In response to the conflict in Ukraine, the United States has raised the bar. It has spearheaded the United States’ G7 allies and Australia to place unprecedented unilateral sanctions on Russia. These sanctions aim to isolate Russia from the global financial system. They want to limit its power to finance military actions. The penalties have hit hard across a variety of sectors, but the energy industry has been hit hardest. Price capping rules and other limitations have greatly increased losses in the market. It appears that the Russian economy has so far beaten expectations on resilience. The International Monetary Fund projects a recovery of 4.1% growth rate in 2023 and 4.3% in 2024.
Since February 2022, Western authorities have imposed more than 21,890 sanctions against Russia. A few estimates indicate the number could be higher, surpassing 28,500. These consist of sanctions on people, corporations, and institutions that are viewed as assisting or facilitating Russian aggression. As a result of these sanctions, approximately $300 billion of Russia’s central bank assets have been frozen in foreign jurisdictions. Even when these sanctions are used, the effectiveness of these individual actions remains an open question among experts and practitioners.
The Impact of Sanctions on Russia’s Economy
The United States, European Union, United Kingdom, Canada, Japan, and allied countries’ sanctions have inflicted crippling damage on the Russian economy. These countermeasures have drastically undermined Russia’s economic stability. They have mainly worked to undermine Russia’s capacity to earn earnings from its crucial energy market. As President Joe Biden noted, these steps aim at one of the heart of Russia’s economic arteries. They want to crimp Moscow’s financial lifeblood as much as possible.
In accordance with UN trade data, foreign direct investment in Russia has dropped by 63% over the course of last year. This steep fall marks a striking lack of international faith in the Russian market. Anton Moiseienko, a leading sanctions expert, explained that these economic measures are designed to punish those who are most culpable and most influential in Russia’s political elite.
“That has included oligarchs, military leaders, propagandists, and others who were in some way deemed to be enabling or supporting Russia’s activities,” – Anton Moiseienko
Yet in all of this failure and misfortune, the Russian economy has proven remarkably resilient. As we outlined in our last inflation report, analysis from the US Congressional Research Service shows that by some metrics, Russia’s economy has been surprisingly resilient so far. Yet such resilience causes concern that long-term sanctions may not be able to effectively achieve strategic goals.
The Adaptation of Russia’s Economic Strategy
To counter the sanctions, Russia has used multiple adaptive approaches to reduce their impact. Experts argue that Russian officials have mastered the art of mitigating the difficulties created by sanctions. Donald Trump remarked on this adaptability, stating that “they’re wily characters and they’re pretty good at avoiding sanctions.”
In addition, because of the sanctions, it has become harder for Russia to obtain components needed to go with its military operations. Moiseienko pointed out that the new measures adopted by Western countries are “increasing the discomfort” of Russia. He stressed that economic sanctions will not ensure peace in the long term. Perhaps their most important contribution lies in the role they can play in continuing to pressure Russia.
“While economic measures alone may not be enough to secure a just and lasting peace, such a peace cannot be achieved without them,” – Philip Luck
Such adaptations have involved looking for new markets to export energy and pursuing new financial partners who are ready to do so without going around Western-imposed sanctions. This strategy may only be short-lived given the potential for continued geopolitical strife and worldwide condemnation to take the stage.
The Future of Sanctions and International Relations
The future of sanctions against Russia is unclear. These steps combined are producing the biggest economic pressure ticks on Moscow. There is speculation as to whether stricter financial sanctions could be ordered. Moiseienko explained that the US is in a culturally distinct and unique place to pass such measures.
“In relation to financial sanctions, this is an area where the US is really the world’s pre-eminent power,” – Anton Moiseienko
Trump’s statements regarding possible secondary tariffs against countries doing business with Russia bring to light the complexity behind international relations. This reality highlights how complex and convoluted international relationships can be. He has even threatened to apply tariffs as high as 100% on countries that still purchase Russian products.
The US and EU are also outwardly in deeper threats and challenges. Despite this, they continue to import tens of billions of euros from Russia in energy and other commodities. Despite our unconditional support for Ukraine, this ongoing trade relationship makes it that much more difficult to economically and politically isolate Russia. Moiseienko pointed out that “the story of Russian sanctions so far is there’s always a caveat somewhere there that’s constraining those sanctions from having maximum effect.”
