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A year on, sanctions against Russia sputter
In the latest expansion of sanctions, the price cap on Russian crude has been extended to refined products as well.Published: 12th February 2023 08:48 AM
By Gurbir Singh
Another few days and it will be one year since Russia invaded Ukraine. Reams will be written on the shifting military positions in Ukraine’s Luhansk and Kharkiv theatres . On another front, it is also time to look at the year-old economic war – the unfolding of a raft of sanctions on recalcitrant Russia designed to bring Vladimir Putin to his knees.
In the latest expansion of sanctions, the price cap on Russian crude has been extended to refined products as well. Kicking in last Sunday, the US and its allies have capped the sales of premium petroleum products such as diesel at $100 a barrel, and low-value fuels at $45 a barrel. The aim is to deny much-needed oil revenue to Russia to conduct its war, while keeping oil products on the global markets at reasonable prices.
Are the sanctions working? Like Putin thought he would hold a victory parade in Kyiv in 2 weeks after his tanks crossed into Ukraine last February, the West too thought the Russian economy would collapse after it enforced wide-ranging sanctions.
Neither happened. In fact, the International Monetary Fund (IMF) has forecast the Russia’s economy is set to expand by 0.3% in 2023, even as the United Kingdom sees its GDP shrink.Part of the reason Russia has survived the onslaught is because the G-7 group while aiming to hurt Russia financially, is also looking over its shoulders to protect its own backside. It has thus deliberately left too many escape hatches unguarded.
Kremlin prepared early
A ‘non-partisan’ note prepared in mid-December, last year by the Congressional Research Service (CRS) for members of the US Congress frankly admitted: “The sanctions have created challenges for Russia but to date, have not delivered the economic ‘knock out’ that many predicted.….the Russian economy has weathered the sanctions better than many expected.”
The sanctions imposed include barring Russia from making debt payments using foreign currency held in US banks. Major Russian banks have been removed from the international financial communication system, Swift. Russian oil, which accounts for 40% of the country’s exports, has been banned from sea borne delivery. Over a 1,000 Russian oligarchs have had their overseas assets like luxury yachts confiscated.
These measures have had an impact, but for most Russians the disruption has not been huge. The kremlin saw it coming and kept its currency strong by insisting on all payments in rubles. Even though Russian crude is selling at a discount, it has cashed in on the perceived shortage, and increased supplies to alternative buyers such as China, India and the African nations. Despite the sanctions, research firm Argus Media estimates revenue from crude sales were up 41% over the last year.
Russia has also been experimenting with developing an alternative financial systems to beat the hegemony of the dollar-led financial system with the ruble-based payment system called the System for Transfer of Financial Messages (SPFS), first set up in 2014.
Ally China has joined in
with its Cross-Border Interbank Payment System (CIPS) — which processes payments in Chinese yuan, and claims an expansive network of 1,280 financial entities.The Russians have also successfully developed other financial and investment hubs like Dubai after being denied access to their old haunts London, Paris and Monte Carlo. Tens of thousands of moneyed Russians have been welcomed to the UAE despite objections of the West. In a recent move that seems to breach the sanctions, the UAE has approved a license for Russia’s MTS Bank to cater to the large Russian émigré population.
Contrarian data
The US and its allies are also not averse to Russian oil products flowing to brace up their own stocks and keep prices in check, as long as there are no windfall gains for the ‘enemy’. Countries like India are importing discounted Russian crude, and then re-exporting refined oil to western ports.On the other hand, there is contrarian data that says sanctions are in fact working. Vladimir Milov in the 23 January issue of ‘Foreign Affairs’ argues that much of the macro-economic data released by the Kremlin is suspect.A deeper look shows revenue from sources other than oil and gas exports was down by 20% in October 2022 from a year earlier.
Moreover, manufacturing industries, most dependent on Western technologies and component parts, were hit the hardest by sanctions. The output of the Russian automotive industry, which provides jobs to 3.5 million people, plummeted by two-thirds in 2022. Russia’s ability to rearm and replenish its war machine, like tanks and precision artillery, has also been considerably degraded. The oil sanctions are finally biting too. For instance, in January Russia’s tax earnings from oil and gas was only 425 million rubles, around half compared to the same month, last year.
On the ground, there is little sign of the Russian war machine tiring. As the Ukraine tragedy plays out without a solution in sight, the only positive spin-off is the possible emergence of an alternative trading and financial block not aligned to the US and its allies. For India, there has been a huge saving. Other developing countries are benefiting too. Hopefully these will consolidate into competitive post-war options.
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A year on, sanctions against Russia sputter
In the latest expansion of sanctions, the price cap on Russian crude has been extended to refined products as well.