Russia’s experience holds lessons for future sanctions

Trying to completely isolate a large, complex and globally integrated economy is costly and difficult. This is the view expressed by Elina Ribakova of the Financial Times. 

Ribakova says that while Moscow’s statistics should be treated with great caution, two years on, the Russian economy appears to have stabilized, thanks to war-related fiscal stimulus accounting for around 10% of GDP and the reluctance of coalition countries to stop buying Russian oil and gas. 

The Russian government’s statistics agency forecasts GDP growth of 3.6 percent in 2023, following a moderate contraction in 2022.

But even if the impact of sanctions is not as devastating as initially predicted, Russia has lost close to $170 billion in exports due to sanctions, has experienced much weaker growth compared to other commodity exporters, and its medium-term outlook is bleak. 

According to Ribakova, the first lesson from this experience is that China – and indeed other countries – are unlikely to be caught unprepared, just as Russia is already preparing for a new round of sanctions following the 2014 sanctions. 

Russia prepared themselves for this sanctions over years

Over the past decade, Russia has reduced its external vulnerabilities by implementing macroeconomic adjustments similar to the most severe IMF programs. Both Russia and China have introduced their own domestic payment systems and intensified their digitization efforts.

As a result, when Russian banks selectively cut their links with the international payment system Swift, they hardly felt the impact. The voluntary withdrawal of Visa and Mastercard only affected Russians fleeing the Putin regime, while local banks continued to process card transactions.

The second lesson is that the consequences of non-compliance need to be strong enough to affect companies. 

The third lesson is that it is difficult to garner multilateral support when the target country has significant economic clout. The US, the EU and their allies have struggled to bring together countries where Moscow’s aggression in Ukraine is not a pressing political concern and where trade with Russia is profitable. China has overtaken the EU to become Russia’s largest trading partner, with trade volume set to exceed $200 billion in 2023. India has increased its share of Russia’s total oil imports from 2 percent before the war to 35 percent in 2023.

Ribakova warns the US: In the case of China, the US will need to remain realistic about the limitations of sanctions and look for vulnerabilities. This is because China has benefited greatly from integration into global markets, which has led to positive spillovers, especially in research and development.