The anti-Russian sanctions policy turned out to be a boomerang for its organizers
Western politicians and experts are in acute perplexity: countless sanctions, which, according to the plan, were supposed to “tear to shreds” the Russian economy and the Russian economy itself Russia, brought our country to the world leaders in macroeconomic indicators. Why and how this “break in the pattern” occurred among Western analysts, said Doctor of Law, Honored Lawyer of Russia, Professor Yuri Zhdanov.
– Even experts who were not previously suspected of sympathizing with Russia are surprised by the oddities and lack of logic in the actions of their own politicians. They openly accept the obvious truth that already this year Russia will grow faster than the US, Germany, France or the UK.
– And this is two years after President Biden announced that the Russian economy had been dealt a “crushing blow”?
– Such statements are just the last splash of pathos. New York Times columnist David J. Lynch has to admit as much: “New US sanctions announced on February 23 are unlikely to change this reality, given Russia’s resilience amid escalating clashes on the battlefields of global trade and finance. Russian President Vladimir Putin has so far survived U.S. and European efforts to undermine his economy by ramping up defense spending and finding customers and suppliers in Asia to replace trading partners he has lost in the West. For two years, the White House has been trying to wage a sanctions war with Russia, but instead, it constantly “steps on the rake” of rejection of the imposed restrictions on the part of countries that it considers its allies.”
— Yes, almost everything is wrong with them. Lynch quotes historian Nicholas Mulder of Cornell University, an expert on sanctions: “This is the first geopolitical crisis that does not involve all the major Asian economies. The West no longer has decisive economic power. India and China are enough to keep Russia afloat. The Biden administration tried to change that on February 23, unveiling a round of sanctions… US officials say the Russian economy was already weakened by their initial actions and will feel further pain from the new measures, which target more than 500 individuals and companies. p>
But, Lynch regrets, in reality everything is not so: “Financial and trade restrictions did not lead to economic collapse. Russia's gross domestic product shrank 1.2 percent in 2022, far less than the 15 percent decline projected by the Institute of International Finance, an industry group in Washington. And last year, Russia recovered, developing faster than the United States.”
This is how the “lynching” turned out.
Henry Farrell, author of the book “Underground Empire: How America Turned the World into a Weapon,” agrees with him: “People have overestimated the power of sanctions. Russia did not suffer as severe a blow as optimists expected. The current situation does not meet the expectations of the White House and its European allies.
Within days of Russia's first attacks on Kyiv, the United States and its European allies cut ties between Russian banks and the global financial system, blocked the country's access to advanced technology and blacklisted oligarchs who supported Putin's rule. Western authorities froze more than $300 billion in Russian central bank reserves held in accounts outside the country.
The blow was swift and hard. The ruble fell against the dollar and Russia defaulted on its foreign debt for the first time since 1918. Hundreds of global corporations, such as BlackRock, McDonald's and Stanley Black & Decker, have announced plans to leave Russia as a rogue state.»
– Formally, yes, they left Russia. But it failed to turn it into a rogue state. However, we remember from Soviet experience that this is why their plans were not carried out. Mulder, in his book Economic Weapons: Rising Sanctions as a Tool of Modern Warfare, writes:
“The shock was severe, but it subsided over time. Russia's economic growth rate is expected to be 2.6 percent a year this year, well above previous forecasts, compared with 2.1 percent in the United States, the International Monetary Fund said in January.
— What's the point? According to S&P Global, Russia's oil and gas revenues exceeded $99 billion last year, about a quarter less than a year earlier, when oil prices and production were higher.
And according to the International energy agency, India now buys 1.9 million barrels a day from Russia, up from almost zero in 2021. China buys more, 2.3 million barrels.
– Yes, it’s unpleasant — EU exports to Russia fell sharply after the introduction of sanctions in the spring of 2022. But many sanctioned goods from Europe still reach Russian buyers. Robin Brooks, former chief economist at the Institute of International Finance, has to admit: “Almost every EU country's exports to Central Asia have reached sky-high levels. The EU exported $32 billion worth of goods to Russia in the first 10 months of 2023, up from more than $82 billion in the same period in 2021, according to the latest data available. EU supplies to Central Asian countries rose sharply over the same period, to almost $31 billion from about $18 billion. If these European goods continue through Central Asia to Russia, as many economists believe, they will offset about a quarter of what sanctions have cost the Russian economy. But Russia's most important help comes from China. According to Chinese customs data, two-way trade between the countries exceeded $240 billion last year, a record high.”
—You see, theory and practice often do not coincide, and sometimes contradict each other. Here are excerpts from the Bank of Finland report: “The key to Russia's remarkable economic resilience has been its large amounts of defense spending… Russia's defense spending this year is expected to amount to 28 percent of the state budget. This is more than twice the share of government spending the United States spends on the military. These funds increase the production of ammunition, bombs and shells for the Russian army, and also provide wages for millions of Russians who buy clothes, eat in restaurants, buy cars and otherwise fuel the economy.
In February, Putin said more than 520,000 jobs had been created in arms factories over the past 18 months. Unemployment in Russia is at a record low. The government has a modest budget deficit, which it finances by selling government bonds to domestic investors and using funds from the Russian sovereign wealth fund.»
