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The Myth of Economic Armageddon: The Truth About Western Sanctions on Russia

Contrary to expectations, the West's "sanctions from hell" on Russia haven't crippled its economy. Instead, they've triggered unintended consequences, harming Western businesses and people while boosting some sectors in Russia.

judge’s gavel, wooden cubes with the text on the background of the Russian flag, the concept on the topic of sanctions in Russia © SergeyCo /

February 26, 2024 09:36 EDT

At the beginning of the Russian invasion of Ukraine, the West promised that Russia would receive sanctions from hell. The question is: Is it so?. So far, results show that sanctions against several hundred Russian companies, businessmen and politicians as well as sanctions against those companies in Europe and Asia that help Russia avoid the economic impact of sanctions, haven’t had any tangible effect. While Russia’s GDP contracted in 2022 by 1.2%, in 2023 it grew 3.6%. Growth is also expected in 2024. It is possible that the impact of the sanctions could be felt later. However, it is unlikely that Ukraine will be able to wait another couple of years.

On February 23, 2024, the European Commission (EC) adopted the 13th package of sanctions against Russia. No surprises are expected as the latest round of sanctions deals with preventing the circumvention of EU sanctions through third countries. Deutsche Welle, citing its own sources, writes that about 200 individuals and legal entities will be added to the sanctions list. Restrictions will be imposed, in particular, against several firms from China and Turkey, which help Russian companies and state held corporations bypass sanctions. Bloomberg also reported that the EU plans to impose restrictions on about twenty companies from China, India, Hong Kong, Serbia, Kazakhstan, Thailand, Sri Lanka and Turkey which allegedly help Russia evade previously imposed sanctions.

Instead of cracking down on Moscow’s multibillion-dollar oil and gas sales, including bypassing sanctions, or ensuring that banned technology does not reach its military, the European Union (EU), as Politico reports, is scaling back its ambitions in favor of sanctioning a small number of rule-breaking companies. Given the lack of consensus among the countries and fierce opposition from Hungary, which continues to seek closer ties with Russia and China, it is clear that the EU may find it difficult to agree on new yet significant sanction measures against Russia. In the meantime, the decline in foreign trade turnover allows Russia to increase its GDP by utilizing the opportunities present within its own market, something that sanctions have enabled.

The impact of sanctions on the Russian Ruble

The question of the effectiveness of sanctions has been raised more than once over the past two years of war. The most obvious indicator is the ruble exchange rate. In Russia, the dollar exchange rate depends much more on the volume of oil exports than on other factors, especially those not related to exports. In addition, for the Russian population, the dollar exchange rate is much more than just an exchange rate. Russians pin their hopes on it for protection from inflation and depreciation of their cash savings.  Before the war in Ukraine started, it was 77.4 rubles to 1 dollar. Immediately after the introduction of the first sanctions package, the ruble fell sharply to 104 rubles per dollar. However, by June it had increased to 57.2 rubles per dollar. 

The change took place because in anticipation of the introduction of the announced restrictions, Western buyers sought to speed up their purchases of cheap Russian energy sources as much as possible. Due to the purchase, Russian exports exceeded imports. Moreover, the Central Bank of the Russian Federation introduced a mandatory sale of 80% of foreign currency earnings for domestic exporters. These measures led to the supply of U.S. Dollar exceeding the demand for it in the Russian market in 2022. 

However, the developments created problems for the Russian budget, which was not prepared to handle a circumstance under which the ruble would become more expensive. Therefore, the norm of mandatory currency sales for Russian exporters was reduced to 50% in May 2022, and in June 2022, it was completely abolished.

In 2023, the situation began to change. Firstly, restrictions on Russian energy exports began to work. Secondly, the Nord Stream 1 pipeline, which had been exporting gas directly to Germany, bypassing Ukraine, was blown up in September 2022. Thirdly, it became clear that India’s massive purchases of crude oil could not be paid for in U.S. currency because of the sanctions and revenue received in Indian rupees could not be counted as foreign exchange earnings because India’s national currency is not convertible. Due to this Russian shipments to India began to resemble barter transactions more than classic trade. Fourth and finally, Western importers did their best to switch from cheap but politically toxic Russian energy to more expensive supplies from other countries, primarily from the United States. 

As a result of all of the above points there was a sharp decline in Russian exports (energy exports fell by 33.6% in 2023 and total exports by 28.3%) and, as a consequence it led to an equally sharp fall in the ruble from 69.2 rubles per dollar in January 2023 to 90.8 rubles per 1 dollar in December 2023. While revenues from oil and gas exports grew by 43% in 2022 to $383.7 billion, they fell by 24% in 2023. Almost 90% of all oil and petroleum product supplies were redirected to India and China. This seriously impacted the Russian economy, although there were other consequences as well.

Energy prices and the cost of living

In Europe, sanctions led to an almost two-fold increase in energy prices between January 2021 and January 2023. Consequently, the cost of household utilities in the EU countries increased in addition to other utilities such as motor fuel. The consequence of the increase in energy prices was inflation in Europe. In October 2022 overall inflation amounted to 11.5% and for energy inflation amounted to 40.2% in March 2022. However, the EU economies quickly adapted and by December 2023 inflation had fallen to 3.4%. 

