By invading Ukraine in February 2022, Russia not only sparked international outrage but also unleashed a wave of sanctions designed to weaken the Kremlin’s ability to finance the war against its neighboring country.
Several nations froze Russia’s assets abroad, its economy was isolated from the global financial system and they also tried to weaken its revenues from energy exports.
Western officials and analysts called the sanctions “crippling,” “weakening” and “unprecedented.”
The situation seemed clear: there was no way for the Russian economy to resist these pressures.
And faced with the prospect of economic collapse, the Kremlin would be forced to back down and withdraw its troops from Ukraine.
But twenty-seven months later, the war continues. Far from being paralyzed, the Russian economy is growing.
The International Monetary Fund predicts that Russia will post economic growth of 3.2% this year, higher than any advanced economy in the world.
The “weakening” sanctions have not caused shortages in stores and Russian supermarkets are stocked.
But it is true that rising prices are a problem and that not everything that was previously on sale is still on sale.
Many Western companies left the Russian market in protest against the invasion of Ukraine.
But many of its products still reach Russia through various routes. If you look hard, you can still find American Coca-Cola in stores.
Business chiefs from Europe and the United States may no longer flock to Russia’s annual economic event, the St. Petersburg International Economic Forum, but its organizers say delegates from more than 130 countries and territories participated this year.
Instead of bowing to Western sanctions, the Russian economy has been developing new markets in Asia and the Global South.
All of this has left Russian officials boasting that attempts to isolate Russia, politically and economically, have not been successful.
“It seems that the Russian economy has managed to adapt to very unfavorable external conditions,” explains Yevgeny Nadorshin, senior economist at PF Capital.
”Without a doubt, the sanctions greatly altered the functioning mechanism of the economy. But it has been restored quite a bit. “He’s adapting.”
Alternative solution
Does this mean that the sanctions have failed?
“The big problem was our understanding of what sanctions can and cannot do,” says Elina Ribakova, a senior fellow at the Peterson Institute for International Economics.
“It’s not like a switch is flipped and Russia disappears. What sanctions can do is temporarily unbalance a country until it finds a way around them, until it finds alternative ways to receive shipments or sell its oil. “We are exactly in that space where Russia has found a solution.”
Moscow has redirected its oil exports from Europe to China and India.
In December 2022, G7 and European Union leaders introduced a price cap plan aimed at limiting the revenue Russia earns from its oil exports, trying to keep it below $60 a barrel.
But Western experts admit that Russia has been able to circumvent this quite easily.
The history of the price cap highlights a dilemma for the United States and its partners.
Recognizing that Russia is one of the most important players in the global energy market, they have tried to keep Russian oil flowing to prevent rising energy prices. The result of this is that Moscow is still making money.
“In a way we refuse to properly sanction Russian oil,” says Elina Ribakova.
“The price cap is an attempt to have it all. The priorities are to allow Russian oil to enter the market and reduce Russia’s revenues. And when these two priorities conflict, unfortunately the first wins. That allows Russia have a lot of income and continue with the war.”
“China has become a lifeline”
Russia has become China’s largest oil supplier. But Beijing’s importance to Moscow goes far beyond energy exports.
China has become a lifeline for the Russian economy. Trade between the two countries reached a record US$240 billion last year.
You don’t need to be an economics expert to understand how important China has become to sanctions-hit Russia.
Electronics stores in large Russian cities are full of Chinese tablets, gadgets and mobile phones.
Chinese car dealers now dominate the local market,
It is not that the Russian automobile industry has stood idly by.
At a recent business meeting in Nizhny Novgorod, the new version of a classic Russian brand, the Volga, was on display.
But there was one detail: the new Volga is based on a Chinese car, the Changan.
“Where was this flyer made? “Is it Chinese?” asked Russian Prime Minister Mikhail Mishustin, apparently irritated by the lack of Russian components.
“We want (the wheel) to be Russian,” he added.
The engine of the economy
But it is not the automobile industry that is driving Russia’s economic growth. It’s military spending.
Since Russia launched what the Kremlin continues to call its “special military operation” in Ukraine, arms factories have been working around the clock and more and more Russians are employed in the defense sector.
This has given a boost to salaries in the military-industrial sector.
But when a lot is spent on the military, there is less money to spend in other areas.
“In the long term, the economy is being destroyed,” believes Chris Weafer, founding partner of the Eurasian consulting firm Macro-Advisory. “There is no money going into future developments.”
He explains that in 2020 there was much discussion about the National Project program, under which US$400 billion would be spent to improve Russia’s infrastructure, transportation and communications.
Instead, “almost all of that money has been diverted to finance the military industrial sector and support the stability of the economy.”
After more than two years of fighting, the Russian economy has adapted to the pressures of war and sanctions.
But now the United States is threatening secondary sanctions on foreign banks that help transact with Moscow, and that is creating a whole new set of problems for Russia.
“The arrival of products to Russia has decreased,” says Chris Weafer.
“Having access to spare parts is more difficult. Every day you hear stories of banks in China, Turkey and the Emirates refusing to transact with Russia, whether with money from Russia to buy goods or money going to Russia to pay for oil or other imports. Unless this is resolved, Russia will have a financial crisis in the fall.”
That is why it would be wrong to conclude that Russia has overcome the sanctions.
So far, ways have been found to address them, circumvent them and reduce the threat.
But the pressure of sanctions on the Russian economy has not disappeared.
