After nearly two years since Russia’s invasion of Ukraine, attempts by the US and its allies to economically pressure Moscow have faced significant challenges. The effectiveness of Western sanctions and export controls has been undermined by substantial sanctions evasion and Russia’s growing economic ties with China and India. While trade restrictions have indeed harmed the Russian economy, it remains resilient and appears to sustain the conflict in Ukraine.Thank you for reading this post, don't forget to subscribe!
As of the close of the previous year, Moscow anticipated an annual economic growth of 2.8%, following a contraction in 2022 when sanctions tightened after the invasion. Defense spending surges and high oil prices have contributed to buoying the Russian economy, and private companies have adapted well to new economic realities. Despite initial predictions of a wholesale exodus of Western businesses, many have chosen to stay, contributing significantly to Kremlin coffers.
However, underlying conditions present challenges, including high interest rates, inflation, a weak ruble, and significant labor shortages. Despite freezing substantial foreign reserves and imposing sanctions on most Russian banking system assets, the West has not crippled the Russian economy. Sanctions evasion and Moscow’s pivot to the East have played a role in sustaining the country. A US study revealed a rebound in Russian imports by the autumn of 2022 after a steep fall post-invasion.
To circumvent Western sanctions, Moscow established a shadow tanker fleet and promoted parallel imports, formalizing the practice in May 2022. The West has sought to pressure exporting countries, yet Moscow claims parallel imports amounted to over $70 billion over the last two years.
Russia’s pivot eastwards, initiated before the Ukraine war, has accelerated. Trade between Russia and China increased by nearly 30% to exceed $200 billion in the first 11 months of the previous year. Military ties with rogue states like North Korea and Iran, coupled with potential technology purchases from friends like Turkey and China, have helped Russia resist Ukraine’s counteroffensive.
China has not only provided economic assistance but likely military and dual-use technology. Russian imports invoiced in Chinese yuan reached a fifth by the end of 2022. Beijing has increased the use of the yuan to pay for Russian commodities, filling investment gaps left by the West. Moscow’s economic ties with Beijing raise questions about Russia becoming a vassal state, but for China, India, and other countries, commercial opportunities appear to be the main driver.
The US and the EU will continue to penalize those engaging in economic ties with Russia, but the scale of illicit transactions remains uncertain. Addressing legitimate trade supporting Russia in the face of Western sanctions will be a significant challenge for policymakers as Vladimir Putin prepares for a potential fifth presidential term in March.