EUROPEAN SANCTIONS ON RUSSIA: A DOUBLE-EDGED SWORD?

What was their impact?

According to estimates, these sanctions have put Russia’s gross domestic product (GDP) on a path to be 8% smaller in 2026 relative to its pre-war trajectory, accounting for a difference of $190 billion (Flatley & Nardelli, 2023). Nevertheless, given that the IMF has repeatedly revised its predictions for the Russian economy (with the 2.1% decrease observed in 2022 being significantly less severe than the anticipated 10% decline foreseen by experts) (The Bell, 2023), these numbers must be analysed cautiously.

Still, Russia’s oil revenue has been heavily impacted. In July of this year, it had decreased by virtually two-fold when compared to the year prior (Flatkey & Nardelli, 2023). This is due to the fact that selling oil with the restrictions in place has become much harder. Russia can no longer count on the EU as its most important buyer, and the reduced demand has forced it to decrease its prices. At least officially, selling to new markets has also not entirely made up for this loss: with the price caps still in place, there is only so much that Russia can hope to export using EU infrastructure (Mufson et. al, 2022). 

Moreover, the sanctions have put pressure on the ruble, resulting in one of the steepest depreciations in emerging markets this year as a result of heavy government spending against the backdrop of a falling trade surplus (which shrank by more than $140 billion in the first seven months of 2023 compared with the previous year) (Flatley & Nardelli, 2023). This has also impacted the everyday lives of Russians, who have had to cope with the resulting inflation and increased cost of living (particularly in big cities) (Levada Center, 2022; Wall Street Journal, 2023). The sanctions have also led to the exodus of Western brands outside the country: Nike, MacDonald’s, Starbucks and dozens others have moved quickly to sever ties with the country (Wall Street Journal, 2023), making it more difficult for Russian citizens to access certain consumer goods.

Hence, despite Moscow’s chest-thumping, European measures have had a tangible impact on the country.

What are their limitations?

Yet, one might also argue that the impact of those sanctions is still a long way off from triggering the “collapse of the Russian economy” that European leaders had predicted (Lough, 2022). 

To begin with, Russia had prepared its economy in order to withstand Western financial pressures. Using the lessons from the 2014 Crimean sanctions, it had stockpiled a vast currency reserve (the fourth largest in the world), tightened budgets and decreased dependence on certain European imports (Fisher, 2022). As a result, the country started the invasion with low public debt, a current account in surplus and the National Wealth Fund flush with cash (Flatley & Nardelli, 2023). This acted as a “cushion” that helped the country face Western restrictions.

But the factor that has perhaps most alleviated the effects of the sanctions is not Russia’s preparedness, but rather the loopholes that exist within the sanctions themselves. This relates to the existence of third-party buyers/sellers that have helped Russia to keep buying from and selling to the EU. For example, whilst the EU might have banned Russian imports of oil and other natural resources, Moscow has been selling its fossil fuels on international markets that the EU then buys from, hence meaning Russia is still indirectly selling to Brussels (Hirtenstein, 2022). These same intermediaries (often based in Dubai and Hong-Kong) have also helped Russia develop an entirely new supply-chain where it can sell to new, untracked destinations (The Economist, 2023). Whilst as previously explained, official oil revenues are far off their pre-war levels, the opaque market that has developed as a result of the war is more difficult to control and has most likely helped to alleviate the impact of the sanctions.

Moreover, as one of the world’s biggest producers of oil, gas and raw materials, Russia maintains long-standing and lucrative partnerships with other countries which have proved unwilling to sever ties with Moscow (Gamio & Swanson, 2022). This is particularly the case of countries which have insisted on their neutrality in the conflict, such as India, China and Turkey (Wang, 2023). By increasing trade with Beijing, Ankara and others, the Kremlin has managed to develop alternatives to the European market. Although these partnerships are yet to prove as fruitious as the one with Brussels ( with regard to energy exchanges), they have been growing and have certainly helped Moscow mitigate the loss of its European trade partner. As a matter of fact, Russia is currently exporting 8.3 million barrels of oil a day - the highest level since April 2020, according to the International Energy Agency (IEA). The biggest importers are India and China (BBC, 2023).

How did the sanctions affect Europe? 

The sanctions have also elicited far-reaching consequences that have reverberated throughout the EU, producing the reputed “boomerang effect” (Sapir, 2023). The sanctions have led to diplomatic tensions and a recalibration of geopolitical relations, prompting the EU to look for alternative sources of energy and diversify its trading partners. Russia has been one of the world’s most important producers of oil, gas and raw materials (Gamio and Swanson 2022) and therefore, a pillar in the global economy (Congressional Research Service, 2023). For instance, in 2020, Russia imported $220 billion of products from the rest of the world (Gamio and Swanson, 2023). As such, the following section will focus on two areas that were affected by the knock-on effect of the embargo for the EU:  trade and economic interdependence and energy disruptions and diversification.

Trade and Economic Interdependence 

While the EU sanctions were aimed at Russia, they also had unintended consequences for EU member states. European businesses that had established trade and investment ties with Russia suffered due to reduced market access. For instance, Volgswagen sold its plant for solely $135 million, when approximately $842 million was spent in building it (Eddy, 2023). The aforementioned example is solely one of several instances where European businesses faced difficulties due to the sanctions. Estimates indicate that the direct losses from operations in Russia are thought to be at least $100 billion for some of Europe’s biggest companies (Hollinger, Sugiura and Telling, 2023). 

Other than the direct impact on European businesses, the embargo has also impacted international trade flows. A matter of critical concern is the global food crisis which was exacerbated by Russia’s decision to block exports of food and grain from the region by terminating the Black Sea Grain Initiative (BSGI), a deal vital for the stabilisation of food prices (Picheta, Krever and Chernova, 2023). The deal was brokered by Turkey and the United Nations (UN) and it was issued that Russia would allow Ukraine to safely export grain and other foodstuffs from various blockaded Black Sea ports (ibid.).