Chris Weafer is the CEO of Macro-Advisory, a strategic business consultancy focused on Europe and Asia.
When Russia launched its invasion of Ukraine in February, Western countries immediately looked to respond with sanctions – specifically, ones targeting the Russian Central Bank, the commercial banking sector and the financial system generally. One of the highest-profile measures was a ban on Russia’s major banks from using the global money transfer system SWIFT, an act that some experts described as the “nuclear option.”
The objective and expectation was that these measures would lead to a freeze in the Russian financial system and in the economy. In turn, it was hoped that these extreme actions would lead to a change in Moscow’s actions in Ukraine.
That expectation seemed reasonable. More than US$300-billion of the Central Bank of the Russian Federation’s foreign currency was frozen in Western central banks, and the SWIFT ban made it largely impossible for state agencies, companies or individuals to either receive money for goods exported or send money abroad to pay for imports.
However, seven months since the sanctions were imposed, Russia’s economy remains quite stable; it is only expected to contract by less than 3 per cent this year. Its trade surplus for the first seven months of the year was US$192.4-billion – more than the 2021 full-year surplus of US$190.1-billion – and its federal budget reported a surplus of US$22-billion in that time. Russia’s Economy Ministry recently said it expects the value of its oil and gas exports to reach around US$340-billion this year.
So what has gone wrong – or was erroneously assumed – with the sanctions plan?
The first factor is that Europe wasn’t able to cut off coal, oil, gas or industrial metal imports as quickly as politicians in Brussels would have liked. The global economy, and the economies of other Western nations, have become highly dependent on Russian imports. That meant that at least one major bank, GazpromBank, had to remain in the SWIFT system so that Western importers could pay for their goods; Moscow had made clear that a suspension of payments would lead to an immediate cut in the supply of energy and other materials.
As a result, GazpromBank has become the main conduit for other financial transactions between Russian and foreign counterparts. This has allowed at least the financial aspect of trade to continue as normal for Russia: it has swapped Western trade routes for ones that go through Turkey and through Asian borders, and GazpromBank allows for goods coming from sanctioning countries to be paid for.
The other major factor is that Russia has been preparing for tougher sanctions since the West first started to impose them in 2014. If the Western nations had imposed these tougher sanctions, including the ban on using SWIFT, eight years ago, the Russian financial system and the economy would have collapsed, quickly. But Russia has since diversified away from financial and trade exposure to the West. European countries, on the other hand, had long talked about the dangers of relying on Russian energy, but had done little to actually mitigate that until they were forced to, this year.
Meanwhile, Russia, China and a few other countries have put in place a direct payment system that doesn’t rely on SWIFT, allowing them to transfer money between their respective central banks. This also suited Beijing, which is pursuing its own ambition to break Western dominance in the global economy and the monopoly of Western-based and -backed financial institutions and processes.
While China was buying very little energy from Russia in 2014, it was Russia’s largest energy partner by the start of this year. More than 50 per cent of Russian oil exports now go to Asian markets and gas volumes have been growing slowly, although Europe is still the dominant customer. Moscow can sell significant volumes of oil, gas and coal to Asian buyers and be paid for those exports in Chinese yuan or Emirati dirhams, and have that money transferred to Russia’s central bank. The Kremlin then has enough foreign currency to pay for nonsanctioned goods and services.
The Russian economy will still certainly suffer from the sanctions, of course. Growth will slow to near-stagnation levels in the next few years, and technology sanctions will block planned development programs, exacerbating a growing technology gap with the rest of the world. But it will avoid a financial sector collapse or any serious disruption to trade, and it will be able to maintain essential services and employment subsidies – and domestic stability is more of a priority for the Kremlin than funding growth.
In short, Russia’s preparations since 2014 will ensure that – almost regardless of any potential new sanctions to come from Western governments – its economy will survive this financial “nuclear” fallout.