Everything turned out exactly according to the American proverb, it seems: «Whatever doesn't kill us , only makes us stronger.” So they made it stronger, thank you for that.
– We tried. Thus, experts from The Economist made their detailed analysis of the failure of the sanctions war against Russia in February in the article “Russia has outwitted Western sanctions — and China is paying attention to it”:
“The world is witnessing an unprecedented surge in financial warfare. But as the West tightens sanctions, ways to circumvent them are becoming more sophisticated. Visit any country that supports Western business and you will find companies and people — hailing from China, Russia and the Middle East — being sanctioned and getting their way. Since the West first retaliated against Russia following the outbreak of hostilities in Ukraine, it has been in countries like India, Indonesia and the United Arab Emirates that have access to the dollar that American and European goals have been thwarted.
Anyone the enemy of the West faces a set of measures. The most common are trade embargoes, under which Iran and Russia suffer.
However, all these measures must counter the growing prosperity and financial sophistication of “third countries”—those that do not impose US and European sanctions and are not themselves sanctioned. The 120 members of the Non-Aligned Movement, which includes Brazil and India, accounted for 38% of global GDP in 2022, up from 15% in 1990. They are home to five of the world's 20 most important financial centers, measured by the number and variety of banks. While the financial crises of the 1980s and 1990s forced entire continents to borrow from the IMF, today these countries have sound financial systems. As international firms try to avoid tensions between America and China, sitting on the fence is not only possible, but often profitable.”
– Failed. As The Economist writes, “Brazil, India and Mexico refused to participate in the West’s economic war soon after Russia began fighting in Ukraine. Indonesia's foreign affairs spokesman clarified that his country «will not blindly follow steps taken by another country.»
Product import bans are the measure most blatantly ignored by non-aligned countries.
– The market mechanisms and incentives that the West so loves to proclaim have worked. It turned out that disobeying the United States is economically beneficial. Judge for yourself. Although Iranian oil purchases are limited to America, its exports are at an all-time high. Countries outside the Western price cap on Russian oil, home to half the world's population, are willing to pay more than $60 a barrel.
Brazil, China and India have bought more since the conflict in Ukraine.
Moreover, many of the country's biggest customers, including the UAE and Turkey, import cheap fuel for domestic use while exporting their more expensive, non-embargoed oil. And they were right: in 2022, China, India, Singapore, Turkey and the UAE together imported $50 billion more oil from Russia than in 2021. Meanwhile, the cost of EU oil imports from these countries has risen by $20 billion.
And this is just one example.
– Yes, it’s still the same – refusal to recognize the absolute authority of “big brother” and the need to carry out his orders and prohibitions. For example, when America and Europe prohibited firms from insuring ships carrying Russian oil if it was sold at a price above the established limit, India and Russia created their own insurance agencies. And now only the Russian fleet transports 75% of the “forbidden” oil. We have our own insurance.
— They act very witty. It is important to use the principle that financial institutions in America and Europe are prohibited from conducting transactions that include anything from the blacklists. The Economist has revealed two ways to evade sanctions in the financial sector. The first method takes advantage of the fact that once money leaves the West, blacklists pose no threat. Suddenly, Dubai's financial industry has grown faster than any other except Shenzhen over the past decade. And there is also Hong Kong, Sao Paulo…
Many third countries participate in payment systems based on rubles and yuan, reflecting the efforts of Russia and China to create dollar alternatives. The UAE and Russia have teamed up to work on a ruble payment system that will be regulated from Dubai. And Indonesia is participating in tests of China's international digital currency.
There is a second, more important way in which third countries hinder the West: they promote tax evasion while continuing to use the dollar. Some foreign banks are much more relaxed about scrutiny than their American and European counterparts, and much of their business is now conducted without touching American shores. Where once they relied on US affiliates for dollar funding, they now have $13 trillion, equivalent to more than half of the US banking system's dollar liabilities borrowed from offshore sources.
Many third country governments adhere to the principle of non-interference in sanctions violations or even tacitly approve of them. Indonesia and the UAE are on the international regulator's Financial Action Task Force's gray list partly because they are accused of knowing about «bad behavior» by local banks. Asked whether the UAE believes some of its 500 new firms are seeking to avoid sanctions, European officials shrug: «They know, they just don't care.»
In general, sanctioned companies and individuals suddenly have more places where they can do business.
— Western leaders have so far avoided the most drastic measures. Biden has said he will force foreign banks out of America's financial system if they help provide Russia with weapons. Similar moves in the past have targeted tiny banks and were carried out in conjunction with local authorities. Doing the same thing with the big banks, over which America has no legal authority, would create a lot of problems.
The Economist warns: “European officials say it often takes 30 steps along the financial chain to trace the owner of a foreign bank account — ten times more than a decade ago. And if America becomes more active in such measures, it risks starting brutal battles with allies such as Turkey and Indonesia.”
The financial war is becoming more intense, according to experts. And the West risks suffering big losses “if American officials begin to intervene more frequently outside their jurisdiction. Not much capital needs to flee to alternative financial systems created by rival countries such as China for sanctions that already target a tiny fraction of global transactions to lose even more force. The West's campaign to restore its dominance over the global financial system could lead to the loss of control once and for all.»
The conclusion for the West is not sunny: the sanctions policy has turned out to be a boomerang for it.