When Russia launched its unprovoked invasion of Ukraine in February 2022, thus starting the biggest war in Europe since World War II, Western policymakers promised to respond with “sanctions from hell.” Yet the so-called hell has yet to come for Russia. In fact, in 2022, Russia earned even larger annual revenues from oil than in 2021, with 2022 receipts jumping by 28 percent .
And while Western sanctions seemed to have decreased Russian budget revenues in early 2023, the Kremlin has subsequently learnt to better circumvent those sanctions. Combined with a favorable oil price dynamic, the state’s energy revenues grew by 15 percent this September and more than doubled to 1.635 trillion rubles ($17.63 billion) from September to October.
This sets Russia on track to keep decreasing its budget deficit while sustaining increasingly ambitious military spending. A new 2024 draft budget projects a defense spending hike from 3.9 percent to 6 percent of GDP. Backed up by state budget handouts, the Russian public continues to support the war. Under current conditions, not only is the Kremlin likely to sustain the war in Ukraine in the foreseeable future, its commitment to funding the war might also outlast the West, where cracks are becoming more visible.
While the Western effort and willingness to endure significant costs to impose sanctions deserve much praise, so far, the sanctions have not posed insurmountable challenges for the Kremlin. At the same time, most new proposals merely double down on tools already proven to be ineffective. On top of that, short-term or partisan considerations are constantly getting in the way of strategic foreign policy goals.
Oil and natural gas revenues (but mostly oil) account for about 45 percent of Russia’s federal budget, with some variation by year. As long as the Kremlin has the money, it will keep buying loyalty domestically and circumvent sanctions internationally. The effort to reduce the cash at the Kremlin’s disposal can possibly succeed, as demonstrated by the case of Iran.
After the West introduced a set of comprehensive trade bans on Iranian crude oil and petroleum products in early 2010s, a declining economy, rising fiscal inefficiencies, and escalating inflation contributed to growing social discontent, pushing the regime toward concessions to the international community within several years. Similarly, in the case of the Soviet Union, Western constraints and sanctions truly delivered only when combined with the collapse of energy prices in mid-1980s, which crippled the Soviet economy.
But, whereas the Iranian sanctions were about cutting off most trade with Iran, the Russia sanctions are designed to punish Moscow while allowing trade with parts of the Russian economy and avoiding inconveniencing Western industry. Take the oil price cap, a tool the West chose to reduce Russia’s energy revenues. The goal is to keep Russian oil available and avoid destabilizing energy markets while essentially redirecting it to Asian customers. The price cap relies on the unique structure of the oil shipment market, which depends on Western insurers to trade.
But Russia has found a way around it, now shipping about a half of its crude oil exports with non-G-7 insurance. Once Russia has finished relocating all its oil trade to the shadow fleet, the Western leverage over Russian oil shipments may disappear entirely.
Western policymakers now plan to sanction companies that violate the price cap regulation, but they will hardly be able to seriously threaten companies with no connections to Western systems, especially those from China. Growing tensions in the Middle East, which will keep pushing oil prices higher, further undermine the effectiveness of the price cap.
In 2022, the European Union took on significant costs to embargo seaborne crude oil imports from Russia, which temporarily reduced Russia’s energy revenues. But given that China and other countries that did not join the embargo already accounted for at least 40 percent of Russian oil sales in late 2021, it would not have taken a huge jump in consumption by these countries, combined with a large world oil hike, to offset any lessening of demand by the West.
Furthermore, while EU countries took many steps to lower their dependence on Russian oil and gas, other measures left them even more dependent on Russia. As the EU worked to lower demand for Russian energy, Germany kept pursuing the decommissioning of its remaining nuclear power plants, which were eventually shut down in April 2023. This action increased demand for external energy supplies, making it harder for Germany to avoid buying Russian energy.
From the start of the war, the West attempted to limit Russia’s imports of various Western consumer goods and products. However, this policy of reducing Western exports to Russia inadvertently helped the Kremlin by leaving more dollars and euros at its disposal and helping to promote ruble stability. Indeed, countries with difficult fiscal situations and capital controls often seek to block imports on their own. Banning sales of consumer and luxury goods to Russia mostly helped deflect blame for its effects to the West, while still allowing Russia to look to China for many of its consumer needs.
While it was necessary to impose export controls on critical components in the tech and defense sector, these policies are dramatically undermined by smuggling. New data reveals that Russia now gets as many critical components for its military as before 2022, including computer components as well as electric and electronic equipment—primarily through Chinese intermediaries. The situation is particularly dire with semiconductors: Western-made microchips are the item most often found in every type of Russian military equipment investigated by Ukrainian authorities.
But policymakers are having issues prosecuting violators. The sanctions framework was largely built to go after oligarchs and Russian companies. However, Western corporate enablers are now a problem as well. While the banking system successfully ensures compliance with financial sanctions, there is no mirror mechanism on the corporate side.
The U.S. government has so far not focused on the one thing in its power to hurt the Russian economy—that is, increasing the supply of oil to the world. Since 2010, the United States has become a net petroleum exporter and arguably the de facto marginal producer that helps determine the world price of oil. Moreover, the main economic crises that Russia and President Vladimir Putin have faced in the last two decades were all driven by low oil prices, straining revenues and budget.
Yet the administration has instead attempted to limit the creation of new pipelines and avoided promoting more fracking as well as export facilities for gas processing. The administration could actually relax environmental restrictions designed to limit production as an emergency measure to accelerate a program of export promotion. Lowering oil prices of worldwide is the only way to hurt Russian revenues whether or not the Kremlin manages to skirt the embargo, and it has consistently been the one thing that has caused crises in both the former Soviet Union and Putin’s Russia.
Similarly, a more sensible approach to export sanctions would focus on targeted and more easily enforceable areas, such as Western-made tools and components with no identifiable non-Western substitutes.
One example is access to CNC machine tools, on which Russian military equipment and weapons production largely relies (the domestic Russian military-industrial complex accounts for some 80 percent of their orders). Most of these machines are produced by G-7 countries, and while Russia imported around 75 percent to 80 percent of machine tools before the 2022 invasion of Ukraine, this figure has subsequently decreased to only 70 percent. Due to their sheer size, these machines are hard to smuggle in secret, and their import ban is more enforceable than, say, that of semiconductors. Yet, to date, many of these machine tools are not subject to export control regulations.
Unless there is a coordinated, well thought-out, and long-term-oriented effort, sporadic solutions dominated by partisan considerations are unlikely to deliver. Since no economy of Russia’s size has ever been sanctioned so comprehensively, much of the sanctions design is understandably still in the making. Yet Russia is likely to remain one of the major challenges for the West for years to come. Poking the bear with a feeble stick is unlikely to contain him.
