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Thursday, April 18, 2024

Russia’s response to the Economic Sanctions imposed by the West

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Abstract

This research paper outlines a complete framework for understanding and analyzing the response of Russia toward the economic sanctions imposed by the west during the invasion of Ukraine. Due to the globalisation of society, conventional weapons, ammunition, or arms are not used to fight war. Currently, unconventional strategies are adopted, namely “sanctions,” to contain the hostile nations. The main aim of this research paper is to study in detail western sanctions on Russia. How it is impacting Russia as well as the west? And how is Russia countering and responding to those sanctions? By the end of this research, it is our aim that develops a thorough understanding of Russia’s strategy against the west due to the sanctions imposed.

Keywords: Sanctions, rubles, Russia, west, counteraction, response

Introduction

Sanctions have always been the vital instruments of western powers in punishing aggressive nations. It has been used as the initial persuasive tactic to deter the belligerent state from acting in opposition to its geostrategic and geopolitical goals. The West started to impose sanctions on Russia after it annexed Crimea in 2014. From then onwards Russia is in a continuous struggle to counter those sanctions in ways that could create drawbacks for the west.

In the wake of the ongoing conflict in Ukraine, America and its allies resorted to the imposition of economic sanctions against Russia. The west could contain the aggressive state and put a strict check on actions it will take against Ukraine. The purpose of these sanctions was to put Russia under financial strain. Though the real-term impacts of these sanctions are debatable. It is yet to be determined whether such sanctions achieve their purpose. Or they lead to a further intensification of the conflict. Nevertheless, the USA and European powers partnered in imposing various categories of sanctions against Russia. However, the main aim of this study is to analyze these three main questions in our research paper.

Research Questions

  • What are the measures taken by Russia as a response to counter the economic sanctions imposed by the west?
  • Why is the Russian energy sector so important to the west that sanctioning economically might be a zero-sum game for the west?
  • How is the west effectively sanctioning Russia as a means to control the Russian aggression and prevent its invasion of Ukraine?

Exclusion from the Service Swift Management

Amid Russia’s invasion of Ukraine, the United States and European countries have been announcing a series of economic sanctions. One of the biggest restrictions is the exclusion of Russia’s major banks from the SWIFT payment system. It is regarded as a significant decision by the US and European countries to bar Russian banks from the SWIFT payment system. This has dealt a severe blow to Russia’s financial system and could lead to economic losses. However, by imposing sanctions on Russia, the United States will also hurt European countries because the big companies in all these countries export their goods to Russia. Payments to all big corporations would stop if Russia left the SWIFT system.

Therefore, it was not until after Russia attacked Ukraine that Western countries demanded that Russia be shut off from the world financial system. British Prime Minister Boris Johnson tweeted about Russia’s removal from the SWIFT payment system. Johnson even tweeted that “we have isolated Russia from the global financial system.”

What is SWIFT?

SWIFT, as the name implies, is a joint venture system for worldwide money transactions. There are 11,000 financial institutions connected to the SWIFT system across 200 nations. This system doesn’t work independently. It works and runs collectively with the National Bank of Belgium, the European Central Bank, the US Federal Reserve, and other banks. The network’s headquarters are in Belgium, despite the fact that its Board of Governors is composed of US bank executives.

It is also a type of financial messaging infrastructure that serves to connect the world’s banks. But SWIFT is no ordinary bank. Therefore, SWIFT is a global system that transmits financial communications between banks and financial institutions around the world. It enables secure financial transactions between them. The SWIFT Network transfers trillions of dollars daily to various governments and companies. The system transmits 40 million messages daily. Out of these 40 million messages, the rate of messages to Russia is one percent. American and European banks, who did not want one bank to gain a monopoly on its payment system, founded SWIFT. Currently, this network has 2000 banks and other financial organizations connected.

Why SWIFT is important to Russia?

International transactions are very important for the economy of any country. Foreign trade strengthens the country’s economy. SWIFT manages activities such as international trade, foreign investment, and remittances from abroad. A nation’s economy will be significantly impacted if it is cut off from the global financial system such as SWIFT. Russia’s expulsion from the SWIFT system will affect Russian business.

