Economic sanctions are a very popular tool in foreign policy, especially when the alternative is military intervention. It’s been used various situations: against the Taliban in Afghanistan, against Russia during the annexation of Crimea – but most notably, against Russia during their current war of aggression against Ukraine. The key goal of these sanctions, both during the annexation and now during the war, has been deterrence: to dissuade Russia from violating international law, further aggression and warfare via economic pressure and isolation. These sanctions have been vast, multilateral and unprecedented in scale, including embargos against Sberbank, Russia’s largest privately owned financial institution, notable Russian gas, mining, oil, telecommunication and railroad companies, the removal of Russia from the SWIFT system, and blocking Russia from accessing foreign exchange reserves. Regardless, the war continues on Ukraine, with Russia largely unfettered. Despite the extreme measures taken against Russia, their war continues undeterred. The question is: why have these sanctions failed?
The anti-dollar
Despite the U.S. dollars dominance in global financial markets, U.S. sanctions against Russia have not been as crippling as expected. Since 2014, Russia has been collaborating with countries like China and seeking alternative trade partners to circumvent Western sanctions, reducing their dependence on Western financial systems.
The dollar is the largest reserve currency in the world – it dominates global financial markets and institutions, banks and loans. With that in mind, US sanctions against Russia should have been crippling, limiting their ability to create capital and maintain economic growth in international markets: especially when such sanctioned countries are in war. The reality of the situation is quite different.
Since 2014, Russia has been taking ‘anti-dollar’ measures – meaning that they have been
building and facilitating alternative initiatives to combat the US’ dominance over the world’s currency via the dollar. Collaborating with other rivals to the US, such as China, they’re striving to remove their dependence on the dollar in their economies. Other than this, Russia has been seeking alternative trade partners in non-Western countries to sustain its economy despite the sanctions levied against it internationally by Western Europe and North America. Russia has progressively reduced its dependency on the dollar by decreasing its presence in their foreign currency reserves, replacing them with the euro, gold and yuan. In 2018, they reduced their dollar holdings from $96.1 billion to $14.9 billion.
Its important to understand that Russia and China’s bilateral relations have only been
improving following sanctions, especially concerning the anti-dollar and other movements that serve to remove their dependence on the West. As the war has progressed, Russia’s investment into China has only increased – Russia holds almost a quarter of global yuan reserves, over ten times the usual average. Following sanctions in 2021, including the removal of Russia from the SWIFT program, anti-dollar sentiments only increased. An alternative was quickly introduced: CIPS, the Chinese rival to SWIFT. This substantially reduced the dependence on the West and their financial institutions, allowing countries such as Iran (also removed from SWIFT) to bypass such sanctions almost entirely and therefore reduce their significance.
SWIFT had been seen as one of the most drastic economic sanctions taken against Russia,
Iran and other states – but the sanction quickly backfired and produced a new problem in
itself. If there’s an alternative to SWIFT, why impose the sanction at all? With other financial systems at hand, it feels moreso like a slap on the wrist from the West rather than a debilitating measure. By diversifying its economic and trade partners and reducing
dependence on Western financial systems, Russia has mitigated the impact of sanctions that were designed to isolate it economically.
Oil and profit
Sanctions by the EU, G7, US, and Australia on Russia's largest industry, oil, aimed to cap
export prices and limit revenue. However, Russia bypassed these sanctions by selling to non-Western buyers, using uninsured tankers for covert trades, and supplying sanctioned markets through third-party countries like India.
Economically, the revenue from Russian oil accounts for 30 to 50 percent of their total budget revenues: it’s logical to conclude that oil serves as the most important singular source of income for the state. Oil sanctions were meant to hit hard and fast, limiting Russian export prices to $60 per barrel. Mainly, this was to avoid a European energy crisis while ensuring that the oil industry in Russia would take a considerable hit in revenue. While their economy initially suffered, they capitalized on an obvious alternative: non-Western and domestic buyers, who were more than willing to pay far above the sanction-led price limit. Even the leaders of the sanctions struggled to monitor all of Russia’s transactions concerning oil, which easily numbered in the thousands. This was especially true for territories outside of the G7’s jurisdiction. Worse still, Russian shadow fleets contribute to a significant amount of the circumvention around oil sanctions – vessels owned, or insured in the West cannot ship sanctioned cargo, but Russia owns a considerable amount of totally uninsured tankers that enable the ‘ghost trade’ of oil. Russian exports targeted by sanctions have vanished in the ghost trade, valued at over $1 billion. Furthermore, there is no limitation on third-party buyers from purchasing Russian crude oil, refining it, and selling it onwards to the states that had originally sanctioned Russia in the first place – India is one such country that operates as a Russian oil ‘laundromat’. To put it short: Russian oil, refined and exported from laundromats, is flowing into the very markets that sanctioned it in the first place, including America and EU markets.
Inflation?
Despite flaws in the economic sanctions imposed on Russia, they have significantly impacted the state by freezing $350 billion in currency reserves, weakening the ruble, and causing Russian inflation to increase.
Russia’s currency reserves, including their reserves in both dollars and euros, have been frozen: valued at $350 billion, this accounted for half of their total foreign reserves despite investment into alternative avenues other than the dollar. The Russian economy is damaged – and the ruble has been weakening. At the beginning of 2023, the ruble-dollar exchange rate was at a 69:1 ratio. Still, it’s a far cry from where Russia originally stood in 2022: after economic sanctions, Russian inflation skyrocketed from 6.7% to 13.8%. Nowadays, the damage has started to even out - Russian inflation has decreased since its record high in 2022, hitting 7.8% in April 2024. Predictions of growth in the Russian economy have been forecasted, with the IMF projecting Russia’s GDP growth to be 2.6% in 2024.
Sanctions in the long term
In the case of the Russian-Ukrainian war, economic sanctions were effective in the short-term as harsh and immediate punishments, but have become progressively more ineffective when left to settle. Alternative methods do exist: culturally, Russia has suffered by being banned from the Olympics, the World Cup, and other important events – but whether or not cultural and social isolation is enough to dissuade Russia is an entirely different matter. Perhaps the most effective move would be to remove Russia from its international seats of political power, such as the Security Council. It would not be without precedent: Russia had been previously expelled from the G8 following the annexation of Crimea, but it remains unlikely in the grander scheme of global power dynamics.
There are always loopholes and alternatives to be found, especially when sanctions aren’t held universally against the sanctioned. States can impose as many as they’d like – if they do not have the ability to uphold them meaningfully, sanctions are little more than symbolic.
