Volume 12 Issue 1
DEFENDING THE ECONOMY: RUSSIA’S EXPERIENCE OF COUNTERING EU SANCTIONS IN 2022
INTRODUCTION
On 21 February 2022, Russian President Vladimir Putin signed the recognition of two breakaway provinces in eastern Ukraine, Donetsk and Lugansk, and sent troops into the eastern part of Ukraine in the name of peacekeeping; after 2 days, Russia sent troops to Ukraine from the northeast, southeast, and south. The U.S. and European Union (EU) immediately imposed economic and financial sanctions against Russia. The sanctions were initiated right before the start of the Russia-Ukraine War. By 25 February 2023, the EU had approved 10 packages of sanctions (see Appendix below). This article assesses the impact of the EU’s sanctions on Russia’s energy, trade, financial and personnel.
EU SANCTIONS AGAINST RUSSIA
Usually, EU uses sanctions, or in the EU’s term “restrictive measures”, to target particular policies or behaviors, and those who are responsible for implementing those policies, rather than on a specific country or population. The EU stresses the imposition of sanctions is not punitive and is one of the means by which the EU’s policy makers form a holistic political dialogue, while trying to minimize the impacts on civilians and non-targeted sectors. Traditionally, the EU adopts, in addition to asset freezes and travel bans for individuals, sectoral measures (e.g. economic, financial, export and arms restrictions).
In the case for sanctions imposed on Russia since the war broke out, however, the 10 rounds of sanctions adopted by the EU so far go way beyond those mentioned above, ranging from energy, finance, trade, industry, freezing of the assets of the Central Bank of Russia (CBR), important political, military and economic personnel, suspension of exchanges in science and technology, sports, culture and academic spheres, sea and air blockade, military and civilian dual-use embargo, etc. More than 1,000 corporations followed up on these government-imposed sanctions with their own sanctions, whereby companies restricted or halted commercial activities in Russia.
The EU’s sanctions against Russia have two purposes: (1) to limit Russia’s access to various resources, such as capital, weapons components, etc., to cause serious consequences for Russia’s invasion of Ukraine, and to effectively undermine Russia’s ability to continue its aggression; (2) to hobble the Russian economy, and make Putin’s regime unpopular domestically, and hopefully to bring an end to Putin's regime.
THE COST OF SANCTIONS
From a micro perspective, the total of personal assets frozen in the EU has reached €21.5 billion, and €300 billion for CBR assets. From a macro perspective, €43.9 billion in EU’s exported goods to Russia and €91.2 billion in imported goods from Russia are under sanctions.[1] According to the latest Russian statistics, however, under the comprehensive economic blockade from the West, Russia’s GDP fell only 2.1% in 2022, which is very different from the estimate at the beginning of the war.[2] Under the economic sanctions of the West, Russia will suffer a huge loss of economic potential in the future. The loss comes from two sources.
The first is the loss of the export market. Raw material export is the major source of fiscal earnings for Russia, and Europe is Russia’s largest raw material market. In 2021, the total EU-Russia trade in goods amounted to $282.1 billion, accounting for 36% of Russia’s trade in goods. The EU’s imports were worth €158.5 billion and were dominated by fuel and mining products – especially mineral fuels (€98.9 billion, 62%), wood (€3.16 billion, 2.0%), iron and steel (€7.4 billion, 4.7%), and fertilizers (€1.78 billion, 1.1%).[3] The following section discusses the heaviest hit sectors of the Russian economy: energy and finance.
SANCTIONS ON RUSSIAN ENERGY
The most important economic tie between Russia and EU is energy, thus the EU did not focus its sanctions on energy, while the United States and the United Kingdom announced as early as March 8 that they would stop importing Russian energy. On March 11, the EU's informal summit promised to end its dependence on Russia's “as soon as possible” without setting an exact date, and reluctantly proposed to completely end its dependence on Russian energy by 2027. Affected by the Bucha Massacre in early April, public opinion began to change, and even Germany, one of the most conservative countries in sanctioning the Russian energy sector, began to waver. The German Defense Minister stated that the EU must discuss an embargo on Russian natural gas. In early May, European Commission President Ursula von der Leyen announced the details of the sixth round of sanction against Russia, including gradually ending dependence on Russian oil. Crude oil would be phased out within six months, and refined oil by the end of 2022. In order to persuade related countries like Hungary, Slovenia, and the Czech Republic not to veto these plans, Brussels gave these countries permission to import oil through the Friendship Pipeline without restrictions.