It would make it hard for Russia and the companies working in Russia to do trade and commerce. By 2020, Russian financial institutions will account for 1.5% of SWIFT’s total transactions. As a result, Iran and North Korea are both subject to the same sanctions. For its members, SWIFT secures global trade and does not support any particular side in conflicts. The restrictions on Iran’s nuclear programme, which cut its oil revenues in half and its trade with the rest of the world by 30%, led to its exclusion from the system in 2012.

SWIFT and Russia

Withdrawal from the SWIFT system would make it difficult for Russian companies to pay, which would severely affect its energy and agricultural exports. In that case, the banks will have to make direct payments which will incur additional costs. This would reduce the Russian government’s revenue. Since annexing Crimea in 2014, Russia has faced threats of expulsion from the SWIFT system. In response, Russia has stated that it would view such a move as a declaration of war. Russia’s exit from the SWIFT system would reduce its economy by five percent. But there are concerns about the long-term effects on Russia’s economy. Russia’s withdrawal from the SWIFT system would require the support of European countries, and many European countries are reluctant to do so for fear of damaging their economies. Excluding Russia from the SWIFT system would hurt companies doing business with Russia, especially German companies.

Russia supplies oil and natural gas to countries of the European Union so Russia is the largest supplier and finding an alternative will not be easy. Oil and natural gas prices are already rising in the world, and European governments do not want to disrupt Russia’s oil and gas supplies at this time. Companies that want to borrow money from Russia will have to find an alternative payment system. Russia’s economy could suffer immediate consequences as a result of its expulsion from SWIFT.

According to an article published in the US broadcaster USA Today, the move would also cut off Russia from international financial transactions, including international profits from oil and gas production. The global financial system has now shut off communication with Russia.  Russia’s ban on SWIFT transactions has also added to India’s woes. Now both countries have to look at other options. Now trade between India and Russia can be in their local currency Rupee and Ruble. Given the economic sanctions imposed on Russia, India can import more from Russia through the local currency. So Russia is taking measures to respond to these sanctions.

Russia’s Response

Moscow is preparing to deal with Russia’s removal from the SWIFT financial transaction system between banks. Moscow is trying to reduce its potential losses if it is removed from SWIFT. So there are the following actions that Russia is considering. Firstly, Moscow-EU relations have soured since Russia’s retaliation against Brussels, invasion of Ukraine, and annexation of Crimea, following the withdrawal of the Swiss system from the US. Russia, in retaliation, has banned eight officials from Europe.

Secondly, as the world’s emerging economic powers, the BRICS have decided to replace SWIFT with a new financial system. The financial system in Russia is SPFS, while the financial system in China is called CIPS. Both intend to link their systems to each other, while India does not yet have such a system. Since 2015, China has launched and expanded a system called the Overseas Payment System (CIPS). Russia replaced SWIFT with the Financial Messaging System (SPFS) in 2014. The SPFS system, established by the Russian central bank, is currently used by 400 institutions. These institutions control one-fifth of local payments. The Russian Financial Reporting System SPFS is designed to counter the risk of Russian banks losing access to the SWIFT system. Iran is currently in talks to join the SPFS and it can rapidly expand with China and other Asian countries.

Russian Transactions

Furthermore, Russia has also developed its own system of transactions with the outside world, dubbed the “National Payment Card System,” also known as MIR. But very few countries use it. Thirdly the gas supplied to Europe is paid to Russia through SWIFT. About 40% of Europe’s fuel needs depend on Russian gas. Russia has threatened to cut off gas supplies to Europe if it pulls out of SWIFT. Europe’s dependence on Russia for energy has weakened the political position of European countries.

Europe cannot afford to shut down its industries and kill its people without Russian fuel. Last but not least, Russia had taken steps to protect itself from sanctions before invading Ukraine. It had accumulated large foreign exchange reserves. Russia’s foreign exchange reserves consist of 16 percent US dollars, 32 percent euros, 13 percent Chinese yuan, 6.5 percent British pound, and 22 percent gold, according to international organizations. Russia’s foreign exchange reserves are 10% of its GDP.

