Sanctions against Russia: which ones work and which ones don't

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Oil tankers on the high seas

: Russian income from oil and gas sales has only been falling for a few months

Photo: Bloomberg Creative/Getty Images

The Russian war of aggression has been raging in Ukraine for a year: According to counts by the UN High Commissioner for Human Rights, more than 18 million people have fled and around 20,000 Ukrainians have been killed or injured.

The number of Russian soldiers killed is probably significantly higher.

Many cities and entire regions have been devastated, and Kremlin ruler

(70) has recently intensified the attacks.

Shortly after the war broke out, the West began to impose extensive punitive measures on Russia in order to weaken the Kremlin's financial strength and thus its ability to wage war.

The EU alone has now put nine sanction packages with around 500 individual measures into force.

That sounds huge.

But the effect?

Less than the West hoped for.

So far, the Russian state has not run out of money.

The explosion in oil and gas prices has continued to bring huge revenues to the Kremlin.

They ensure a record surplus in the current account of around 230 billion dollars.

According to IMF estimates, gross domestic product (GDP) shrank by just 3.4 percent in 2022.

The government deficit is also manageable at the equivalent of 44 billion euros, which corresponds to around 3.2 percent of GDP.

What's more, according to Bloomberg calculations, investments by Russian companies rose by 6 percent in 2022, as companies had to open up new import sources and set up new supply chains in response to western sanctions.

These key figures hardly provide the whole truth.

Economists like

(51), Russian economics professor in Paris, consider the GDP in the war year 2022 to be of little significance, since Putin has increased arms production enormously, but the goods produced do not appear on the free market.

He also thinks the unemployment rate, which allegedly fell to 3.7 percent in December, is misleading.

For him, private consumption, which fell by around 10 percent in 2022, is more meaningful.

All in all, however, according to a recent internal report by the federal government, the Russian economy is proving to be more resilient than expected when the sanctions were introduced.

After a year, the balance sheet is rather sobering.

To understand why that is, it is worth taking a look at the sanctions.

What measures are Russia really taking?

Which ones can the Kremlin undo itself?

Where are countries like China, India, Iran or Dubai mitigating the impact?

And what could really help?

What sanctions hit Russia:

Aviation industry suffers

So far, the sanctions against the Russian aviation industry have proven to be effective.

The airspace in the US and large parts of Europe is closed to Russian airlines.

In addition, they do not get any aircraft, spare parts or other technology from Western manufacturers such as

or

.

As a result, the utilization of Russian aircraft factories fell by 80 percent, and passenger numbers recently plummeted by 20 percent.

In order to slow down the decline, the Russian leadership now wants to exchange components between aircraft.

Airlines like the state-controlled Aeroflot

are already being forced to cannibalize older planes to secure spare parts.

According to estimates by The Economist, in two years one in five civil aircraft in Russia will have to be grounded for lack of spare parts.

Until the beginning of the war, Russia was also an important market for aircraft leasing: aircraft worth almost 10 billion US dollars are now stuck in Russia because the lessors had to terminate the contracts.

Meanwhile, Russia wants to register the planes in its own country - which "effectively means we stole the planes," according to independent Russian aviation expert

.

The Kremlin wants to buy some of the more than 400 leased aircraft.

But this plan is likely to fail because the EU would have to agree to the deal.

car industry on the ground

Russia's auto industry has long been shaped by Western companies.

When car manufacturers such as

and

left the country as a result of the attack on Ukraine and German manufacturers such as

and

also announced their departure, practically all car production came to a standstill.

Russian manufacturers such as

– previously dominated by Renault – were suddenly forced to cut back their production due to a lack of parts.

The assembly lines have been rolling again since mid-2022, but construction is being carried out without ABS or airbags.

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Thanks to China:

The new "Moskvich" is being built in the former Renault factory in Moscow

Photo: IMAGO/Anton Novoderezhkin / IMAGO/ITAR-TASS

In an emergency, the state tries to close the gap with partners.

In the former Renault plant near Moscow, for example, the Moskvich was revived after around 20 years - in cooperation with the Chinese car manufacturer

A few hundred models were supposed to be produced in the factory last year, and the models are not to be mass-produced until 2023.

Overall, however, car sales in the industry fell by almost 60 percent in 2022 - to exactly 687,370 cars and light commercial vehicles, according to the Russian Association of European Businesses (AEB) .

After the departure of the Western car companies, Chinese car manufacturers in particular are now trying to fill the gap that has arisen.

These sanctions Russia bypasses:

sanctions against banks

Numerous Russian banks were excluded from the Swift payment system by the EU shortly after the start of the war, which briefly shook the financial sector.

Foreign investors no longer received payments for their Russian government bonds because Russia was cut off from international payment transactions and was therefore technically insolvent.

The national currency ruble lost massively in value, inflation skyrocketed and the Russian stock market also crashed.

But the Russian financial system did not collapse.

The reason: the Russian central bank counteracted this with interest rate cuts, the money for oil and gas continued to flow, since the energy-hungry West continued to transfer money to Gazprombank by way of an exception.

In addition, capital controls and the obligation for Russian exporters to convert 80 percent of their foreign exchange earnings into rubles ensured damage limitation.

The ruble was back to its previous strength just two months after the sanctions began.

Instead of using Swift, some of the financial transfers are now being made using Cips, a kind of Chinese Swift.

Freeze of foreign exchange reserves

The decision to freeze the foreign exchange reserves of Russia's central bank abroad also had little economic effect, says the Russia expert and economist

from the Berlin Foundation for Science and Politics.

Here, too, the reason was the oil and gas billions, so that the country got along well without the reserves.

