Economic weapon or sanction defeat
Almost two years ago, in response to the special military operation conducted by the Russian Federation, major countries adopted "large-scale" and "unprecedented" sanctions against Russia. The entire world community stood in anticipation of exceptional economic damage that would force the country to abandon the intended plan. However, there was no dramatic effect, the Russian economy showed an "unprecedented" level of adaptability, and the "scale" of the restrictions never became global: about two-thirds of the world's population live in countries that did not support the sanctions policy against Russia.
In fact, the history of sanctions adopted by the United States and the European community in the XX-XXI centuries is largely a history of disappointment. Iran, North Korea, Venezuela, Afghanistan - the effectiveness of restrictions against countries has declined as their use has expanded, and the example of Russia is not an exception.
Effectiveness of sanctions
The size, speed and scope of the sanctions imposed on Russia were the most impressive since the Second World War: all possible tools were used against the country, from trade blockades to personal bans. The sanctions were expected not only to curb the country's military and economic development by restricting imports and exports, but also to change the way it behaves politically. Today, after the passage of time, we can judge the real effectiveness of the restrictions: they were able to cause some economic damage, give an impetus to the transformation of the Russian economy, and squeeze import markets, but the economic, social and political pressure caused by them was clearly insufficient to achieve the main goal pursued by the U.S., the EU and some Asian countries - the containment effect was not achieved.
According to the European Commission, the EU has banned 49% (worth more than €43.9 billion) of exports of goods to Russia and 58% (worth more than €91.2 billion) of imports of goods from February 2022 compared to 2021. The European Union froze €300 billion in assets of the Russian Central Bank and €21.5 billion in assets of Russian individuals and legal entities.
Sanctions on Russia are unprecedented — in no other circumstance have we moved so swiftly and in such a coordinated fashion to impose devastating costs on any other country. The economy is forecast to contract as much as 15 percent or more in 2022. This economic collapse of Russia’s GDP will wipe out the past 15 years of economic gains in Russia, according to the Institute for International Finance. Inflation in Russia is already spiking, with analysts projecting it to rise up to 15 percent on a year-over-year basis
However, despite the pessimistic forecasts, the figures show the opposite. The International Monetary Fund estimates that Russia's economy shrank by only 2.2% in 2022 against the predicted 15%. Annual inflation rose to 11.94% after 8.39% in 2021, exports increased by 19.9% and imports fell by only 11.7%. At the end of 2022, the Russian Federation was recognized as the fifth largest economy in the world, behind China, the United States, Japan and India and overtaking Germany, Brazil, France and other countries of the world.
The reorientation of trade flows from the West to the markets of Asia and the Middle East made it possible to achieve such indicators to a large extent. Although, according to the Federal Customs Service of Russia, China, Turkey, the Netherlands, Germany and Belarus became Russia's main trading partners in 2022, relations with India, South Korea, Latin America and ASEAN are actively strengthening. It is expected that by the end of 2023 they will be among Russia's top markets, finally displacing European countries. Expansion of the geography of presence, including by strengthening international organizations in which Russia is a member, establishment of trade chains with the countries of the Global South, record use of the ruble to pay for Russian exports - all this demonstrates the ineffectiveness of sanctions as an instrument of diplomatic blockade and reputational pressure: the world's largest economies continue to see Russia as an important and strong global partner.
In the face of large-scale sanctions restrictions, Russia's foreign economic activity is undergoing a transformation in terms of settlements. According to the Bank of Russia, at the beginning of 2022, 87% of all export settlements were made in the currency of unfriendly countries - mainly in US dollars and euros. By the end of 2022, this figure had fallen to 48%; today most export transactions are made in rubles (34%) and yuan (16%).
The foreign private sector is not ready to give up the Russian market either. It is known of repeated cases of criminal proceedings being brought against managers who continue to cooperate with Russian business in violation of restrictions. One such precedent was the case of Metalhouse LLC - the company's manager was charged with money laundering to facilitate the violation of U.S. sanctions by conducting transactions to purchase metal products from Russia for more than $160 million. However, this practice is not new to the U.S. justice system; it has also been applied to other countries under sanctions. For example, British American Tobacco (BAT), the largest tobacco company in the world, using a subsidiary and an intermediary, illegally conducted business in North Korea, which, according to the U.S. court, contributed to support for the North Korean regime and its nuclear weapons program. BAT was subsequently fined $629 million.
The Western coalition is increasing pressure on the countries that did not support the sanctions regime
The leaders of Western countries also claim that the anti-Russian sanctions have failed to achieve their goals. Europe is discussing the adoption of a sanctions package that would impose a diamond embargo and limit supplies of Russian propane and butane, but some European countries have already promised to vote against it. Hungary's Minister of Foreign Affairs and External Economic Relations said it was a mistake to discuss new restrictions against Russia without analyzing the consequences of the previous 11 packages, as the bans imposed hurt the European side more than the Russian side. The Czech Republic and Slovakia are seeking the exclusion of Russian oil products and steel from the sanctions list. And the German government is urging potential EU candidates to stand united against Russia.
Central Asian countries that continue to cooperate with Moscow have been warned about the risk of secondary sanctions from the West. The U.S. has already imposed export restrictions on companies in Uzbekistan, Armenia, Turkey, Syria, and China.
In the opinion of Western analysts, it was the low level of policy consolidation in the states that were adopting the sanctions that prevented them from achieving their intended goals. In an attempt to persuade potential candidates to take their side, the United States began to use the practice of prioritizing funding from the Export-Import Bank and the American Corporation for International Development Finance for countries that are potentially ready to join the anti-Russian coalition. However, due to the limited budget of these institutions, this measure proved to be ineffective. Earlier, the U.S. government considered an initiative to adopt a law that would reduce import duties for countries that voluntarily agreed to support the sanctions regime.
Experts from the Peterson Institute for the World Economy propose to introduce preferential access to the U.S. market as an economic instrument of encouragement, as this measure will partially compensate for the losses that countries incur after abandoning the Russian market. The system is supposed to be based on trade preferences (similar to the Global System of Trade Preferences) that would expand access to the U.S. market for economies that are willing to support the anti-Russian coalition and are "needy," i.e., not high-income countries. This program, under the guise of promoting the development of poor countries, will impose on lagging economies the corresponding responsibility for not providing diplomatic support. The main target audience should be Southeast Asia, Latin America, and Africa, some of which are already entitled to preferential treatment under previous agreements with the United States.
To monitor the implementation of the sanctions by the EU, G7, and Australia, the REPO (the Russian Elites, Proxies, and Oligarchs) working group was established to search for and seize Russian assets abroad. At the end of 2022, REPO claimed to have blocked more than $58 billion worth of assets of Russian sub-sanctioned persons. On its basis, it formed the KleptoCapture Task Force under the U.S. Department of Justice, which also searches for assets, identifies and suppresses evasion of the sanctions regime.
The year 2022 was a crucial year for the Russian economy. Large-scale Western sanctions fundamentally changed the external conditions for the development of the domestic economy, there was an expansion of domestic production, the geography of exports and imports changed. After almost two years, we can say that Russia has proved to be resistant to economic pressure and has retained a certain financial stability. The key idea that sanctions should change the planned political course has not come true, and neither has the predicted collapse of the Russian economy.
Sanctions around the world have ceased to fulfill the role of a restraining mechanism. As the experience of Iran, Venezuela, Afghanistan and now Russia shows, they can cause temporary damage, but in the long term they are ineffective.