In addition, a ban on insurance and financing of oil shipments to third countries was proposed. As EU operators are important providers of such services, such a ban would make it difficult for Russia to continue exporting its crude oil to the rest of the world. However, as UK only banned Russian tankers from entering the UK after December 31, 2022 and the oil price hiked after June, the EU postponed the initiative.
The eighth round of sanctions, following on the previous G7’s oil price ceiling on Russian seaborne oil, adopted a price cap on Russian crude oil and petroleum products exports to third counties starting from December 5, 2022 and February 5, 2023 respectively. The initial price cap for crude oil was set at $60 per barrel, while petroleum product at $100 per barrel. The price cap is adjustable to meet the market situation.
FINANCIAL SANCTIONS
Financial sanctions include several elements, namely freezing the foreign assets of CBR and Russian nationals, prohibiting access to European financial markets. The first three rounds of sanctions focused primarily on prohibiting the provision of financial services and funds in the money and stock markets to the Russian government, the Central Bank and organizations under their control, and state-owned enterprises, thereby cutting off Russia's access to Western capital markets. In addition, in the area of personal finance, the acceptance of Russian residents’ deposits above a certain value is prohibited, as well as the holding Russian clients’ accounts by EU central securities depositories, in order to prevent the Russian elite from hiding their wealth in Europe.
At the beginning of these sanctions in the U.S. and Europe, Russian banks suffered a run on the ruble, which fell by 30% to as low as 110 rubles to the U.S. dollar; the CBR immediately raised interest rates from 9.5% to 20% in an attempt to retain deposits and provided 10 trillion rubles to maintain liquidity.[4] The Moscow Exchange, the main marketplace for stocks, bonds, derivatives and currencies, suspended trading on all markets on February 24.[5] In view of this, international credit rating agencies such as Standard & Poor's, Moody's and Fitch lowered Russia's sovereign credit rating, and the impact on Russia's financial stability begun to emerge.
As people expected sanctions would result in insufficient stocks of household appliances, cars, electronic devices, and furniture and food, active buying of manufactured goods and non-perishable food products started to emerge, and the inflation rate jumped to 17% for 3 consecutive months since March 2022.
RUSSIA’S COUNTER SANCTION MEASURES
In hindsight, although the economic sanctions did not have a major economic impact, they did initially have a significant psychological impact on Russian society, as witnessed by the free fall in the stock and money markets. In addition to the measures implemented stated above, CBR also adopted several measures to counter the West’s hostility. In an attempt to boost ruble demand and counter the removal of Russian banks from the SWIFT messaging system, on March 31, Putin signed a decree demanding buyers from “unfriendly” counties pay in rubles for Russian gas from April 1. A recent review shows that, after the transfer of payment for natural gas to rubles, the share of rubles in settlements exceeded 30% by the end of the year, similar to that of the US dollar and exceeding that of the Euro. That said, the total percentage of US dollar and Euro is still considerable in 2022, only slightly less than 50%.
In order to keep the foreign reserves information secret, an amendment was made to the Law on State Secrets, excluding information about the amount of gold reserves and foreign exchange reserves from the list of information that is not subject to classification.[6] Before sanctions, the Central Bank published the structure of reserves, including the amount of gold in physical and value terms and the amount of currency deposits in other central banks and foreign commercial banks, etc. on a monthly basis.
The Russian government also adopted the following measures, as shown in Table 1.
