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Why sanctions did not empty Russia's pockets and how to increase pressure from West

Why sanctions did not empty Russia's pockets and how to increase pressure from West Sanctions against the Russian Federation are not in full effect (collage - RBC-Ukraine)

Sanctions against Russia have been in place for almost two years, but their effectiveness has not been as impactful as anticipated. In this article, RBC-Ukraine correspondent Yurii Doshchatov explores how the imposed restrictions have influenced the Russian economy and whether their effect can be strengthened.

The publication draws on data from open sources, documents from international financial organizations, and exclusive comments from experts.

The countries of the European Union and G7 initiated sanctions against Russia literally from the first days of the escalation of military actions in Ukraine. Since February 2023, 12 sanction packages have been adopted. Russia has been excluded from many international organizations, and its trade and financial relations have been restricted. Personal sanctions have been imposed against top officials and major businessmen.

In just the first 10 days following the full-scale invasion of Ukraine, Russia became the target of 2,778 sanctions, totaling 5,530 with previous measures. This surpasses Iran, which faced 3,616 sanctions over the course of 10 years. As of today, after the implementation of the 12th sanction package, the total number of sanctions is nearing 19,000.

Pressure on Russia intensified almost every month in 2022, with the adoption of 9 sanction packages. Major Russian banks and import-oriented industrial enterprises were among those targeted. While the impact of the sanctions was felt, it wasn't as strong as expected. The sanctions were intended to curtail, if not entirely deprive Russia of the ability to continue the war.

However, Moscow managed to sustain active military operations, and the economic blow, while significant, was not critical. Russia gradually adapted to the new conditions, utilizing additional price discounts to increase energy resource supply to India and China. "Parallel" or "gray" imports from third countries were established for prohibited products.

In 2022, Russia's GDP contracted by 2.1%, and inflation rose to 12%. Industries such as aviation, black metallurgy, and telecommunications were the most affected. However, increased revenue from the export of energy resources helped alleviate the situation.

Gas supplies to the EU significantly decreased, but the price skyrocketed to unprecedented levels, occasionally exceeding $3,000 per thousand cubic meters, covering losses from reduced sales volumes. The price of oil exceeded $90 per barrel. Considering the depreciation of the ruble, Russia's budget revenue from the export of energy resources increased. Currency reserves remained sufficient due to a nearly 13% reduction in imports through sanctions.

Revenues from the export of energy resources began to noticeably decline only in 2023, after restrictions on oil supplies and a decline in gas prices. In December 2022, a price cap of $60 per barrel was introduced for Russian oil. Direct import of Russian oil to EU countries by sea was prohibited, with an exception until the end of 2024 only for pipeline transport, specifically the Samara - Western Direction pipeline part of the Druzhba oil pipeline, also known as the "Medvedchuk's pipe."

Russia's economy is recovering. But this is not an economic breakthrough

For the first three quarters of 2023, according to the Russian Audit Chamber, revenues from oil and gas sales in Russia have decreased by one and a half times to 5.58 trillion. They now constitute about a third of all budget revenues, whereas they previously accounted for nearly 45%. Substantial improvements from the import of oil and gas resources are not expected in 2024; they will contribute to 33% of the budget's revenue portion.

Recent data indicates that Russia's economy has essentially recovered in 2023 after the decline in 2022. Initial forecasts by international analysts were not confirmed. The IMF expected Russia's GDP to contract by 2.3% in 2023 at the end of 2022. However, by spring, the estimate improved to 0%, and by July, it reached +1.5%. According to the latest October forecast, Russia's GDP will grow by 2.2% in 2023. This essentially signifies recovery after a 2.1% decline in 2022.

However, the GDP indicator does not imply an improvement in the quality of life or any economic breakthrough. The production of the gross domestic product in Russia primarily occurs through the activation of the military industry. The development in regions where military equipment and ammunition are produced compensates for the decline in production in regions that manufacture export-oriented and high-tech products.

The reduction in unemployment is also linked to economic development. The IMF improved this indicator from 3.9% to 3.3%. However, the reason lies in increased employment in sectors not related to economic development. In simpler terms, the unemployed are joining the Russian army instead of working in enterprises.

