Russia’s economy shrank 4 percent in the second quarter from a year earlier, according to data released by Russia’s federal statistics service Rosstat. The drop, while significant in absolute terms, was not as drastic as expected by Russian and some Western observers. “June data suggests that the contraction in Russia’s economy appears to have bottomed out as the situation in some sectors stabilizes,” Sergey Konygin, an economist at Sinara Investment Bank, told Portal.
Hungarian Prime Minister Viktor Orban claimed in a speech last month that the European Union’s sanctions strategy against Russia had failed. “A new strategy is needed, which should focus on peace talks and crafting a good peace proposal…instead of winning the war,” he said. Orban said the West’s strategy is based on four pillars – that NATO-backed Ukraine can win a war against Russia, that sanctions will hurt Russia more than Europe, that the rest of the world will support Western punitive measures against Russia, and that sanctions will do would critically weaken Russia. “We are in a car that has flat tires in all four. It is absolutely clear that the war cannot be won this way,” Orban said.
The last three “hoops” have created a constellation of unexpected challenges for the western sanctions regime.
The Central Bank of Russia took swift action to protect the ruble from a spate of US and EU financial restrictions following the invasion of Ukraine. Far from being reduced to “rubble” like President Joe Biden proclaimed in March, the ruble became one of the world’s best-performing currencies this year.
Even as Moscow takes unprecedented macroeconomic steps to contain the damage from sanctions, Russian policymakers are honing their tools to circumvent or otherwise mitigate certain sanctions. Citing a running list from Yale University’s Chief Executive Leadership Institute (CELI), supporters of the sanctions regime have noted that over 1,000 companies have “restricted” their operations in Russia.
While the sheer scale of the Western-led financial disengagement from Russia seems overwhelming, the reality on the ground is a bit more complicated. According to a recent DW report, the Russian authorities have successfully facilitated a wide range of “parallel import” programs. From Levi’s jeans to Apple iPhones, numerous everyday and luxury products are still available in Russia’s metropolises, although these manufacturers no longer supply the Russian markets directly. Such goods typically enter Russia through unauthorized imports from companies based in former Soviet countries, including Kazakhstan, Belarus and Armenia.
Moscow has opened the floodgates to such activities by lifting restrictions on the resale of many types of goods purchased abroad. These transactions, also known as gray market sales, have totaled $6.5 billion since May and are expected to reach $16 billion by the end of the year, according to Deputy Prime Minister and Industry and Trade Minister Denis Manturov. Other products and services continue to be available through rebranding and knock-off ventures. McDonald’s and Starbucks, both of which ceased operations in Russia in the months following the invasion of Ukraine, have been replaced by successor companies offering nearly identical products with similar branding. Courts would normally quickly put a stop to such blatant copycat companies, but Russia’s legal system is in no mood to listen to Western companies’ patent and infringement claims at a time of unprecedented hostility between Russia and the West.
Perhaps the biggest long-term challenge to the West’s campaign to pressure Russia over its invasion of Ukraine is the fact that the world’s major economic powerhouses have not only refused to join the Washington-led sanctions regime, but their trade – and financial ties continue to deepen Moscow. Both India and China have increased the pace of their energy imports from Russia over the past six months. There have been credible reports of refined Russian oil being sold to European and US importers. Russia’s energy export revenues have skyrocketed following the barrage of Western sanctions earlier this year.
Experts say it could take years for the full impact of sanctions on Russia to manifest itself. Even then, there is no guarantee that the projected economic stagnation will materialize on a sufficient scale to starve the Kremlin’s war machine or otherwise bring about meaningful, positive changes in Russia’s foreign policy. Moscow, driven by the belief that its vital interests depend on victory in Ukraine, believes it can outlast the West economically and on the battlefield. Russia has so far largely managed to ease the pain of sanctions, shifting its strategy in Ukraine from trying to quickly seize major cities to a grueling war of attrition.
European consumers, meanwhile, are being rocked by skyrocketing heating and electricity bills as officials scramble to contain the energy crisis sparked by what experts have described as the EU’s ill-conceived plan to shift away from Russian energy imports. With Germany reportedly on the brink of recession, mounting economic challenges in Europe have reignited concerns that EU nations could break away from Western sanctions regimes. Even before Russian energy giant Gazprom officially threatened to cut off gas supplies to European customers, polls showed that a majority of Europeans – including 49 percent of Germans – preferred a policy aimed at a negotiated solution rather than Russia’s outright defeat. As the war drags on with no end in sight, these growing trends risk splintering the West’s united front on Ukraine before the sanctions regime succeeds in taking a decisive toll on Russia’s economy.
Mark Episkopos is a national security reporter for National Interest.