The deep political crisis in relations between Russia and the West after February 2022 has led to large-scale changes in the application of economic sanctions. There was a significant increase in the speed, focus and scope at which sanctions could be applied to a country.
At first glance, sanctions policy is a narrow and even technical issue. Financial, trade, transport and other restrictive measures are only one of the tools available to the great powers to achieve their political objectives. However, the transformation of sanctions, as a tool, gives an idea of the much broader changes of the modern economy under the influence of political risk. This “tsunami of sanctions” against Russia is the sign of a bifurcation point. Its passage will either launch a reformatting of global power relations or, alternatively, preserve American hegemony in the global economy and in finance.
After the end of the Cold War, the United States was able to consolidate its role as the undisputed leader in world finance. The US dollar is still the most popular way to make international payments, and US financial institutions are hubs for global financial transactions. A side effect of this leadership has been the ability of US authorities to trace financial ties around the world. Since the early 2000s, against the backdrop of the fight against international terrorism, Washington has steadily increased its ability to control financial transactions, stopping them where the issue concerns national security. Thus, the blocking of financial sanctions and the freezing of foreigners’ assets have become widespread.
A similar tool had existed before; but American leadership in global finance has greatly enhanced its effectiveness. In addition to terrorists, other people are increasingly placed on blocked lists. Few doubted the advisability of blocking international criminals, drug traffickers or WMD manufacturers. But the list of blocked individuals began to replenish massively for more controversial reasons. Blocking sanctions were increasingly used to deter hostile states. Given the globalization of world finance and US leadership, Washington’s blocking sanctions have become tantamount to a suppression of customary international transactions. Targeted or “smart” sanctions against individuals or companies have proven extremely damaging. For example, blocking the backbone companies of a particular target country could lead to huge losses, as happened in the case of the sanctions against the oil and gold sectors in Venezuela or against the oil industry in Iran. . Financial blocking sanctions have also been combined with more familiar sanction instruments, including export or import bans.
It would seem that the rapid economic growth of China and the European Union should have interfered with American leadership and reduced the severity of the sanctions. However, it turned out that the size of a given economy is not commensurate with the possibilities of using it for political purposes. Neither the European Union nor China has yet managed to catch up with the United States in terms of the extent of the application of restrictive measures. To date, only the United States has been able to create a globally functioning sanctions machine, including the application of extraterritorial (secondary) sanctions and a broad interpretation of US jurisdiction. For example, US authorities apply financial sanctions and even criminal prosecution for dollar transactions with sanctioned persons, even against foreign individuals and organizations.
Over the past 12 years, EU financial institutions have paid over $5 billion in fines to the US regulator for violation of US sanctions. The EU itself is strengthening its sanctions capabilities by actively using blocking financial sanctions. The UK has also been very active since leaving the EU. Britain often imposes sanctions as part of a coalition. Other Western economies mirror the moves by the UK – Switzerland, Japan, Australia, etc.
Russia became a major target of sanctions in 2014. However, until 2022, their volume was relatively modest. The 2019 IMF report noted that the sanctions had slowed the growth of the Russian economy only 0.2% per year, and their role is incomparable with oil prices and the regulatory policy of the Russian authorities themselves. The situation changed dramatically after the start of the military operation in Ukraine. Over the past few months, the United States and its allies have used almost every possible sanction against Russia. Large banks and industrial companies have been hit with blocking sanctions. Russian financial reserves and assets of Russian citizens worth hundreds of billions of dollars have been frozen. It is prohibited to supply a wide range of goods and services to Russia, including electronic and industrial equipment. Bans have been introduced on the import of Russian oil and oil products, and restrictions have been imposed on their transportation to third countries. Sanctions affect Russian coal, gold, ferrous metallurgy products and more, including transportation restrictions.
A significant number of non-Western countries refused to apply the sanctions against the Russian Federation. However, companies in many of these countries are afraid to violate US sanctions for fear of administrative or criminal prosecution by US authorities. A recent example is the massive suspension by banks in friendly countries of cooperation with the Russian payment system Mir.
Despite the colossal damage from the sanctions, the Russian economy has shown a high threshold of stability. The authorities have succeeded in maintaining financial stability. Export deliveries are redirected to Asian markets. Critical imports are replaced by substitutes from friendly countries. Russian companies are actively exploring the niches of Western companies that have left the country. The process did not go smoothly everywhere, and it is far from always possible to replace the assets that are given away with adequate analogues. However, the very system of life under sanctions is being built in a coherent way and has a real chance of stability.
It will be of crucial importance for Russia to organize payments in alternative currencies to the dollar and the euro. The Chinese yuan has become the most sought after option. The main reason is the volume of the Chinese market and the high density of Russian-Chinese trade. Moreover, China itself is increasingly the target of US sanctions. In recent years, Beijing has vigorously sought technological independence from foreign countries. Sanctions against major Chinese telecommunications companies only fuel China’s efforts. The creation of channels of financial and trade relations with Russia independent of foreign actors will be the first major precedent for an alternative mechanism of economic relations involving two great powers. However, here too, quick and guaranteed breakthroughs are hardly to be expected. A large number of Chinese companies operate in Western markets and do not want to lose them to Russia. Moreover, the volume of the Russian market is much smaller. The same logic applies to Russian partners in India and many other friendly countries. Making new connections will take considerable time and effort.
The success of these efforts is not guaranteed, although Russia, under current conditions, has no choice but to radically restructure the mechanisms of its financial and trade relations with foreign countries. Strictly speaking, the ability of Russia and its partners to achieve such an outcome will reveal the flaws that exist in the current system of American leadership. A negative outcome of such a bifurcation point will be the marginalization of Russia in global finance and trade at the level of the DPRK or Iran, while other major non-Western players, even the closest allies Russia, will maintain tight integration into the US-centric system. . A positive outcome would be the restructuring of global finance, which would leave room for the formation of an alternative hub such as China or several similar hubs. Such a scenario would give Moscow a wider room for maneuver and would promote the diversification of its external economic relations.
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