But this did not solve the problem of rising utility prices for households. This was due to the continued rise in electricity prices. In 22 EU countries, residential electricity prices increased in the first half of 2023 compared to the same period last year.The largest increase was observed in the Netherlands, where electricity bills increased by 953%, helped by national tax policies. However, Lithuania, Romania and Latvia also saw significant jumps in electricity prices by 88%, 77% and 74% respectively. In Germany and the Czech Republic it was 25 and 35% respectively. 

The situation is even worse with gas prices. They rose in 20 of the 24 EU member states that report gas prices to Eurostat. Gas prices (in national currencies) increased the most in Latvia (+139%) followed by Romania (+134%), Austria (+103%), the Netherlands (+99%) and Ireland (+73%).

The increase in gas prices led to food inflation, which unlike general inflation in the EU remains high. According to Euronews Business, real food inflation stood at 4.6% in the euro area (4% in the EU) in October 2023, putting enormous pressure on low-income households. In October 2023, annual food and non-alcoholic beverage inflation exceeded headline inflation in 33 of 37 European countries. Moreover, if in Belgium it was 10.9%, then in the Czech Republic it was 5.7%. Food inflation led by rising energy prices, affected the entire agri-food chain: from farmers to processing enterprises and transport.

In Russia, the average price for electricity has remained virtually unchanged. Russian consumers faced an 8.5% hike in the regulated tariff at the end of 2022 when natural gas exports to Europe fell by 75% on an year on year basis.The increase in gasoline prices in rubles was 5% from February 2022 to September 2023. Gasoline costs approximately 0.56 euros per liter. However, in 2022, the general inflation was recorded at 11.9%, which is slightly higher than European inflation of the same year and 3.55% higher than what was recorded in Russia in 2021. At the end of 2023, inflation in the Russian Federation was at 7.42%.

The discrepancy between the collapse of the ruble and declining inflation in 2023 suggests that Russia has overcome its dependence on imports, at least for the main groups of goods. The cost of food items in Russia increased 8.10 percent between January 2023 and January of 2024. 

Moreover, the Russian leadership did not put up much resistance to the sharp depreciation of the ruble, as in October 2023 when Putin signed a decree obliging 43 exporting companies (out of several hundred) to sell foreign exchange exposure. The remaining companies were not affected. This stopped the collapse of the Russian currency, but did not bring it back to its previous high values of mid-2022. In the context of a mass exodus of foreign suppliers, the state benefits from a weak ruble, as it stimulates domestic industry.

The steps taken by the Russian government demonstrated the ineffectiveness of sanctions. Far from severely impacting the Russian economy, the sanctions brought Russia to a point that it was able to stimulate its domestic industry and led to it overcoming its dependence on imports. 

Effects of sanctions on the Russian domestic market

The weakening of the ruble exchange rate and decreased export revenues are probably the only serious results of the sanctions. A close look at the developments within the Russian domestic market suggests that McDonald’s restaurants changed their signage to the Russian “Tasty and That’s it!” (the author did not notice any difference in the menu and in the quality of dishes), the Zara brand of clothing stores was replaced by the Maag brand of Fashion And More Management DMCC from the UAE, the Australian 2XU replaced Adidas, and the South Korean firm Inni replaced H&M.

The Commonwealth Partnership (CMWP) estimates that of the 85 brands that wanted to shut down their business in Russia, only 25% have actually closed. According to the NF Group, since March 2022, 23 foreign companies have announced their departure from Russia, while another 34 have rebranded and transferred (or announced plans to transfer) Russian business to other market players. At the same time,16 new brands entered the country in 2023. Among them, the largest number of chain stores were from Turkey (5), two big companies from China, one each from the USA, Italy, Australia, South Korea, Estonia and Kyrgyzstan, and three from Belarus.

Hotels operating under the Radisson Blu, Park Inn by Radisson, and Olympia Garden brands, which were owned by the international company Wenaas Hotel Russia until March 2023, started operating under the Cosmos brand. In March, the Russian Cosmos Hotel Group bought 10 hotels in Moscow, St. Petersburg, Yekaterinburg, and Murmansk from this company for $200 million.

Moreover, the Russian population which had never been spoiled with high wages, survived the impact of European sanctions quite calmly, as energy prices remained virtually unchanged since the end of 2021. It is also the case that Russian manufacturers have very quickly replaced imported products with their own, especially in the consumer sectors.

Western companies that stopped business operations on the Russian market did so because they did not want to pay taxes to the aggressor country were replaced by other companies, mainly from Asian countries and by Russian companies themselves. Today, chain stores in Russia lack only well-known brands of expensive spirits. 

From the developments it is clear that Russia was prepared to deal with the economic consequences of the sanctions and there were countries that were willing to have economic relations with Russia in spite of the sanctions. This could clearly be seen in the developments that took place in the Russian market after the imposition of sanctions by Western Europe. 

