“We have overcome all the problems that arose after sanctions were imposed on us”- Putin.

 Seeing as the Russian economy only contracted by 2.1% in 2022, much less than the World Bank’s prediction of 11.2%, is there an ounce of truth to Putin’s claim? 

Sanctions are an economic tool that have been levied by the West and its allies against Russia to punish the country and attempt to make its war against Ukraine unsustainable. EU sanctions have been issued against Russia since 2014 in response to its illegal annexation of Crimea. When Russia launched its full-scale invasion of Ukraine in February 2022, Russia was hit by several new rounds of sanctions including exclusion from SWIFT, banning oil and gas imports, targeting Russian oligarchs and freezing the foreign exchange reserves Russia holds in the west.

Let’s examine how well, if at all, Russia has managed to shield itself from the effects of western sanctions, beginning with Russia’s exclusion from SWIFT…

SWIFT is an international messaging system, helping banks transfer trillions of dollars between themselves every year. SWIFT is very secure, so payment instructions are typically honoured without question instead of having to be slowly processed by bank clerks. This leads to fast transactions, saving banks approximately $100 USD per transaction. Of the 40 million messages sent per day by SWIFT, 1% involve Russian payments. Exclusion from SWIFT makes it difficult for Russian firms and individuals to pay for exports or to receive cash payments for imports.

However, after sanctions were levied on Russia over its annexation of Crimea in 2014, Russia tried to cushion itself from major economic shocks in the future. It established an alternative to SWIFT, the SPFS system, used by many international Swiss and German banks tied to Russia. Russia can also use the People’s Bank of China’s CIPS network (China have not imposed any sanctions on Russia), as well as phone messages, emails, and even WhatsApp as alternative channels to instruct transactions. Although these alternatives are less secure and efficient, likely leading to transaction volumes falling and costs rising, they show that Russia has attempted to reduce the harm that comes from being excluded from SWIFT. 

Therefore, blocking Russia’s access to SWIFT, which was a largely symbolic move from the west to condemn the invasion, has certainly not unleashed maximum damage onto the Russian economy. Has Russia been able to shield itself as effectively from sanctions on gas and oil? 

The G7 imposed an oil-price cap on Russia in September 2022, and the west vowed to lean itself off of Russian oil and gas imports. The latter has been a success, EU Russian crude oil imports have fallen greatly since 2022. 

However, the KSE estimates that Moscow is set to make $200 billion in oil revenue in 2024. Granted, this is lower than the $218 billion made by Russia mid 2022, when Europe was still leaning itself off of Russian oil imports, but even so- how have Russia been able to replace lost revenue so quickly?

 Russia has effectively ignored the G7’s price cap, selling oil to China at well over the $60/barrel limit. The G7 lacked the capacity to monitor the thousands of shipping, trading, and insurance transactions Russian exporters use. Oil output has only contracted by 1% since pre-war levels- making it obvious that China is not the only country that Russia has increased its oil exports to. When it comes to Russia’s attempt to diversify its exporting markets, India and Turkey have fully taken advantage of the lack of competition which has driven oil prices down. Russia’s monthly crude oil export prices have thus fallen by a whopping $50/barrel due to the discounts demanded by their new Asian consumers. 

Of all of the sanctions, those on oil and gas imports have arguably been the most effective. Although Slovakia and Hungary continue to buy oil and gas imports, they are the outliers in the EU. Also, gas giants like Gazprom have not managed to bring in profits nearly as close to those made with the EU in the past. Gazprom have failed to lobby the Duma into removing price caps for domestic Russian consumers and have failed to significantly boost gas exports to countries like Uzbekistan or Turkey. There is a reason why Russia barely exported oil to Asian markets before the war; it takes just a few days to ship to Rotterdam, whereas it takes a whole month for an oil tanker to arrive in India; adding an extra $10-15 cost per barrel. Delays caused by traffic by having to pass through the Suez Canal also make this endeavour more challenging and less profitable for Russia. This is very bad news for Russia, in 2021 Gazprom made up 7% of government tax revenue, in 2023, only 3.5%. 

It is clear that Russia has not managed to shield itself very effectively from EU sanctions on gas and oil. But, have Russian oligarchs managed to? 

Oligarchy, first defined by Aristotle, is a society governed by the extremely wealthy. In Russia, oligarchs are the businessmen who amassed obscene wealth during the presidency of Yeltsin after the USSR fell in 1991. They are important to Putin as they created and continue to fund his political party, known today as: United Russia. By hitting oligarchs with sanctions, the west is trying to hit Putin where it hurts. 

Western sanctions led Russian oligarchs to lose $330 million/day in 2022. Roman Abramovich, who headlined most UK newspapers when the story broke, saw his fortune fall by 57% to $7.8 billion in 2023 after he was forced to give up ownership of Chelsea FC by the UK Government. Abramovich lost the most of all oligarchs, losing $7.5 billion after the sale of the football club. However, Forbes estimates that only a couple of months later, his fortune managed to increase by $5.2 billion. He is not the only oligarch who has regained the majority of his former wealth- 39 regained $104 billion by the beginning of 2023.

How exactly has this happened?

Many oligarchs saw sanctions coming. On the first day that bombs began dropping on Kyiv, Abramovich transferred a majority stake in 10 trusts, which held at least $4 billion in assets (according to OCCRP), into the offshore hubs Cyprus and Jersey to his 6 children; Abramovich was far from the only oligarch to do this. This meant that on the next day, when the EU sanctioned Abramovich, these assets could not be frozen. Weeks later he moved his superyatchs, with a combined worth of well over $936 billion, to friendlier Turkish shores. As well as recovering much of the wealth lost, some oligarchs have even profited off of sanctions- Vladimir Potatin repurchased Russian banking group Rosbank from the French firm Societe Generale. 

Whilst sanctions on Russian oligarchs have been levied at full force, prepared oligarchs exploiting financial loopholes have dampened their effectiveness. What about the freezing of $300 billion in Russian oversea assets? 

Half of the $612 billion in gold and foreign exchange reserves that the Russian central bank holds in foreign countries were placed in major currencies, gold and government bonds held in the West. Soon after the 2022 war broke out, the US and its allies froze around $300 billion in Russian assets. This is bad news for Russia: the Russian central bank will no longer be able to prop up the ruble, whose value has plummeted since February 2022, meaning Russia will find it more difficult to meet its international payment obligations. 

Furthering the damage upon Russia is the leverage G7 countries may have in potential peace negotiations with Russia. The west could use the frozen assets as a bargaining chip, stating for example, that the $300 billion will only be unfrozen if Russia withdraws troops from Ukraine and promises to never try to compromise Ukraine’s borders again.

As of the 12th June 2024, the G7 are discussing issuing Ukraine a $50 billion loan backed by the $300 billion in seized Russian assets. This is crucial given the possibility that Donald Trump wins the 2024 US presidential election and likely if not outright stops aid to Ukraine, reduces it. With this in mind, transferring these assets to Ukraine is perhaps one of the only ways for Ukraine to be funded to victory. The UK is a strong advocate of this move, with Foreign Secretary David Cameron pictured below holding a shirt, written on it: “Make Russia pay.” 

Ultimately, Russia has indeed been able to mitigate the impacts of some sanctions: SWIFT exclusion, and sanctions on oligarchs. However, Russia has not been able to fully ‘sanction proof’ its economy. Bans on oil and gas imports, and the freezing of $300 billion in Russian oversea assets are sanctions that the Kremlin have not managed to shield themselves from feeling the impact of. Putin has certainly not been able to “overcome all the problems” western sanctions have caused Russia’s economy.