Financial sanctions: Banning the central bank of Russia

Financial sanctions have dominated the first group of sanctions imposed upon Russia. On the 28th of February 2022, a few days after the invasion, sanctions were inflicted upon the central bank of Russia and other sovereign wealth funds. The US department of treasury, Britain, Canada, and European leaders were at the forefront in imposing these sanctions. This was an effort to target Russian financial institutions and freeze their assets. Through this, Western countries will stifle the source of funds for the ongoing war. As it will destabilize the internal economy of Russia which will lead to turning the popular opinion against the war. Furthermore, on the external front, this will erode the value of the Russian currency and wreck fiscal and monetary losses. The move was successful in achieving its objective as these sanctions triggered a 15% fall in Russia’s GDP and causes inflation to rise to 20%.

The Russian response to the financial Ban

Russia acted fast in retaliatory measures in response to western financial sanctions, which included sanctioning the Russian state bank, freezing Russian assets, and efforts to devalue the Russian currency. First, Russia declared all these acts as “unfriendly and illegitimate actions”. Later onwards, on 31st March, Russia asked its energy client countries to pay in Rubble, Russian currency, for energy products. This was aimed at revitalizing the value of its currency. Then compelled Russian companies to not pay a dividend to foreign shareholders and establish any sort of business link with any country that endorsed sanctioning Russia.

The most significant development came on 4th May 2022 when Russia announced a decree. This decree laid down harsh measures and termed these sanctions as a violation of the Russian right to property. Through this, the central bank restricted payment to foreigners who owned local sovereign debt. These measures were not enough to recover 300$ billion frozen in western banks. Russia went a step further by deciding to prepare a lawsuit against international financial institutions.

Sanctioning on travel and transportation from Russia

Another domain of sanctions that garnered much attraction was the travel and transportation of Russia. In an attempt to completely isolate Russia on the international front, the western leaders cumulatively acted to ban Russian state representatives. In February 2022, the EU refused to access the Russian aircraft that may be private business jets or Russian registered. All of the West imposed sanctions on the exports of Russian goods and space industry industry. This has highly impacted the Russian economy.

Within that, the UK on 19 May 2022 announced new sanctions against Russia’s largest aircrafts Aeroflot, Ural, and Rossiya Airlines. They would not be able to sell their unused lucrative landing slots at the airport of UK. This has impacted the Russian economy about 50 million pounds worth of loss. Afterward, Britain and New Zealand restricted Russian aircraft from landing in the country. The Union of European Football Associations (UEFA) prevented Russian national players and Russian-based clubs from participating in the league.

Furthermore, the EU forbade road transport from Russia to Belarus then entered Europe. The prohibition aims to disrupt the road trade and turn down the economy by banning transportation. They can grant derogations forthe transport of energy, medical, agricultural, and food products. The aim of these sanctions was to target the soft image of Russia and decrease the value of the Rubles. They tried to leave no avenue through which Russia could remerge and present itself as a cultural force. Western leaders were highly successful in achieving their purpose. People particularly from Russia and generally from all over the world started blaming Russia for provoking aggression.

Russian Response on ban on travel and transportation: 

Russia also responded to a ban on travel and communication. In the first set of measures, Russia shut down its airspace to western countries. This made the flight of European and USA airlines take a longer route to Asia. Russia also imposed travel restrictions upon the host of people from the USA, European Union countries, UK and Canada. This ban included persons belonging to the different fields of life such as journalists and politicians.

In a recent move, 22nd of May 2022, Russia banned 963 government officials and other stalwart figures from traveling to Russia. This included Joe Biden and the president of Russia. The travel ban has an impact on Britain in addition to the USA. Russia also banned 150 members of the House of Lords, including English Prime Minister Boris Johnson. It is noteworthy that Russia made strides to maintain cordial ties with other countries that were not part of this sanction regime. 

This ban on transportation would deeply affect the economies of the following countries in Europe and Central Asia. The meetings between the officials wouldn’t take place because of the ban on transportation. States would be unable to negotiate diverse types of economic regimes and agreements, severely affecting multilateral diplomacy.  Apart from this the due to the ban on travel the trades routes won’t be used. For example Belarus to Russia route is closed for trade. If the same step Russia takes it would have a great impact on the economies. The regions will suffer from inflation, shortage of oil and gas, increased prices of commodities and instability.

