Russia’s invasion of Ukraine in February 2022 not only ignited global condemnation but also prompted a series of sanctions aimed at undermining the Kremlin’s capacity to wage war against its neighbouring country.
These measures included freezing Russia’s assets abroad, isolating its economy from the global financial system, and directing sanctions specifically towards its energy exports.
I can remember Western officials and commentators describing the sanctions as “crippling,” “debilitating,” and “unprecedented.”
With adjectives like these filling the airwaves, the situation seemed clear.
There was surely no way that Russia’s economy would withstand the pressure.
Faced with the prospect of an economic collapse, the Kremlin would be forced to back down and withdraw its troops.
After twenty-seven months, the conflict persists. Surprisingly, Russia’s economy is not weak but rather flourishing.
The International Monetary Fund forecasts a growth rate of 3.2% for Russia this year, surpassing that of any advanced economy.
Despite being described as “debilitating,” sanctions have not led to shortages in Russian stores.
Supermarket shelves remain well-stocked.
However, inflation is a concern, and some Western companies have withdrawn from the Russian market in response to the invasion of Ukraine, leading to certain products no longer being available for sale.
But many of their products still find their way into Russia through a variety of routes. If you look hard enough, you can still find American cola in Russian stores.
While CEOs from Europe and America may be less inclined to attend Russia’s annual showcase economic event, the organisers of this year’s St. Petersburg International Economic Forum assert that delegates from over 130 countries and territories are participating.
Despite the challenges posed by Western sanctions, the Russian economy has pivoted towards developing new markets in the East and the Global South.
Russian officials are keen to highlight that attempts to politically and economically isolate Russia have not yielded the desired results.
“It looks like the Russian economy managed to adjust to very unfavourable external conditions,” says Yevgeny Nadorshin, senior economist at PF Capital. ”Without any doubt, sanctions broke a lot in the mechanism of operation inside the economy. But a lot has been restored. Adaptation is happening.”
Workaround
Does this mean that sanctions have failed?
“The big issue was our understanding of what sanctions can and cannot do,” says Elina Ribakova, senior fellow at the Peterson Institute for International Economics.
“It’s not like flipping a switch and Russia disappears. What sanctions can do is throw a country off balance temporarily until it finds a way to work around the sanctions, until it finds alternative ways to get shipments or sell its oil.
We’re eactly in that space where Russia has found a workaround.”
Moscow has redirected its oil exports from Europe to China and India. In December 2022, G7 and EU leaders introduced a price cap plan aimed at limiting the revenue Russia earns from its oil exports by trying to keep it below $60 a barrel.
But Western experts concede that Russia has been able to circumvent this quite easily.
The story of the price cap highlights a dilemma for the US and its partners.
Recognising that Russia is one of the largest players on the global energy market, they have tried to keep Russian oil flowing to avoid hiking energy prices. The result of that is that Moscow is still making money.
“In a way, we refused to properly sanction Russian oil,” Elina Ribakova concludes. “This price cap is an attempt to have our cake and eat it.
The priorities are to allow Russian oil to enter the market and to reduce Russia’s revenue. And when these two priorities conflict, unfortunately, the first one wins.
This substantial revenue stream enables Russia to sustain its operations, including the ongoing conflict.”
Russia has emerged as China’s primary oil supplier, underscoring the significance of their economic relationship beyond energy exports. China has become a crucial lifeline for the Russian economy, with bilateral trade reaching a staggering $240 billion last year.
A stroll through the streets of St. Petersburg or Moscow reveals the profound impact of China on a Russia affected by sanctions.
Electronics stores are brimming with Chinese tablets, gadgets, and mobile phones, while Chinese car dealers have gained dominance in the local automotive market.