In implementing financial sanctions against Russia, the EU and its international partners were very speedy and bold. They acted within days after the start of Russia’s invasion on 24 February. However, it took months before the real economy, especially the energy sector, followed suit.  This was mainly due to political and economic self-interests. But when the decision was finally taken to impose energy sanctions, it was a decisive one. This was also due to the realisation that the financial actions alone had not had an excessive effect.

Nearly one year after the first sanctions package was imposed by the EU, it is time for a critical summary: What has been achieved? What are the learnings? What happens next?

The EU acts quickly on financial sanctions

We start with a brief overview of what has happened in the last 12 months. On 23 February 2022, the EU tightened personal sanctions in response to Russia’s decision to recognise Donetsk and Luhansk as independent territorial entities. From 24 to 28 February 2022, sanctions consultations were held nearly every hour. Surprisingly for some outsiders, the EU, G7 countries and other important actors such as Switzerland and Singapore swiftly adopted substantive financial sector sanctions – including sanctioning transactions with the Russian Central Bank (CBR).

This move was possible due to intensive preparations, including private-public sector consultations. By the beginning of March, a substantive part of the Russian banking system was excluded from the international payment messaging service SWIFT, and the use of euro cash in business relations with Russia was banned. Likewise, the European subsidiary of Sberbank (Sberbank Europe) was closed and wound up as early as the beginning of March 2022.

At the same time, substantial foreign exchange reserve positions of the CBR, deposited in the Western financial system, had been frozen over the weekend in a unique and internationally coordinated operation. The aim was to restrict the CBR from using foreign exchange reserves to support the rouble (RUB) and macroeconomic stability. After these remarkable sanctions against the CBR came into force, the rouble exchange rate fell dramatically to levels beyond RUB/USD 130, up from RUB/USD 80.

In the following months (April, May), Russia slid into an international sovereign default. In part, “over-compliance” by Western financial market players was evident here. Many large Russian state-owned companies were technically unable to service their foreign debts. Currently, billions of dollars in foreign debts from Russia are not being serviced. The possibility of simply returning to the Western financial markets is blocked for a long time. Almost the entire Russian banking sector (with the exception of Western subsidiaries) is de-SWIFTed and excluded from international payment transactions with Western banks and currencies. Sanctions against individuals and companies have been continuously expanded, which in turn has intensified the effect of financial sanctions.

More hesitancy on the real economy and energy

First EU sanctions restricting trade were only decided in mid-March (trade restrictions on iron, steel and luxury goods). A month later, further measures were imposed on the real economy (import ban on coal and some other goods, ban on Russian ships entering EU ports), while the already comprehensive financial sector sanctions were tightened even further (ban on deposits in crypto wallets, further exclusion of banks from the international financial market). Dual-use or investment goods were continuously included in additional sanctions packages.

After intense political debates, crude oil and oil products came into the focus only in May and June of 2022  in the 6th sanctions package. However, exceptions were made for individual EU countries and pipeline deliveries in the first energy sanctions package. In contrast to financial sanctions, there have also been long phase-in periods (in the case of oil until the end of 2022).

Gold trade was sanctioned in July, while price caps for Russian commodity exports or processed commodity products have not been addressed before autumn (October, eighth sanctions package). Here, implementation took until December 2022, after which the respective EU embargoes will increasingly take effect (e.g., on oil and oil products).

Overall, Russia is currently the most sanctioned country in modern economic history. But why were comprehensive financial sanctions implemented so much faster than sanctions against the real and energy economy?

Negligible impact on the financial market but systemic importance in energy

Overall, the damage to the global and European banking and financial system caused by deep sanctions against Russia is very manageable. In the global financial markets, Russia is less significant than Greece. This is due, among other things, to the “Fortress Russia” strategy of recent years, which sought to reduce the dependency of the Russian economy on global financial markets by borrowing less on the global capital markets. Accordingly, Russia accounted for market shares of just 0.5-1% on global financial and banking markets in February 2022. Even at regionally specialised “Eastern European banks” in EU countries such as Austria, Italy or France, Russian exposure was less than 10% of Eastern European business. Thus, Russia was not of systemic importance to the global financial system and, therefore, easy to sanction.