Withdrawal of companies of Supply-Chains

When Russia decided to invade Ukraine on February, 24th caused so many problems for the West. In today’s globalized world a country can be contained through sanctions or we can say that it is the motto of the West. The fact is that a state will always be independent in taking decisions. To contain Russia and stop its war in Ukraine many global supply chain companies are closing their firms. They are re-examining their relations with Russia to damage its economy. In reaction, Russia would be compelled to end the Ukraine invasion. Some companies are maybe at a loss while leaving Russia. However, the pressure from the West have compelled them to do so.

The collapse of the Soviet Union made the Western firms step up their presence in Russian Federation. Russia is a big economy with a big landmass and huge human capital. The economy needs to prosper to gain a strong foothold in the world and mainly against the United States. So, Russia found the presence of Western companies positive and fruitful. It’s been decades that these firms are functioning in the Russian Federation and profiting a good amount of money.

Companies

These companies range from worldwide famous fast-food chains like McDonald’s, Starbucks, PepsiCo, Coca-Cola, and retail shops to luxury goods, technology, and so on. An estimated 330 businesses are leaving Russia, according to estimates. In the year 2020, almost 44% of the Russian exports are for the NATO countries. And if we talk about imports, then approximately 38% come directly from NATO countries. Big billionaires and famous Russian oligarchs are known to have a close association with Putin. Because of this, they are directly targeted by the United States, European Union, and the United Kingdom. Their corporate and personal assets were frozen. They are not allowed to have any kind of access to maintenance or even for hiring employees.

Carmakers:

Some car makers hurriedly stopped car production in Russia. For example, both Japan’s Toyota and Germany’s Volkswagen stopped their production in the Russian factories. They have also stopped the export of cars in Russia which is disrupting the supply chain. Additionally, luxury car manufacture has also been put on hold. Jaguar, Rolls Royce, Mercedes and many more have implemented the same restrictions.

Fashion:

Many renowned fashion brands have stopped their sales and shut their shops temporarily. For example, H&M, and Zara including the sports brands like Nike, Adidas, and Puma. Not only but also Adidas even stopped its production for the football team. Many luxurious brands like Louis Vuitton, Chanel, and Hennessey have also stopped their sale and shops temporarily. Along with many makeup brands like Estée Lauder, L’Oréal, Michael Kors, DKNY, etc.

Impact on Global Supply Chain

The disruption in global supply chains is not something new. From COVID to the US-China trade war to the climate crisis to the Russian war in Ukraine. Many expert analysts are saying that the war may go on for a longer period of time than expected. Russia is the largest exporter of wheat and fertilizer, which has had a significant impact on the food and agricultural markets. Due to sanctions the prices of these products have been rising. The African continent is more likely to get the most affected. Even the United Nations is warning about the high prices. Along with G7 countries they specify that the Russian invasion of Ukraine can cause the most severe food crisis around the globe.

Russia and the Black Sea are adjacent. As a result of the conflict with Ukraine, shipping is being severely hampered by the protracted delays of shipments. And putting the containers in huge amounts on the sea for shipment can disrupt the supply chain more. In order to cover the risks of armed warfare, shipping costs are also rising. The conflict has deteriorated the sailor labor shortage. Both states have around 14.5% of the global workforce of seafarers. The crews are stuck inside the ships in the black sea and Ukrainian ports.  And they are unable to take out the people safely.

Russian Minerals

Russia is also one of the main sources of various minerals that are crucial for the U.S industries. Including nickel, titanium, aluminum, scandium, and palladium. For example, nickel is the basic component of electric vehicle batteries. In catalytic converters the palladium is critical input and titanium is very important for the engines of commercial jets and airplanes as well. The price of all these components has hit the roof since the invasion. And the automobiles that use EV batteries, it will be very difficult for them to produce more. Even if they are getting the nickel it will be of very high cost.

