The sanctioning effort by the West has thus far failed in its objective of deterring Russian aggression and creating serious economic costs back home.
The list of first-wave sanctions is a long one: asset freezes of wealthy and politically-connected individuals, financial sanctions (including a ban from the global SWIFT payments system), the sanctioning of various political and financial groups associated with the conflict, and new restrictions on fossil fuels and sensitive technologies, to name a few. Yet despite this effort – unprecedented in both the breadth of sanctions and the extent of the coalition implementing them – the Russian economy has managed to weather the storm: a 3.3% economic contraction is expected for 2022 (far better than the initial prediction of a 7-8% drop), inflation is hovering around 12% (not far off from the year-on-year rates of Western countries), foreign reserves remain as high as $300 billion, and the engine of the fossil fuel industry continues to churn out revenue for the state.
In fact, fueled by inflation and higher prices due to sanctions, Russia’s energy export earnings actually rose by 38% through August of last year. Overall, the industry has been far more resilient than other, hard-hit ones such as vehicle manufacturing and IT, in large part because it is less exposed to the West and more able to pivot to sanction-averse markets such as India, China, and Turkey.
Second Wave of Sanctions Looms
A second wave of sanctions is now taking shape. Foremost among them is the G7-EU $60 price cap on seaborne oil imports, which was brought into effect on 5 December 2022, and will be adjusted as time goes on to remain at least 5% under market price. On the surface the policy is less severe than the complete EU ban on seaborne oil imports imposed in June 2022. However, the primary objective of the new sanctions is to impose lower oil prices beyond the West and keep Russia from shifting its exports to higher-price markets outside of the sanction regime. This will be achieved by prohibiting the shipping, insurance, or re-insurance of any Russian cargoes that are not being sold below the G7-EU price cap rate.
A similar price cap regime is expected to be levied at refined oil products as well, eating into Russian export revenues in Europe and elsewhere. The EU is currently scheduled to ban the import of Russian refined oil products on February 5; such imports have surged in the wake of EU bans on unrefined oil from Russia. Yet despite the combined effects of first- and second-wave sanctions, the EU remains Russia’s largest market for fossil fuels by a significant margin.
