Explained: Why sanctions are flagging

Since February 23, the day before Russia invaded Ukraine, the Council of the European Union has adopted six rounds of sanctions “to impose clear economic and political costs” on President Vladimir Putin’s government, and to “crimp the Kremlin’s ability to finance the war”. .

Western governments, including the US and UK, have cut off major Russian banks from SWIFT, the interbank messaging system to enable cross-border payments. They have frozen about $315 billion of the $550 billion in foreign exchange reserves of the Central Bank of the Russian Federation (CBR) held in currencies and gold within their jurisdictions, as of January 1.

On April 6, the White House released a statement that the “most impactful, coordinated, and widespread economic restrictions in history” would cause Russia’s GDP ‘shrinks by up to 15 percent this year’eliminating 15 years of economic gains.”

Did he confirm the intention of the West in reality?

More than four months into the war, the story hasn’t exactly followed the scenario predicted by the West. First of all, the latest median forecast for a decline in GDP for 2022 – based on a survey of 27 economists from various organizations (including the likes of Credit Suisse, Goldman Sachs, and JP Morgan) conducted by CBR between May 25 and 31 – at 7.5%. That’s better than the -9.2% average growth projected in a previous survey from April 13-19.

Average expectations for consumer price inflation for the year as well decreased from 22% to 17% between the two surveys.

The sanctions initially led to a free fall of the Russian ruble, from around 76 against the US dollar in mid-February to a low of 158.3 on March 7. February 28, which was aimed as much at boosting the currency – which US President Joe Biden derided as “mounds” – as much as it aimed at curbing inflation risks.

But with the ruble bouncing back to 75-76 levels in the second week of April – it is currently trading at a seven-year high of 53.4 per dollar. The central bank cut the key interest rate to 17% on April 8, to 14% on April 29, 11% on May 26, and to 9.5% on June 10.

With the ruble rising, inflation trending downward (and not up, as the White House predicted) and GDP unlikely to shrink as much as expected, Western sanctions have not had the desired effect.

Nor has Russia’s foreign trade really been affected. The surplus of the country’s exports of goods and services over importsFrom 44.5 billion dollars in the period from January to May 2021 to 124.3 billion dollars in the period from January to May 2022. The same applies to the total current account surplus – from 32.1 billion dollars to 110.3 billion dollars – for similar periods.

Why do the sanctions seem not to have the desired effect?

The main reason is the dependence, especially of European Union countries, on energy imports from Russia. In 2021, Russia accounted for 25.7% of petroleum oil, 44.5% of natural gas, and 52.3% of coal imported by the 27-nation bloc.

During the first 100 days of the war, from February 24 to June 3, Russia’s revenue from fossil fuel exports totaled 93 billion euros ($98 billion), according to the Finland-based Center for Research on Energy and Clean Air (CREA).

This included €46 billion in crude oil, €13 billion in refined petroleum products, €24 billion in pipeline gas, €5.1 billion in liquefied natural gas, and €4.8 billion in coal. Out of 93 billion euros, it was The EU share alone was 57 billion euros or 61%.

In the sixth sanctions “package” on June 3, the European Union decided to phase out imports of crude oil and refined products from Russia for six and eight months, respectively. The temporary exemption has been granted to countries such as Hungary and Slovakia, which import crude oil via pipelines and “have no viable alternative options”.

The main reason is the dependence, especially of European Union countries, on energy imports from Russia. In 2021, Russia accounted for 25.7% of petroleum oil, 44.5% of natural gas, and 52.3% of coal imported by the 27-nation bloc.

This was preceded by an outright ban on imports of Russian coal from August, as part of a fifth round of sanctions on April 8.

It remains to be seen how successful the plans to phase out imports will be, in terms of implementation on the ground. The test will be in winter, when energy demand is at its peak.

Fatih Birol, Executive Director of the International Energy Agency, recently warned that Europe is at risk of energy rationing, particularly if we have a harsh and long winter, and if cold weather coincides with increased demand in China after Covid lifted lockdowns there.

The European Union has not yet announced any ban on natural gas imports from Russia. This, even with the Russian state-owned energy giant Gazprom cut gas supplies to nearly a dozen countries in the European Unionincluding Germany, France and Italy, over the past few weeks.

Did China and India have a role to play in this situation?

It is important that China and India emerge as major buyers of Russian fossil fuels. CREA’s latest tracking shows Russia’s cumulative oil, gas and coal exports to the European Union since February 24 at around €64.4 billion.

But among individual countries, China (16.6 billion euros) has overtaken Germany as the largest importer from Russia. At number 8 is India. The value of its imports during this period amounted to 3.7 billion euros, of which 3.2 billion euros were oil, and the rest coal.

While the European Union is trying hard to distance itself from Russian energy, Moscow has aggressively diversified its exports towards China and India. China was the world’s largest importer of crude oil in 2021, and India ranked third after the United States.

in May, Russia has overtaken Saudi Arabia to become the main supplier of crude to China. From 2021 to 2222, Russia was the ninth largest exporter of crude oil to India. However, by May, it had jumped seven places to replace Saudi Arabia to become No. 2 after only Iraq.

By continuing to sell to the European Union, while at the same time increasing exports to China and India by offering deep discounts on international prices, Russia effectively eased Western sanctions.

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Does this mean that sanctions targeting Russia have hurt the West?

The table shows the share of oil and gas in Russian merchandise exports at almost 50% in 2021. It was 66% during the period 2011-2014, when crude oil prices averaged more than $100 per barrel. Higher prices are benefiting Russia again, although its average oil production has fallen to 10-10.1 million barrels per day in April and May, from 11-11.1 million barrels per day in February and March.

As Russia increases its efforts to find alternative markets, and the world works to find ways to trade with it, the country’s exports may not drop significantly from $494 billion in 2021.

Again, it’s not just a fossil fuel. In the coming months, one can expect Russia to increase its exports of wheat and fertilizers. Being the world’s largest supplier of palladium and nickel — central inputs to emissions control systems and electric vehicle batteries respectively — along with ferroalloys, chromium and vanadium (needed to produce steel), Russia is easier to deal with than it is for Cuba, Iran or North Korea .

Perhaps Europe and the West will discover that sanctions may harm them more than they harm Russia.

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