A negative indicator is inflation, largely occurring due to the devaluation of the ruble and the increase in the cost of imports, including equipment for industry, purchased bypassing sanctions and, therefore, costing more.

Therefore, the predominance of positive indicators is relative, but it allows Russia to continue the war. In the coming years, according to World Bank forecasts, Russia's economy will not just recover but grow. However, the growth will be at a very slow pace.

"It is projected that economic growth in Russia will remain weak, averaging only 1.1% per year during 2024-2025. This growth will be constrained by capacity limitations, labor force strain, and a lack of access to technology and equipment due to sanctions," as stated in the World Bank report.

How to strengthen the impact of sanctions

Currently, sanctions remain the sole economic instrument to deter Russian aggression, but the pace of their implementation has significantly slowed. In 2023, only 3 sanction packages were adopted. Moreover, these new sanctions are unlikely to yield the same economic results as the measures taken in the previous year.

RBC-Ukraine previously reported on the impact of the 12 sanction packages. Vladyslav Vlasiuk, advisor to the head of the Presidential Office, generally positively assessed the content of the document but noted that the Ukrainian side is not entirely satisfied with the measures taken. "I can say that I am satisfied (with the new sanction package). I would be glad if such a package came out every two months," commented Vlasiuk to RBC-Ukraine.

As for restricting cooperation with Russia in the nuclear sector, Europe is unwilling to risk imposing sanctions on Rosatom. This reluctance stems from the tight integration of the nuclear sector of some EU countries with the Russian company. Severing these ties would have a negative impact on them. Thus, Europe refrains from imposing sanctions on the nuclear sector, considering them hazardous to its own interests.

Currently, sanctions have been applied in almost all directions that could lead to tangible negative consequences for Russia. However, these restrictive measures were not always implemented to the necessary extent, notes Dr. Oleksii Plotnikov, an economist and professor. He is confident that existing sanctions need to be strengthened in the future.

"Enhancement can be applied to almost all sanctions. We can completely cut off Russia from SWIFT and make payments not go to or from Russia at all. Because the sanctions that are currently in place for individual banks are not half-measures but quarter-measures. We can completely prohibit the export of oil by canceling the exception for Druzhba, and we can completely ban Russian gas," stated Plotnikov in a comment to RBC-Ukraine. Additionally, he believes it is necessary to strengthen control over the enforcement of sanctions and possibly impose sanctions on countries aiding Russia in circumventing prohibitions.

Türkiye, Armenia, and Central Asian countries such as Kazakhstan, Uzbekistan, and Kyrgyzstan are primarily aiding Russia in bypassing sanctions. These countries significantly increased imports from Europe and exports to Russia after the imposition of sanctions. They conduct deliveries through Belarus and Georgia.

Assistance in sanctions bypass may lead to imprisonment

Many companies, although they ceased operations in Russia, continued to supply their sub-sanction products under the guise of "grey exports." From April to November 2022, the US and several European countries exported chips to Russia amounting to $777 million. Intermediary firms were established in Türkiye and Hong Kong for these transactions. In 2023, the volume of shipments decreased, but imported technology, particularly from Intel and AMD, continued to reach Russia.

In 2024, the EU may introduce criminal liability for violating sanctions. A draft law to this effect has already been prepared and needs approval from member countries before being adopted by the Council and the European Parliament.

Criminal offenses under consideration include aiding sub-sanctioned individuals in circumventing travel bans, engaging in trade and other transactions with them, and providing financial services. Inciting and assisting in these crimes will also be punishable. Penalties may include fines or imprisonment ranging from 1 year and more, depending on the severity of the offense.

Strengthening accountability for sanctions violations will enhance the effectiveness of their application, believes Olena Omelchenko, a partner at the Ilyashev & Partners Law Firm.

"The criminalization of sanctions violations will allow for the seizure of assets of individuals subject to sanctions and their accomplices, making it easier for the victims to seek compensation from confiscated property," she noted in a comment to RBC-Ukraine.

However, Omelchenko emphasized that the real impact of increased accountability for sanctions violations can only be assessed after the proposed measures are implemented.