TABLE 1: Counter Sanction Measures of the Russian Government
Sphere
|
Measures
|
Finance
|
(1) providing loans at preferential rates; (2) deferring deadlines for tax, loan principal and interest; (3) extending the Fast Payment System to small and medium-sized businesses to avoid risk of disconnecting from the international payment systems; (4) grants for young entrepreneurs between 100 - 500 thousand rubles; (5) allocating an additional 14.3 billion funds for concessional loans, and injecting 9 billion rubles for the capitalization of the SME Corporation, which provides unsecured loans to SMEs; (6) Extension of the deadline for the advance payment of income tax; (7) Restructuring loans with floating rates; (8) Preferential access to infrastructure for small industries ; (9) Preferential loans for replenishment of working capital within the framework of the national SME project ; (10) Preferential loans at 3% for high-tech; (11) SME Corporation guarantees up to 50% of the loan amount.
|
Tax
|
(1) extension of the deadline for paying tax under the simplified tax system;
(2) resetting the VAT rate for the hotel business.
|
IT
|
IT companies exempted from inspections and payment of income tax for 3 years.
|
Administrative Burden
|
moratorium on bankruptcy; (2) moratorium on scheduled business inspections; (3) simplification of confirmation of the country of origin of goods; (4) reduced fines for micro and small SMEs and non-profit organizations; (5) renewal of driving license; (6) temporarily allowing amendments to the terms of concession agreements (CAs) without holding a tender.
|
Import substitu- tion
|
import customs duty exemption for 6 months for goods used in food, pharmaceutical, metallurgical, digital, and electronic products and goods used in the light industries, construction and transport industries.
|
Source: Министерство экономического развития Российской Федерации, “Меры поддержки бизнеса в условиях санкций [Measures to support business under sanctions],” https://www.economy.gov.ru/material/directions/sanctions_measures/; Государственная Дума Федерального Собрания Российской Федерации, “До конца 2022 года концессионные соглашения, концедентом по которым является субъект РФ, смогут заключать без конкурса [Concessional Agreements will be able to Conclude without a Tender for a Constituent Entity of the Russian Federation Until the End of 2022],” 6 июля 2022.
http://duma.gov.ru/news/54847/.
WHY SANCTIONS WON’T WORK
After more than a year of sanctions, Russia's economic recession, the ruble exchange rate, trade volumes, and bank failures have not been as dramatic as expected at the beginning of sanctions. The IMF also predicted in the World Economic Outlook published in January 2023 that Russia's GDP growth in 2023 will be 0.3%.
There are several reasons for the ineffectiveness of sanctions. First, since 2014, Russia has been building a so-called “Fortress Russia,”[7] which includes the creation of large foreign currency reserves, food security, i.e. a doubling of grain production since 2012, as well as a wire message transfer system called System for Transfer of Financial Messages (SPFS). Furthermore, the prompt interest rate hike from 9.5% to 20%, the extensive capital restrictions on capital movement to prevent capital flight, and the closure of financial markets are considered the most effective defense mounted by the CBR.[8]
Second, sanctions can only change the route of commodity flows, but can’t block the route. Many incidents of crude oil and LNG shipped from Russia to the EU via the third countries have been observed after the energy sanctions. For those sanctioned commodities, traders use Turkey, Kazakhstan, and Armenia to dodge sanctions against Russia, which made the trade amount of these countries with Russia increase substantially.[9] U.S. and the EU have tried to close these loopholes by strengthening the custom screening in these countries.
Third, Russia did its best to enhance its economic tie with Asia after the sanctions started. “Pivot to Asia” has been Putin’s policy since 2012. Oil and gas successfully sold to Asia, especially China and India, have largely mitigated the loss of the EU market.
CONCLUSION
Although Russia has actively responded to Western economic sanctions and the short-term economic losses are not as severe as expected, but as time goes by, the impact will become more and more noticeable. For example, some components and software for which Russia has long relied on imports cannot be replaced or updated, which will reduce productivity in the future. Other intangible losses brought about by the war are still to emerge. For example, young men emigrating to neighboring countries to avoid mobilization has cause a large loss of young scientific researchers and information professionals. The effects of a prolonged production decline will slowly become apparent.
