Over the last 14 months, the global economy has witnessed something previously unthinkable: the severing of trade, financial and personal ties with a country that spans 11 time zones and sits at the centre of globalisation. Can this really work?
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It is very fortunate that confidence in the effectiveness of sanctions did not prevent the US and its allies from sending weapons and other aid to Ukraine. Initially, it was expected that the confiscation of Russian foreign currency reserves held abroad, strict restrictions on Russian banks and private individuals, and the halting of trade in technology and raw materials would trigger a collapse of the Russian economy, potentially forcing V. Putin to abandon his “special military operation”. Less than two months after the invasion, the International Monetary Fund forecast that the Russian economy would shrink by 8.5% in 2022 and by 2.3% this year.
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We now know why the optimistic forecasts regarding the impact of economic sanctions were unfounded. China, India, Malaysia and Singapore have increased their purchases of Russian oil, and companies in Western democracies have increased their imports of petroleum products produced by these emerging market economies from Urals crude.
China, which has become Russia’s new primary trading partner, is supplying the Russians with semiconductors, drones and other dual-use technologies. Turkey, the United Arab Emirates, Kazakhstan, Armenia and other so-called “former Soviet republics” have flourished as intermediaries between Western exporters and Russia, supplying everything from smartphones to machine tools (after a 43% drop in the first months of the war, Russian imports largely returned to pre-war levels in November 2022).
Furthermore, the self-serving interests of certain governments have hindered the European Union from banning the import of products important to Russia, such as diamonds and steel. Some EU countries doubled their imports of Russian semi-finished steel products last year, replacing supplies from Mariupol factories in Ukraine that were destroyed by Putin’s army.
Moreover, some of Russia’s main financial channels to the West have remained open during the war. For example, the EU has not yet cut off Gazprombank, even though gas imports from Gazprom, the bank’s majority shareholder, have all but ceased. In Cyprus, Gazprombank, Russia’s third-largest lender, continues to operate under the supervision of the European Central Bank.
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The Russian elite – both top officials and leading business people – are highly pragmatic and non-ideological. Many Russian billionaires accumulated their wealth in the 90s and, naturally, still consider their ties to the Kremlin to be a very important asset. Sanctions have created unprecedented insecurity for them; they continue to demonstrate negative loyalty to V. Putin: they are dissatisfied with the situation, but they continue to work in Russia, supply resources to the war machine and earn money. It took some Russian billionaires less than eight months to restore international cooperation and even find new clients.
The current “reward” for them is large cash flows from countries in Asia and the Global South. Combined with the threat of official repression and the prospect of remaining on Western sanctions lists indefinitely, the fact that their standard of living has not deteriorated means they have no reason to stand up to or speak out against the regime.
A clear example in this regard is Alexey Mordashov. Following the start of the war and the imposition of sanctions, he dedicated considerable effort to “washing” his reputation in the West. Major US media outlets even published sympathetic articles portraying A. Mordashov as a reform-minded oligarch attempting to keep his distance from V. Putin.
https://www.project-syndicate.org/onpoint/imperfect-russia-sanctions-nonetheless-effective-by-federico-fubini-and-alexandra-prokopenko-2023-05