In contrast, Russia is a giant and top producer in the global oil and gas market (number 2 or 3), with particularly high dependencies in Europe. In this respect, it was hardly possible to quickly impose drastic sanctions due to both political and economic reasons. The “hesitant” energy sanctions policy (in combination with a mild winter) also helped Europe avoid falling into a deep shock recession in the winter half-year 2022/2023.

Russia: Real GDP growth & oil/commodity price developments

chart: Russia Real GDP growth & oil/commodity price developments

No collapse but a “normal” crisis so far

According to key performance indicators (such as GDP growth, inflation, exchange rates or financial market/banking sector stability), Western financial and economic sanctions have so far not plunged Russia into an existential crisis either. The CBR managed to stabilise the exchange rate for the rouble in the course of 2022 through smart foreign exchange management measures and capital controls.

Paradoxically, the rouble was the best-performing emerging market currency in 2022. Its solid performance in the last year should now help to push the inflation rate sharply into single digits in 2023. In fact, inflation in Russia in 2023 could be even lower than in many euro area countries as the CBR has already reacted. Key interest rates are now lower than in pre-war times.

Capital inflows from solid commodity exports have also helped to stabilise the rouble and the Russian economy. In fact, Russia even posted a record trade balance as well as current account surpluses for 2022. Commodity exports were facilitated by the fact that Russia can now (as of the turn of the year 2023) settle almost 50% of its exports in currencies other than the euro and the dollar, partly also in roubles.

Russia’s banking sector performed “only” as badly in 2022 as it did in 2015. But there is no sign of a systemic crisis. Shortly after the implementation of deep financial sanctions, a horror loss was recorded (mainly due to losses from derivatives and FX hedging), but this was made up for in the course of the year. The overall banking sector performance is favoured by the solid results of the relevant Sberbank while other large and state-owned banks remained in the red in 2022.

Overall, the hesitant sanctioning of Russian goods and energy flows de facto counteracted the initially tough financial sanctions. For example, the trade balance surpluses allowed Russia to replenish its foreign exchange reserves during 2022 and thus regain the sanctioned reserve asset buffer.

2022 in recession, but low growth is possible in 2023

Accordingly, one might think that sanctions imposed by the EU and the West did not have a big effect. But after all, with crude oil prices around 80-90 USD (and generally high energy prices), Russia has slid into a veritable recession with a GDP decline of 2-3% in 2022. This had not happened in prior periods of high commodity prices.

However, the IMF recently (January World Economic Outlook Update) forecasted growth of the Russian economy for 2023 of 0.3% and around 2% for 2024. This shows that sanctions on Russia have led instead to a “normal” and precedented economic crisis so far and not to a full destruction of the Russian economy or financial system.

In fact, the case of Russia shows that it is very difficult to effectively sanction an economy above a certain size (e.g. a member of the G-20) with a substantial current account surplus in the short term. This holds especially true if other large economies are critically dependent on certain parts of the sanctioned economy, which is almost unavoidable in an economy of the Russian size and regarding particularly some EU member states.

But even if trade relations are capped by one part of the world economy, there is a chance to generate further export revenues with other partners. After all, “only” 60% of the world economy is sanctioning Russia – 40% of the world economy has not joined the Western/G7 sanctioning bandwagon for political and/or economic motives. For some parts of the world, economic interactions with Russia are less morally frowned upon, and “overcompliance” with Western measures or even voluntary sanctions of one’s own are hardly conceivable.  This holds especially true for some countries in Central Asia, the Caucasus or Turkey for which compliance with Western sanctions (e.g., against Iran) have not paid off in the past.

What matters is the long-term view

The rather limited effect of sanctions so far might be disappointing, particularly as it might feed into the Kremlin’s “propaganda machine.” Therefore, critics of the West’s late and cautious sanctioning may feel vindicated. However, it has also become clear in the last 12 months that mere short-term calculations are just one side of the coin. Long-term geostrategic considerations are at least as important.