APPENDIX: Eu Sanctions Against Russia
Date
|
Energy
|
Finance
|
Trade and Industry
|
Personnel and inter- national ORGs
|
Feb. 22, 2022
|
halt the certification
of Nord Stream 2
|
|
|
|
Feb. 23
(1st package)
|
|
prohibition on providing financial market services and funds for the Russian government, CBR, or ORGs under their control
|
prohibit Donetsk and Luhansk from trade, investment, tourism, and export of minerals, metals, machinery, military-related products and mining technologies
|
asset freezing and travel bans on 351 members of the Rus- sian State Duma & 27 high profile individu- als and entities
|
Feb. 25, 2022
(2nd package)
|
prohibit the sale, supply, transfer or export to Russia of specific goods and technologies for oil refining
|
cut Russia's access to the most important capital markets; prohibit the acceptance of deposits exceeding a certain value from Russian nationals or residents, the holding of accounts of Russian clients by the EU Central Securities Depositories, the selling of euro-denominated securities to Russian clients
|
ban the sale of all aircraft, spare parts and equipment to Russian airlines; restrictions on exports of dualuse goods and technology
|
asset freezing of the Russian President, Minister of Foreign Affairs, members of the National Security Council, and the remaining members of the Russian State Duma; visa facilitation provisions for officials and busi- nessmen
|
Feb. 28, 2022
(3rd package)
|
|
prohibit any transaction with CBR unless absolutely necessary
|
ban on the overflight
of EU airspace and
on access to EU airports by Russian carriers of all kinds
|
add 26 individuals
and 1 organization to the list of sanction
|
Mar. 2, 2022
(3rd package)
|
|
exclude key Russian banks from the SWIFT system; Prohibit investing in projects cofinanced by the Russian Direct Investment Fund; Prohibit the provision of euro-denominated
banknotes to Russia
|
Prohibit state-owned media Russia Today and Sputnik from broadcasting in the EU
|
|
Mar. 15, 2022
(4th package)
|
ban on new investment in the Russian energy sector.
|
prohibit EU agencies from providing financial rating services to Russian companies
|
prohibit transactions with certain Russian State-owned enterprises, with the exception of State- owned banks, railways and the mari- time shipping register; Prohibit the export of luxury goods; ban on imports of iron and steel products
|
add 15 individuals and 9 ORGs to the list of those sanctioned
|
Apr. 8, 2022
(5th package)
|
ban on all forms of Russian coal.
|
asset freeze on four additional Russian banks (Bank Otkritie, Novikombank, Sovcombank & VTB); prohibit provision of high-value crypto-asset services; ban on providing trust services to wealthy Russians
|
freight road operators working in the EU, except for shipment for essentials; export bans on quantum computing, advanced semiconductors, sensitive machinery, transportation and chemicals; exclude Russia from EU public contracts
|
addition of a further 217 individuals and 18 ORGs on the sanction list
|
Jun. 3, 2022
(6th package)
|
Crude and refined oil embargo with excep- tion for Bulgaria & Croatia; prohibit EU operators from providing maritime oil tanker insurance and finance services to non-EU countries
|
exclude Russian banks (Sberbank, Credit Bank of Moscow & Agricultural Bank from the SWIFT system
|
expand list of dual-use technology export; suspension of Rossiya RTR/RTR Planeta, Rossiya 24/Russia 24, and TV Centre International; ban on providing accounting, auditing, statutory audit, bookkeeping and tax consulting services, business and management consulting, and public relations services
|
add further 65 individuals and 18 ORGs on the sanction list
|
Jul. 21, 2022
(7th package)
|
exempt certain Russian state-owned companies from transporting oil to third countries
|
sanctioned people obliged to declare their assets, in order to facilitate the freezing of their assets in the EU extending bans on accepting deposits
|
gold import ban; Export controls on dual use and advanced technology reinforced by extending the list of items; Port access ban
|
add a further 48 individuals and 9 ORGs on the sanction list
|
Oct. 5, 2022
(8th package)
|
implement the G7 oil price cap
|
sanctioned people are obliged to declare their assets, in order to facilitate the freezing of their assets in the EU
|
gold import ban; extend items on export controls on dual use & advanced technology; additional import restrictions on steel products, machinery, plastic, textile, etc., additional restrictions on State- owned enterprises, Deterring sanctions
circumvention
|
add 28 individuals and 7 ORGs on the sanction list, and those involved in Russia’s occupation, annexation, and sham “referenda” in the occupied territories of the Donetsk, Luhansk, Kherson, and Zaporizhzhia regions to sanction list
|
Dec. 22, 2022
(9th package)
|
|
ban on the Russian Regional Development Bank
|
four additional Russian channels sanctioned in the EU; cutting Russia's access to drones, laptop, printed circuits, radio navigational systems, radio remote control apparatus, aircraft en- gines and parts of engines, cameras and
lenses
|
add almost 200 additional individuals and ORGs
|
Feb. 25, 2023
(10th package)
|
prohibit Russian nationals and entities booking gas storage capacity
|
add 3 Russian banks to the list of asset freeze and the prohibition to make funds and economic resources available
|
new export restrictions on sensitive dual-use and advanced technologies, heavy trucks, goods easily directed to military use, etc., additional import ban on bitumen, synthetic
rubber
|
add about 120 individuals and entities to sanctions list
|
Dr. Charles CJ Wang is an Assistant Research Fellow at Division of Cyber Security and Decision-Making Simulation, INDSR. His research interests include Quantitative Analysis, Supply Chain Security, and Russian Economy.