The Russian and Ukraine war can help China and Russia to strengthen their relations. The Russian investment in China can increase. The Commerce Ministry of China has publicly cautioned companies that if they supported The United states and sanctioned Russia, China will take that as an offense to the Chinese law. These companies will bear the consequences in the market in China and even get added to the unreliable entity list. This statement of China clearly shows that Russia and China are somehow forcing firms to choose sides. It can be seen that the United States is doing the same, making the companies stop their businesses in Russia. As a result, many firms of China are deciding to make investments against the United States. So are the Firms of the United States looking for the supplies that are outside the boundary wall of China.

Moscow’s response as countersanctions against “Un-Friendly” States

With the intensification of the war, there was an increase in sanctions so that Russia will stop the war in Ukraine. But this time Moscow come prepared and they have put countersanctions against sanctions and named the states “unfriendly states”. These unfriendly states mainly include the United States, UK, and EU. Russia’s response towards the unfriendly states is: Firstly Russia made it mandatory for its debtors to pay back Russia in rubbles which is the Russian currency. Along with the unfriendly states that are buying gas from Russia. They have to pay in rubbles as well. If states do not pay in rubbles it can lead to more delaying in the supply of gas.

Secondly, it is made mandatory for the Russian people to ask the Government Commission for Control over Foreign Investments. To grant their people permission for having the transactions from the foreign countries which are “unfriendly states”. Thirdly any amount of money that is transferred from accounts of Russia to a non-resident of Russia (can be a company or an individual) from unfriendly states. That account will be suspended for at least six months.     

Fourth, it is forbidden for any business or organisation from a hostile nation to purchase any non-ruble currency from Russia.

Also, the companies of Russian states that are being sanctioned by the EU and USA are allowed to hold back any public information about the activities of procurement and the supplies as well. Lastly, until the end of the year 2022, the banks in Russia along with financial institutions refrained from putting certain information publicly for the sake of Russia to avoid any more sanctions from the unfriendly states. Mainly regarding ownerships, control structure, managing bodies, and many other offices. And along with banks and financial institutions, the insurance firms are also refrained from any contracts with unfriendly states.

Oil and Gas Sanctions

Earlier in the start of 2022, oil prices went 4% higher in the global market as The United States imposed a complete ban on Russian oil and gas imports due to its invasion of Ukraine. Following the US, the UK has also imposed a complete ban on oil and gas imports. According to US Energy Secretary Jennifer Granholm, the US does not rely much on the Russian Oil and Gas supplies so no such impact would be deeply affected on the US economy due to the sanctions imposed.

Furthermore, on March, 27 European Union countries announced a “sixth-sanction” package on the Russian oil and gas imports. This plan would include a phase-out of Russian oil and gas imports by the end of the year. The main aim of these sanctions imposed by the west is to prevent Russia from taking over Ukraine and to limit its financial capabilities and it was a response to Putin’s aggression toward Ukraine. However, this plan significantly has and will deeply impact the European Union as Europe is the biggest importer of Russian oil and gas and 45% of its natural gas supplies comes from the Russian pipelines.

Fig 1.0 and Fig 1.1, basically describe the strategic importance of Russia as it has pipelines all over the European countries, which shows that almost all of Europe is depending on the Russian oil pipelines. The Russian Nord Stream and Blue pipelines, which import both natural gas and oil, are connected to almost all of the European nations. Putting on sanctions would stop the gas and oil flow and Europe would have to find an alternative or a new source quickly in a short period to meet the domestic demands in Europe. The impact of this sanction would further affect the landlocked states in Europe which are Hungary and Slovakia, which are 90% heavily dependent on Russia for its natural gas and oil supplies and they would now have to face a deeper challenge in finding a new source to overcome this deficiency.

How have oil and gas sanctions affected the economy of Russia?

These sanctions imposed by the west aim to put a check on Russia’s war tactics and to stop its invasion of Ukraine by targeting the Russian economy. The Russian energy sector is the target of these oil and gas sanctions, which also forbid the sale of European technology used to advance the oil and gas refineries sector. Through this Russia would not be able to receive much of the European technology to advance its industries. Secondly, according to the US Department of Treasury, these sanctions are to target the main backbone of Russia which is Gazprom which is multinational energy cooperation in Russia to restrict its ability to generate capital for its economy and to eventually utilize in the invasion of Ukraine.