The only place where the changes are noticeable is the car market – Western brands are no longer supplied to the Russian market. Their place has been taken by Chinese brands. Instead of new BMW, Opel, Volvo or Volkswagen, those Russians who could afford to buy new cars are opting for Chinese car brands such as Chery, Exeed, Omoda among others.

According to the Associated Press (AP), citing a Yale University database, by June 2023, 151 foreign companies are reducing business in Russia, 175 firms are trying to buy time, and another 230 are undecided over how to exit the Russian market. Among the latter, Chinese companies are particularly numerous.

As for production, the final data for 2023 allow us to draw conclusions about the industrial production growth rate in Russia. At the end of the year, growth amounted to 3.6%. The positive dynamics were provided by manufacturing industries, which grew by 7.5%. On the contrary, the extraction of minerals decreased by 1.3%, primarily due to reduced exports to Europe.

The main problem with the Russian industry last year was in the large raw material regions, mainly located beyond the Urals. Growth was mainly driven by the defense industry and import-substituting machine building in a country where economic activity is driven by raw material extraction. The growth of the military industry pulled along a number of related industries, primarily metallurgy, as well as those companies that took advantage of the withdrawal of certain sanctioned goods from Russia. These include food products, industrial production and machine building. 

While the defense industry is losing money, it has the potential to increase employment and wages, allowing the population greater purchasing power for individuals employed in the defense and manufacturing industries. During war time a larger than usual number of people will be employed in the defense and manufacturing industries due to which the war results in impact across the chain of the military industrial complex ranging from demand for metallurgical materials which produces metal for tanks to the textile industry which sews uniforms for soldiers. While the impact stemming from war and increase in employment prospects and the resultant purchasing power in the hands of the civilians is purely temporary in nature, money in the hands of ordinary people results in them having disposable income to buy civilian products. 

From the developments in the Russian domestic market it is clear that the sanctions have led to the revival of Russian manufacturing which is driven by war. If the sanctions intended to hurt the Russian economy that did not take place. 

Effects on the flow of capital

The situation with capital outflow from Russia best illustrates this process. In 2022, it reached a record high of $243 billion or 13.5% of GDP. This was certainly one more serious challenge for the Russian economy. It was related to several factors. First was that Russian companies were forced to repay their loans to Western banks in one go. Second was the withdrawal of Western companies and the purchase of assets from them by Russian companies. Third was the refusal of Western suppliers to work with Russian importers on pre-supplies (Reference in this context is only about advance financing of all imports) and the fourth was the withdrawal of western investments from the Russian economy. 

However, in 2023 the capital outflow decreased 6 times, according to the estimates of the Central Bank of the Russian Federation. This outflow was largely compensated by the inflow of capital from Russian citizens, who have or had their accounts closed by Western banks and did not want to risk their assets previously based in Western countries.

Many of the most significant decisions of the West are restrictions related to money transfers from Russia and the entry of Russian citizens into Western countries, which I wrote about here. Since the collapse of the USSR, Russia has been unable to solve the two important problems concerning its economy – stopping the flight of money and brain drain of individuals from Russia.  Sanctions on Russian banks, refusal to accept money from Russia and seizures of Russian bank accounts in the West resulted in Russians abroad transferring their money home. As of September 2023, $50 billion worth of money has returned to Russia. 

By closing its borders in the spring of 2022, the West did everything possible to ensure that Russian individuals, especially skilled individuals remained within Russia. The visa restrictions by countries in the West have helped the Putin regime reduce brain drain. One important example of this has been the reduction in the number of Russian scientists leaving the country. According to the Higher School of Economics of Russia in 2021 before the start of the war, 6,000 scientists had left the country. The total number of scientists who left Russia after the start of the war till 2024 is 2,500 people. However, the reduction is not limited to just scientists leaving Russia. 

Approximately 261 thousand people left Russia after the announcement of mobilization to other countries primarily Turkey, Georgia, Armenia and other countries in Central Asia. The question that arises is why did the people who wanted to avoid mobilization chose to go to these countries in specifc?. The answer quite simply was that at the beginning of the mobilization these countries did not prevent the entry of citizens who were leaving Russia in large numbers. The individuals are mostly educated people working in different sectors of the economy. Many of them have returned since these countries began to deny them the right to stay.  It is notable that Western countries did nothing to help these individuals.

The West promised, “sanctions from hell” at the beginning of the conflict in February 2022. The question is, who are the sinners who have felt them in full? These sanctions did not stop the war in Ukraine nor did it destroy the Russian economy. In fact in some cases the sanctions contributed to Russia’s development. The sanctions led to financial losses for millions of people in the West, losses of Western companies and their loss of access to the Russian market. Moreover, by imposing all sanctions almost simultaneously, the West lost its final opportunities to influence Putin. If this was done in the name of victory in Ukraine, then clearly, ineffective, means were chosen.

While the sanctions may work in a few years time say 3 to 5 years we may not have this time. The fate of Ukraine, and with it the future world order, will be definitely decided in 2024. Immediate and fundamental steps will need to take effect here and now in matters connected to the Ukraine conflict and in turn the international world order.

[Aniruddh Rajendran, Cheyenne Torres and Gwyneth Campbell edited the piece]

[Ali Omar Forozish fact-checked this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.


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