[1] “EU sanctions against Russia explained,” European Council, June 26, 2023, https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-against-russia-over-ukraine/sanctions-against-russia-explained/.
[2] “Russian GDP down 2.1% in 2022 — statistics,” TASS, April 4, 2023. https://tass.com/economy/1601481; “Russia's GDP decline could hit 12.4% this year, economy ministry document shows,” TASS, April 27, 2022, https://www.reuters.com/business/russias-gdp-decline-could-hit-124-this-year-economy-ministry-document-shows-2022-04-27/.
[3] “Russia- EU trade relations with Russia. Facts, figures and latest developments,” European Union, https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/russia_en.
[4] “Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 18 March 2022,” Bank of Russia, March 18, 2022, https://www.cbr.ru/eng/press/event/?id=12765.
[5] “Moscow Exchange suspends trading on all markets,” Reuters, February 24, 2022, https://www.reuters.com/business/moscow-exchange-suspends-trading-all-markets-2022-02-24/.
[6]“Власти предложили снять запрет на засекречивание золотовалютных резервов [The authorities Proposed to Lift the Ban on the Classification of Gold and Foreign Exchange Reserves],” РБК, 7 июн 2022, https://www.rbc.ru /economics/07/06/2022/629df6409a7947a6b36cc7bf.
[7]Darian Woods, “Economic warfare vs. Fortress Russia,” NPR, March 1, 2022, https://www.npr.org/2022/03/01/1083804497/economic-warfare-vs-fortress-russia; Tony van der Togt, “Will Putin’s War Lead to The Collapse of Fortress Russia?” Clingendael, June 24, 2022, https://www.clingendael.org/publication/will-putins-war-lead-collapse-fortress-russia-0
[8]Paddy Hirsch, “Why sanctions against Russia aren’t working — yet,” NPR, December 6, 2022, https://www.npr.org/sections/money/2022/12/06/1140120485/why-the-sanctions-against-russia-arent-working-yet; Paul Krugman, “Wonking Out: The Curious Case of the Recovering Ruble,” The New York Times, April 1, 2022, https://www.nytimes.com/2022/04/01/opinion/russia-ruble-economy.html?utm_source=headtopics&utm_medium=news&utm_campaign=2022-04-01.
[9] Andrius Sytas, “Latvia says traders use Turkey, Kazakhstan, Armenia to dodge Russia sanctions,” Reuters, February 3, 2023, https://www.reuters.com/world/latvia-says-traders-use-turkey-kazakhstan-armenia-dodge-russia-sanctions-2023-02-03/; “Sanctions Loophole Closed as Turkey Blocks Parallel Imports to Russia,” The Moscow Times, March 9, 2023, https://www.themoscowtimes.com/2023/03/09/sanctions-loophole-closed-as-turkey-blocks-parallel-imports-to-russia-a80436; Joanna Lillis, “Kazakhstan to Strengthen Screening of Re-Exports to Russia,” The Moscow Times, March 24, 2023. https://www.themoscowtimes.com/2023/03/24/kazakhstan-to-strengthen-screening-of-re-exportsto-russia-a80602.