the money game

Are the Sanctions Against Russia Working or Not?

Pedestrians walk past a branch of Alfa Bank, Russia’s largest private bank, in Moscow on April 7. Photo: Natalia Kolesnikova/AFP via Getty Images

Six weeks after the U.S. and the G7 countries weaponized the global financial system to impose their harshest-ever sanctions on Russia, the fissures are becoming apparent. The ruble strengthened to its prewar value against the dollar by Thursday, a sign that the capital controls set by the country’s central bank were working. As the currency continued its rise on Friday, the Central Bank of Russia surprised the world by cutting its interest rates 3 percentage points to 17 percent — still high, but a sign that the country’s defensive stance was too aggressive. European countries are still buying energy from state-run giants like Gazprom, flooding Russia with euros and dollars that can then be used by any of the more than 200 banks that aren’t under sanction.

Anecdotally, the pressure seems to be diffuse and hard to pinpoint: A Moscow resident I’ve known since well before the war told me over Telegram that grocery stores were full of food and mostly 5 to 10 percent more expensive; diesel gas prices were 53.59 rubles a liter, or roughly equivalent to $2.70 a gallon — cheaper than just about everywhere in the U.S.; and luxury-goods retailers on Tretyakovsky Proyezd, Moscow’s equivalent to Rodeo Drive, are still apparently selling clothes and handbags on the down low to some of their most prized customers, thanks in part to the government blessing the gray market in upscale goods. Russian President Vladimir Putin has called sanctions a “declaration of war” — and perhaps it is, but it has also been a propaganda boon for the Kremlin as it escalates its war in Ukraine.

Remember, Russia was prepared for this. As one of the world’s largest economies — with a gross domestic product of around $1.8 trillion — Putin has leveraged the country’s most important asset, its oil and natural gas reserves, so that countries like Germany are more reliant on it than ever. But it’s not just that the rest of world was caught flat-footed. According to Columbia University economist Adam Tooze, the Russian budget had been engineered prior to the invasion to balance out if the price of oil fell to $44 a barrel, meaning that it’s been able to sock away a ton of money. Ever since 2014, when Putin faced Western sanctions for the annexation of Crimea, more of Russia’s goods have been produced domestically and debts were restructured to be paid in the local currency. In its run-up to war, Russia effectively removed itself from the global system where it was spending while further entangling its neighbors that were giving it money, and given the country’s size and power, made it difficult for the world to reverse course.

It’s not that sanctions are having no effect. “The sanctions are having a dramatic impact on the Russian economy. We’re going to have most likely the most severe crisis Russia has had in recent history,” says Elina Ribakova, deputy chief economist at the Washington, D.C.–based Institute of International Finance. The country’s central bank has been frozen out of its own foreign accounts, choking it off from hundreds of billions’ worth of dollars and euros. Its largest banks have been kicked off SWIFT, the financial messaging system — limiting the country’s ability to perform basic financial functions. According to Moody’s, more than 400 international companies have left Russia — including McDonald’s, Starbucks, and even a reluctant Goldman Sachs — which has led to “mass layoffs that will dent incomes.” Ribakova notes that many Russians are trying to leave the country, and the brain drain to other countries in Europe and Southeast Asia could have a generations-long drag on the country’s economy. And of course, there’s a global hunt for every yacht and luxury apartment owned by Russian oligarchs, as well as a host of other trade and travel bans.

But the impression that the sanctions had isolated Putin’s economy from the world’s markets is hardly the case. “Russia has not been shut out of the financial system,” says Adam M. Smith, a partner at Gibson Dunn who, as a former senior adviser at the U.S. Treasury, helped craft sanctions against Russia in 2014. While much of the world’s consumer countries have banded together against Russia, many of the world’s largest economies — including China, India, Brazil, Indonesia, and Saudi Arabia — have been more accommodating, either seeking out business with the country or refusing to join in on sanctions. “There are more than 250 banks in Russia; the vast majority of them haven’t been sanctioned. So there’s certainly a way to engage in international commerce without using the big banks, without using SWIFT. I think that’s what the Russians are going to do,” Smith adds.

If you want to to see how the West is undermining its own sanctions, look no further than Russia’s oil and gas sales. Those deals, negotiated prior to the war, are in dollars and euros. While Putin has previously tried to get “unfriendly” countries to pay for the energy in rubles, that hasn’t really been the case. Ribakova points out that all those unsanctioned banks can still hold foreign currencies — effectively acting as a replacement for some of the dollars and euros that the Central Bank of Russia has been frozen out of. “It was a dramatic blow to the whole sort of principle of fortress Russia, the central bank sanctions,” she says. “For them, it would be important for financial stability purposes to accumulate foreign reserves.”

As Russia has adjusted to sanctions, the U.S. has escalated its financial punishments, further isolating the country’s largest banks and targeting Putin’s daughters. Still, these have not had the broad economic effect on how the country operates. “There are very sophisticated economists who run the economy in Russia. These are not hacks, right? They know what they’re doing,” says Smith. Various sanctions that have yet to fully bite, like export controls on semiconductors and other computer equipment, are expected to hurt the Russian economy only down the line. “Some of the sanctions are not really designed to turn the screws that hard yet,” Smith explains, “but will soon.”

Are the Sanctions Against Russia Working or Not?