February 21, 2023

IntelBrief: Russia Tries to Parry Western Sanctions

AP Photo, File

Bottom Line up Front

  • U.S. and European sanctions – a core component of the allied response to Russia’s invasion of Ukraine – have damaged Russia’s economy but have not crippled Moscow’s war effort.
  • Russia has been able to manage the financial effects of Western sanctions as well as redirect its exports of oil and gas from European markets to China, India, and other buyers.
  • Some key semiconductor and other technologies are still reaching Russia, but sanctions have complicated Russia’s efforts to obtain the highly sophisticated chips needed for precision-guided weaponry.
  • Russia has been able to exploit the willingness of governments in the Caucasus and elsewhere to allow the flow of Western industrial equipment and other vital goods to Russia.

A core component of the U.S. and European response to Russia’s unprovoked invasion of Ukraine has been the imposition of sweeping sanctions on the pillars of the Russian economy, particularly its exportation of oil and gas, its banking system, and its importation of high technology and industrial equipment. The objective of the sanctions - planned to work incrementally over time - has been to deprive Moscow of the economic wherewithal to continue its aggression in Ukraine and to promote public and inner circle pressure on Russian President Vladimir Putin to negotiate an end to the conflict. To foster splits within Putin’s regime, some of the sanctions specifically target Russian oligarchs as well as the Wagner Group private military organization – which is increasingly active on the battlefield in Ukraine as well as areas of the Global South where Moscow seeks to exert influence. Affiliates and facilitators of Wagner, including air transportation and other entities incorporated in several different countries, have been sanctioned as well.

Western sanctions have not, to date, caused Putin to seek substantive talks with Ukraine to end the aggression, clearly demonstrating the limitations of sanctions to cause determined leaders to change course. Some argue that Russia’s ability to both prepare for and subsequently reduce the economic and political impact of sanctions accounts for their marginal effectiveness to date. Financial measures by Russia’s Central Bank and other officials were able to cushion the fall of Russia’s currency, the ruble, and limit Russia’s overall economic output decline in 2022 to about 3%, according to the head of Russia’s Central Bank. A gross domestic product (GDP) decline of that magnitude is far less than the 10% downturn Western officials expected from the Russia sanctions architecture. Sergey Aleksashenko, a former first deputy chairman of Russia’s Central Bank, told a panel discussion in Washington in January that “Instead of growth, [Russia’s economy is in] a decline. But saying all of that, it’s definitely not a collapse. It’s not a disaster…We may not say that…Putin lacks funds to continue his war. No, it’s not true.” Western sanctions on Putin’s allies, which have included the seizure of yachts and other high-value assets from some of Russia’s many oligarchs, have not to date shown to have a significant influence on Putin’s decision-making on the Ukraine war.

Some attribute Russia’s ability to weather the sanctions regime to European reluctance to immediately impose sanctions on Russian oil and gas exports. At the time of the Ukraine invasion, European countries imported about 40 percent of their natural gas and more than 25 percent of their oil from Russia. The dependence caused European leaders, particularly in Germany but backed by inflation-wary U.S. economic policymakers, to agree to gradual and stepwise restrictions on Russian energy imports. An EU ban on the importation and insuring of seaborne Russian oil went into effect only on December 5, raising the possibility that sanctions on Russian oil exports might yet put unbearable pressure on the Russian economy. European countries have also successfully arranged alternative sources of natural gas, substantially reducing Moscow’s economic leverage with which to try to compel the NATO countries to cease supplies of military equipment to Kyiv. A mitigating factor in Moscow’s favor has been Russia’s ability to re-route much of its oil and gas sales to China, India, and other buyers who have sought to remain engaged with Russia despite openly questioning its aggression against Ukraine.

If economic sanctions might have a medium to longer-term effect on Russia’s war effort, a more immediate question is whether the sanctions regime is preventing Russia from acquiring key technology and components that it can use on the battlefield. The evidence on that question appears mixed. Reportedly semiconductor chip exports to Russia by China and Hong Kong increased during 2022, compensating, to some extent, for supplies that Moscow formerly received from other suppliers. The increased chip supplies from China are consistent with Beijing’s efforts to straddle a middle ground with Moscow – expressing concern over Putin’s decision to invade Ukraine while also refusing to join or comply with Western sanctions on Russia. However, according to the U.S. Commerce Department, the most technologically advanced chips - which are generally made in the United States and Europe and are needed for precision-guided systems - are not reaching Russia, rendering the continued flow of more basic chips of limited value to Russia’s war effort.

Russia also has been able to circumvent sanctions to obtain needed parts and supplies to maintain its industrial production – a critical factor given that Moscow is converting some of its civilian production capacity to military manufacturing. Russia-EU trade has declined since the invasion, but many European companies continue to trade with Russia in basic, non-luxury civilian goods, in accordance with U.S. and European sanctions regulations. Sophisticated industrial equipment, on the other hand, can have military uses, and Western sanctions generally prohibit them for sale to Russia. Attempting to address its pressing need for equipment and other goods, Moscow has been able to expand its trade routes through Georgia – a former Soviet republic that borders both Turkiye and the Russian Federation and can therefore serve as a conduit for European goods. As do the leaders of most ex-Soviet states, Georgia’s leaders seek to avoid conflict with the unpredictable Russian leader. The Georgian government insists that it strictly enforces Western sanctions and that it has denied many shipments. Yet, opponents of the ruling party in Parliament say that goods and money still flow through largely unhindered. Armenia and Azerbaijan, two other Caucasus states, have reportedly cooperated with the Georgia-Russia trade traffic. Azerbaijan’s involvement is of particular significance because Baku, an ally of Turkiye, is consistently at odds with Russia over Moscow’s support of Azerbaijan’s historic adversary, Armenia. Lines of trucks waiting to cross into Russia from Georgia often extend for miles, and the long wait prompts many drivers to take a detour and enter Russia through Azerbaijan. The emergence of the Caucasus as a key link in commerce to Russia highlights a potential loophole in EU sanctions policy. If US and EU officials are unable to plug the many holes in the Western sanctions regime, the prospects for crippling Moscow’s war effort through sanctions will diminish.

This IntelBrief is part of a series reflecting on the 1-year anniversary of the invasion of Ukraine.