Examining the Impact of Sanctions on Russia One Year Later
In the wake of Russia’s invasion of Ukraine in February 2022, the United States and its allies imposed a range of economic sanctions on the country in an effort to limit its access to international finance, curb its oil exports, and blunt its military edge. One year later, the efficacy of these sanctions is still a matter of debate.
Russia’s Federal Statistics Service announced this week that the country’s gross domestic product had contracted by 2.1 percent in 2022, a far less severe contraction than had been predicted by some analysts. Earlier sanctions had sought to limit the country’s access to international finance, curb pricing for its oil exports, limit technology sold to it, and more.
Some have argued that these sanctions have not actually stopped the European Union from buying Russian fossil fuel products, which are still its second largest import. Others point out that, while the sanctions have caused a disruption, some estimates still predict a looming contraction of Russia’s economy. The Institute for International Finance predicted a 15% fall in Russian GDP in 2022, while JP Morgan envisaged a 12% contraction.
China and India have replaced the EU as Russia’s top customers for fossil fuels, and the war has resulted in two key changes: (i) Russia is selling its oil at a discount – about USD30 less than the Brent officially – and The list of its top buyers is now vastly different. As of February, the EU remains the second largest importer of Russian fossil fuels — trailing China, but still larger than India.
Russia can finance its budget deficit domestically by running down assets in the National Wealth Fund, by issuing bonds on the domestic market, and by tapping the NWF to finance the fiscal shortfall. As of February 2023, the NWF assets were estimated at RUB10.8trn, equivalent to around USD155bn. Since about one third of these assets is estimated to be frozen due to Western sanctions, liquid NWF assets amounted to approximately RUB7trn, or USD100bn, equivalent to 4.5% of GDP.
Whether the sanctions have worked as intended is still up for debate. Supporters say the punishments are not designed to crush Russia’s economy or end the war, but to send the message that violating international norms and invading a democratic neighbor will be met with a strong coalition response.
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