The targeted financial sanctions of 2014 against Russia gave some idea about how Russia has been dealing with sanctions. It has used countersanctions as a form of retaliation against the western countries and has currently banned export of 200 items to the sanctioning coalition.

Analyzing the Direct, Negative and Unintended Effects of Sanctions Against Russia

Dr. Souravie Ghimiray

 13th February, 2023

Image Courtesy: Business Times

The multilateral sanctions against Russia for invading Ukraine are unprecedented in their scope and severity against a major power, such as Russia. If not completely cripple the Russian economy the sanctions aim at preventing Russia from further escalating the Ukraine War through the restrictive measures. Despite sanctions, the Russian economy has seemed to adapt well even after the 2022 shocks and in addition the IMF has projected the Russian GDP to rebound in 2023 and increase by 0.3%.  The revenues from crude oil grew by 40% by the end of last year which continues to fuel the war in Ukraine. This makes us question the effectiveness of sanctions on Russia and assess its multidimensional impact which is felt not just in Russia but globally too. These impacts have direct, negative and unintended consequences. The direct impact of sanctions has resulted in countersanctions by Russia, the negative impact of sanction is related to its effects on global economy/trade and the unintended consequences concern the humanitarian issues.

In the recent past, Russia has used countersanctions after the annexation of Crimea in 2014. Russia retaliated with counter-sanctions against the US and the EU and looked for ways to become self-reliant in industries on which it was heavily dependent on external entities. Russia carved out a strategy to be self-reliant in the food industry and used countersanctions against its opponents. It effectively blocked the import of food items and agricultural products from these countries. This led to a loss of EUR100 billion in trade for Russia, while exports from the EU to Russia alone decreased by EUR 45 billion from 2014 to 2017. To avoid its overdependence on the EU for food imports Russia started to find alternative countries for food imports, such as China, Turkey, Brazil, and Belarus. Russia has about two hundred items under its countersanction plan, including fertilizer that can harm the food production and markets around the world. Autocratic regimes like Russia can use sanctions for its own benefit by taking advantage of the trade flows and use it against its opponents by deepening trade relations with non-sanctioning states. For instance, Iran made stronger ties with China and North Korea when faced with sanctions by the US.

Right after the sanctions were announced, the International Energy Agency warned of a “global oil-supply shock” due to the rise in the global prices of oil and gas in Europe. It further led to an increase in prices of commodities, such as nickel, wheat, and palladium.  The subsequent rise in the commodity prices have increased global inflation and lowered economic growth. The oil prices soared immediately despite the effort by the US and Europe to tame prices. The Eurozone inflation grew due to the rise in energy prices as it has been relying on Russia for about 30% of its energy requirements. The sanctions have banned all imports of oil, gas and frozen the assets of the Central Bank of Russia that transacts foreign exchange. Several Russian banks’ and companies’ access to capital markets have been blocked, and the G-7 countries disconnected Russian banks from the international financial messaging system SWIFT which has delayed the transaction in payments for oil and gas import. Several energy companies, such as Shell and British Petroleum and several car companies, aircraft, and shipping companies made an exit from Russia. The US and UK have banned all the oil imports from Russia. In a sweeping round of new sanctions, the EU has banned all the refined oil products from Russia. It has decided to ban oil completely coming from the sea but continues to import Russian gas because of its over reliance on the item.

In the long run, the sanctions against Russia may affect the foundations of the global economy and trade by eroding the significance of the US dollar as an international currency even as countries try to find alternate financial and payment systems. Countries that have previously been sanctioned by the US, such as Venezuela and Russia have taken steps to bypass sanctions with alternative modes of payments and by raising anti-dollar rhetoric to curry favours with some countries. In the Russian case, Moscow has responded to sanctions by de-dollarizing its reserves and has aimed to reduce its dependence on the dollar in trade settlements. Recently Russian banks have adopted alternate payment systems like UnionPay of China. China has ramped up its efforts to make Renminbi widely acceptable as an international currency for trade. Its achievement in being the largest trade partners of above hundred countries is unmatched by the US or the EU.

The unintended effects of sanctions may include human rights abuses if the sanctions in place are for a prolonged period of time. Besides the authoritarian regime, sanctions hit ordinary people. When economic sanctions affect the public at large, the autocratic regimes try to protect the political support base more strongly while silencing the opponents to perpetuate their powerbase in the society. The ruling regime gets the opportunity to blame the external sanctioning actors and steer public opinion against the domestic opposition as well. Several whistleblowers, activists and opponents in Russia have been repressed by the regime since the annexation of Crimea in 2014 and the resulting sanctions by the West.  If the sanctions result in deeply harming the economy of a targeted country, then sanctions have an adverse effect on the population leading to unemployment, poverty, increase in abuses against women and children, spread of diseases and rise in mortality rates as witnessed previously in Haiti and Syria due to sanctions.

The targeted financial sanctions of 2014 against Russia gave some idea about how Russia has been dealing with sanctions. It has used countersanctions as a form of retaliation against the western countries and has currently banned export of 200 items to the sanctioning coalition. As the sanctions continue to affect the people in Russia, President Vladimir Putin will try to strengthen his position at home by subduing the opponents and committing human rights violations. Sanctions have also created economic opportunity for countries which are not part of the sanction coalition, such as Iran and China. Due to the dependence of the EU on Russian oil and gas, the transition to different energy sources has been difficult for the member countries. At the same time Russia’s oil and gas sectors that withstood revenue losses last year may face further difficulties after the new EU ban on most of the oil imports. The loss of some sectors like the technology sector dominated by the foreign companies will have negative impact on Russia. Moscow will try to build deeper trade relations with countries such as China, Turkey and other non-sanctioning states but the sanctions will drag Russia into an economic quagmire, especially with the restriction of foreign technology and massive loss of revenues from EU oil imports.