Faster and tougher energy sanctions would certainly have made sense, but would also have put the West’s unity to a hard test and would ultimately not have changed the fact that sanctions regimes only unfold their real effects in the long term. Lessons from the past show that an effective long-standing sanctions regime may last 15-30 years. The sanctions against Russia would probably have to last for a similarly long time to undermine the structural resilience of the Russian economy. The close coordination initiated in 2022 with “pariah” states such as Iran or North Korea – with specific experiences under long Western sanctions regimes – suggests that Putin-Russia is probably preparing for such a scenario.

What to expect for 2023 and the medium term?

We are likely to see more gradually unfolding sanction effects this year. The current record account surplus should start to decrease or possibly half in 2023 and shrink further in the medium term. On the one hand, Russia should not be able to simply count on further volume or price increases in commodity exports. Initial economic figures for 2023 already point to a possible slump in raw materials export revenues of up to 50%. On the other hand, imports are slowly increasing again. The latter are needed to secure a certain narrow-track modernisation and cater to a certain part of private consumption in Russia. Moreover, new patterns of circumvention are also to be expected.

In most planning scenarios, Russia should be able to maintain its current account surplus well into the 2020s. But if the Western strategy of shrinking this surplus prevails in the medium run, Russia will sooner or later have to draw on its finite reserves to finance the war. So far, this has not been the case, with a budget deficit in the low single-digit percentage range and a current account surplus in the double-digit percentage range. However, recent developments as of January 2023 show a first “cosmetic” recourse to reserves in the range of USD 20 billion due to falling export revenues (with an overall reserve position of around USD 400-500 billion).

A collapse of the Russian economy in the midterm only seems conceivable if a new external shock, i.e., an additional global economic crisis, should occur. Then there is a threat of low global commodity prices so that Russian products (possibly still traded at a discount) would have to be sold at rock-bottom prices. In such a scenario, opportunistic cooperation with Russia could possibly become less economically attractive, e.g., for countries like India, Turkey or the United Arab Emirates. Although we cannot predict the time of the next big shock, a geopolitical escalation between China and Taiwan could be precisely the trigger. For here, we are dealing with even more comprehensive direct and indirect economic risk dimensions than in the case of Russia and the war against Ukraine.

Although the EU continues to put together sanctions packages (at the time of writing, the 10th package is being prepared), it can be assumed that the decisive actor in the Western sanctions regime will remain the USA. This holds particularly true as it remains a constant challenge for the EU to stay united in its sanctioning efforts. At present, Washington aims at acting even more restrictively in the financial sector in terms of extraterritorial (secondary) sanctions to deprive countries such as China, Kazakhstan, Turkmenistan, Turkey and the United Arab Emirates of their (risk) appetite to act as hubs in Russian trade and payments. Parallels can be seen here with Iran trade, where the USA also had to resort to such means.

The United States’ commitment depends on domestic political developments. But if the US stays the course, the G7 will probably continue to impose tough sanctions on Russia. However, it will take the sanctioning countries’ increasing complex ethical and moral considerations to exclude Russia even further or completely from the global financial system and/or international trade in goods other than armaments, technology, dual-use and lifestyle goods in the foreseeable future, as this might increasingly affect the Russian population itself.

This view represents the personal and private opinion of the author Gunter Deuber and not necessarily the position of Raiffeisen Bank International AG or of the Bertelsmann Stiftung.

About the author

Gunter Deuber is Managing Director and Chief Economist of Raiffeisen Bank International AG in Vienna. He collaborates closely with a team of local economists on-site in 13 countries in Central and Eastern Europe (including Ukraine and Russia), for whom he has a steering and coordination function.

More on the war in Ukraine and sanctions against Russia

Sanctions Against Russia  – What Can We Learn From the Past?

What are the economic implications for the Russian and European economies? The Russian war against Ukraine

How the War Against Ukraine can Change the Global Economy