The sanctions have had no effect, but the West can do more

Down Angle Symbol A symbol in the form of an angle pointing downwards. Russian President Vladimir Putin listens to Supreme Court Chairman Vyacheslav Lebedev at the Kremlin on February 6, 2024 in Moscow, Russia. Alexander Kazakov, Sputnik, Kremlin Pool Photo via `

• The West's sanctions against Russia have not significantly affected its war economy.
• Analysts say the “permeable” nature of the sanctions has allowed Russia to circumvent restrictions.
• Sources said additional sanctions could select better targets to pressure Russia.

Attempts by Western nations to end Russia's invasion of Ukraine through economic sanctions are running into difficulties, and the measures do not appear to have hit Vladimir Putin as hard as expected.

Sanctions and trade restrictions have hit Russia's economy hard since it invaded Ukraine two years ago. They target key areas such as energy, freezing foreign assets and cutting the country's financial ties to much of the West.

But the reality is that despite all this, Russia's war economy has performed well. After a 1.2% GDP decline in 2022, Moscow recorded annual growth of 3.6% in 2023 and reached an unprecedented unemployment rate of 2.9%.

Russia expert Owen Matthews, author of “Overreach: The Inside Story of Putin and Russia's War Against Ukraine,” told Business Insider on Friday that the Nord Stream pipeline explosion in September 2022 appears to be a major blow to the Russian economy than for the Western sanctions so far.

Analysts said the sanctions toolkit was “permeable” and gave Moscow plenty of opportunities to slip through the net of restrictions, but Western countries could do much more to increase pressure.

Liam Peach, a senior emerging markets economist at Capital Economics, highlighted Russia's ability to circumvent trade restrictions in a note last week.

“The US has tightened sanctions to circumvent sanctions against companies that help Russia import through third countries, but trade has the opportunity to find new paths and is difficult to control. If it is profitable to avoid sanctions, some companies will take the risk,” he wrote.

According to Peach, the sanctions have not stopped the flow of money into Russia from non-Western countries. Even the G7's attempt to curb export revenues by capping oil prices at $60 a barrel has not really affected Moscow's oil trade.

FX share of Russian export processing (%) Source: Central Bank of Russia, Capital Economics

“The US has noted a sharp increase in banking flows between Russia and Turkey and the United Arab Emirates. The West has significantly reduced imports of Russian energy, but Russia has largely redirected oil exports to Asia.”

Meanwhile, Matthews notes that European nations rarely say no to certain energy supplies from Russia, sabotaging their own attempts to punish Putin.

“The whole dirty secret behind all the European sanctions packages was that Europe, for example, talked big about sanctions against Russia, but never sanctioned Russian gas,” he said.

Even with regard to US-dominated financial sanctions, Matthews said only limited progress has been made.

The dominance of the US dollar as a trade and reserve currency forced Russia to de-dollarize, and Russia can still bypass the US-controlled global financial system with the help of China.

Trade in goods between Russia and China (SA, billion USD) Source: Refinitiv, Capital Economics

“This type of sanctions regime has inadvertently only encouraged more renminbi-denominated transactions and massively strengthened Dubai in particular as the main non-American-dominated hub for financial transactions,” Matthews said.

What else can the West do?

Peach wrote that the West could put more pressure on Russian energy by imposing secondary sanctions on third-party purchases of oil and gas from the country.

“Russia does not need loans abroad, but it needs foreign exchange in the form of energy exports to finance the budget, pay for imports and stabilize the ruble.”

But the West is unlikely to take that route, he added, given Russia's energy dominance and the risk of volatility that could ultimately anger partners like India.

Alternatively, the US could target Russia's non-oil exports, particularly industrial metals and liquefied natural gas, Peach added.

With current sanctions not enough, Peach estimates the country's GDP growth will be 3.0% to 3.5% this year and inflation will be 5.5% to 6.0% at the end of the year. However, he reiterated that the sanctions will remain in place.

“Sanctions are unlikely to be rolled back in the next six years, especially if Russia continues to mobilize and wage a more aggressive war,” Peach said, adding that even with a negotiated settlement, a release of Russia's foreign exchange reserves would likely be “out of the question.” come.”