From Kluge's point of view, however, it made sense to freeze the foreign exchange reserves.

After all, Moscow could otherwise have exchanged the reserves for other currencies, beyond the reach of Western sanctions, he argues.

And in the coming months, according to Kluge, the effect is likely to increase.

If the West manages to slash Russia's oil revenues through the recent price caps and embargoes, Russia's trade balance is likely to deteriorate, the ruble to weaken, inflation to rise and the 300 billion euro in reserves to be sorely lacking.

Embargo on Russian oil

The sanctions against Russia's oil industry came into force late.

The EU members had already agreed on the import bans on Russian oil in mid-2022, but with long transition periods.

The embargo on diesel and other oil products has only been in effect since the beginning of February 2023, linked to an international price cap.

The long terms helped crude oil and diesel prices in particular continue to rise in 2022 and Russia even benefited from higher revenues.

Although Russia exported less oil and gas, it still achieved higher revenues than in previous years.

The West's goal is therefore to further depress the price of Russian energy resources on the world market.

This is done firstly by switching to other energy sources and secondly by negotiations with other states to join the sanctions against Russia.

The Kremlin is currently still finding large buyers, especially in India, China and other Asian countries.

However, the state-owned oil companies Rosneft, Lukoil and Co. have to grant customers significant discounts in order to get rid of their Urals crude oil variety;

only for the Espo variety has the price level remained stable.

The time factor is also at work here: Month after month, Russia's income from the oil and gas business is falling, so that the oil and gas sanctions are now having an increasing impact.

Meanwhile, however, the oil business is booming on the shadow market, through which Russia is undermining Western sanctions.

A shadow fleet of disused tankers transports the oil under the radar to secret customers.

The ships are sometimes renamed or repainted, sometimes several times per trip.

On the high seas, traders load the Russian oil onto larger tankers, mix it with other crude oil and thus disguise its origin, for example recently off Gibraltar.

The Kremlin is getting help from

, which has many years of experience in circumventing oil sanctions.

At least 16 tankers in the Iranian shadow fleet have switched to transporting Russian oil since the crude oil embargo in December, the Financial Times has found.

Asset freezes for oligarchs

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Money shifted in time

: oligarch

Photo: Swen Pförtner / dpa

At the beginning of the war, a lot of attention was paid to the punitive measures taken against individuals and organizations - including numerous Russian oligarchs, MPs, ministers, prominent businessmen and others close to Putin.

Thousands of people are affected by the sanctions imposed by the EU, Great Britain and the USA.

But the effect so far has been disappointing.

The EU has frozen around 19 billion euros in private assets - a manageable sum given that there are 83 Russian oligarchs with assets of more than one billion dollars, according to Forbes.

Despite some spectacular cases, such as the confiscation of various super yachts, states are having a hard time locating the assets.

Many properties or company shares can only be assigned with difficulty by the insufficiently equipped authorities because they are hidden behind nested constructs.

And many oligarchs hid their fortunes in shell companies or with straw people in good time.

A large part of the money from the EU country Cyprus, which was long considered a tax haven by Russia's elite, has already been transferred to new hiding places.

Steel magnate

(56) transferred part of his $1.5 billion stake in tour operator Tui from a Cypriot company to a company in the British Virgin Islands on February 28.

Others like

(73) transferred their money back to their home country.

Technology Export Bans

In fact, Russia should no longer have access to Western high-tech products.

But the Kremlin has so far been able to circumvent these sanctions in some areas - with the strong help of friendly states.

According to the EU sanctions, numerous goods - from cutting-edge technology such as quantum computers or powerful semiconductors to drones to technology for the energy industry and machines - can no longer be exported from the EU to Russia.

In the meantime, there is a lack of high-tech products in the Russian economy.

But data on trade flows suggest that companies in Turkey, China, Kazakhstan, Belarus and Kyrgyzstan are stepping in and supplying Western products via a roundabout route.

An example:

In the past year, smartphone imports in Armenia have skyrocketed – and at the same time, smartphone exports to Russia have been increasing rapidly in Armenia.

Similar phenomena were also evident in washing machines, computer chips and other products in a handful of Asian countries.

Loopholes became apparent particularly in the case of technologies in armaments.

Russian nationals residing in the US or Europe are said to have set up shell companies and used them to order electronic components from Western manufacturers.

With forged documents, they are said to come to Russia via China, South Korea and Hong Kong, among other places.

According to Reuters, electronic components worth at least 2.6 billion US dollars made their way into the country in the first seven months of the war, and at least 777 million US dollars can be traced back to components from Western companies.

It is unclear to what extent Western companies are aware of the violations.

In addition to parts from the US tech companies Intel, Advanced Micro Devices (AMD) and Texas Instruments, Russian weapon systems also included products from the German company Infineon.

In October, people were arrested in Germany who are said to have sold semiconductors and microprocessors for fighter jets, missile systems and other military technology to Russian companies.

EU representatives are therefore planning to tighten the export bans for technology exports as part of a tenth package of sanctions and to extend them to other electronic components.

The package is also intended to halt Iran's delivery of drones to Russia and close loopholes.

Russia's best friends

The ways in which Russia is circumventing the West's export bans illustrate one of the greatest weaknesses of the previous sanctions packages: More than 100 countries, which account for around 40 percent of global economic output, are not participating in the Western alliance's punitive measures.

China or India even benefit from cheap energy supplies.

Politically, there is still a lever here that could have a greater impact.

The Western states will not give up their sanctions anyway.

Since the embargo on Russian oil, which began late, and the price cap for gas are now slowly taking effect, the EU is confident that Putin will feel the sanctions much more severely in the second year of the war than before.