According to Putin, due to these sanctions, some of the “unfriendly countries” in Europe are delaying the transfer of payments on the deliveries which were made, and these sanctions have heavily blocked the exports of technology, equipment, and funding that were directed to Russia for advanced development of the energy sectors.

Russian Oil Traders

Also, some of the traders have avoided the Russian oil and are searching for new sources like Qatar and Saudi Arabia for oil and gas and now Russia has to sell its oil at many heavy discounts in the international markets which in return is creating losses in the Russian markets and Russia hasn’t been able to generate any profit which would result in recession shortly.

According to Brent which is a global yardstick for oil prices, it was seen that they were trading the Russian crude oil from $108 a barrel to $30 a barrel. According to the International Energy Agency’s forecast, starting in May, production of 3 million barrels a day would be shut down. Numerous economists anticipated that Russia will experience high unemployment and inflation rates as well as an impending isolation from the infrastructure of the West.

Statistics

In Fig 1.2, the statistics explain that due to the western sanctions, Russia is experiencing a 1.2 % of its drop in crude oil exports. 2.9% drop in its annual GDP from the natural gas exports. This gives a clear illustration that soon Russia will face a major hit in the economy. It will soon need to look for alternatives in order to improve and close the gap the West has created.

However, these sanctions have not yet put the powerful impact which the west wanted, as these sanctions would impact Russia in several years and will take a lot of time to show their effect and not in this short period. European countries are the ones that have a lot to lose due to these sanctions and the domestic and household activities in European countries are at risk.

Response of Russia to the oil and gas sanctions imposed by the west?

However, in response to these sanctions by the west, Russia is playing double tricks on the west by contemplating the “unfriendly countries” to pay for the gas and oil in Russian currency which could become a drawback for the dollar in the global markets. Additionally, the Russian energy company Gazprom is beginning to halt oil and gas shipments from Poland and Bulgaria and will only resume them once roubles have been paid. EU has considered this form of action as blackmailing did President Putin. But for Russia to boost its economy, payments paid in rubles would be the best course of action.

According to Kremlin officials, Russia has more than enough buyers who are ready to buy oil and gas, and Russia will not persuade anyone to buy their oil and gas. Russian Foreign Minister in a meeting in Turkey has mentioned that Russia will supply its oil and gas in the market and that the west is welcome to replace the Russian supplies. This type of response has shown that Russia is fully confident in its capability and that no sanctions can weaken Russian supremacy when it comes to oil and gas.

Russia and China

Russia is now also looking and establishing good ties with the Asian nations. It has been supplying its natural gas to China via the Serbia gas link. It has also been in continuous talk with Asia for a long-term deal for its supplies via Mongolia. However, the Russian infrastructure is not yet capable of importing gas towards the east. Energy imports from Europe won’t be as necessary if the agreement between Russia and Asia is implemented. It would develop this “interconnector.” 

According to some analysts, putting on sanctions against Russia may create an iron curtain between Russia and the West again. These oil and gas sanctions can result in catastrophe in the global markets because Russia is now moving toward Asia, especially towards China which is the second-largest economy in the world. This action would be a drawback for the west and they would have to face serious consequences.

Conclusion

In conclusion, the essay provides comprehensive responses to the concerns that were the focus of this research study by properly examining and comprehending the western and Russian perspectives. Even though the west has a proper agenda, it is portraying its propaganda in the form of sanctions to restrict Russia’s sphere of influence and to economically constrain Russia so that it cannot continue its invasion of Ukraine.

However, Russia, on the other hand, has been continuously countering those sanctions by creating new and advanced strategies. These are creating drawbacks for the west, as the majority of the European Union countries are heavily dependent on Russia for its oil and natural gas. They can’t search for other sources overnight. Despite the US and European sanctions on Russia, the Russian economy will not suffer much. The problems of developing countries like Pakistan may increase due to the high cost of food and fuel. Therefore not only is their disagreement in Europe over sanctions on Russia, but China, Asia’s second-largest economy, has also opposed sanctions on Russia.     

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