Russia Energy Divorce: State of Play.” Bruegel, March 28, 2024. https://www.bruegel.org/analysis/european-union-russia-energy-divorce-state play#:~:text=In%202023%2C%20Russian%20pipeline%20supplies,gap%20of%20122%2 0bcm%20in.
xvii “The Russian Oil Price Cap Explained.” YouTube, December 6, 2022. https://www.youtube.com/watch?v=nvGYO0uVaSw&t=517s.
xviii “The G7 Price Cap Is Working Surprisingly Well.” YouTube, January 17, 2023. https://www.youtube.com/watch?v=TU_JGOMaTYo.
xix Russia dodges G7 price cap sanctions on most of its oil exports. Accessed April 2, 2024. https://www.ft.com/content/cad37c16-9cbd-473c-aa2f-102c21393d2e.
xx x “Russia Exports.” Trading Economics. Accessed April 2, 2024.
xxi “Russia Reports a Painful Rub308bn Deficit in January, but Nowhere near as Bad as the Rub1.7 Trillion Deficit in January 2023.” bne IntelliNews. Accessed April 2, 2024. https://www.intellinews.com/russia-reports-a-painful-rub308bn-deficit-in-january-but nowhere-near-as-bad-as-the-rub1-7-trillion-deficit-in-january-2023-311449/.
xxii “Russia Imports.” Trading Economics. Accessed April 2, 2024.
xxiii “Is Central Asia Helping Russia Evade Sanctions?” YouTube, February 25, 2023. https://www.youtube.com/watch?v=kM6c2gaEK6o&t=363s.
xxiv “GDP Growth (Annual %) – Russian Federation.” World Bank Open Data. Accessed April 2, 2024. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=RU.
xxv “Russia Inflation Monthly 2024.” Statista, March 14, 2024.
russia/#:~:text=In%20February%202024%2C%20the%20inflation,April%202022%20at% 2017.8%20percent.