The Russian economy appears to have survived three years of war despite being under heavy sanctions by the US, European Union and members of the G7 bloc.
With Istanbul set to host crucial peace talks between Russia and Ukraine, Moscow’s delegation will potentially start from a position of strength, with the country emerging unscathed from what were supposed to be crippling economic sanctions by the US-led Western bloc.
After a relatively small contraction of 1.3 percent at the outset of the war in 2022, the Russian economy soon rebounded and recorded a growth rate of 3.6 percent in each of the two subsequent years.
The resilience of the Russian economy in the face of unprecedented sanctions has shocked Western countries, which expected to bring Moscow to its knees by cutting off the main source of revenue: oil and gas exports.
Sanctions limit a country’s ability to trade with the outside world. Once sanctioned, a business or bank can’t make transactions in major currencies or use SWIFT, the mainstay of the global payments network that banks rely on to process cross-border trade.
Aimed at reducing Russia's ability to finance the war, the Western bloc sanctioned Moscow’s energy exports, which traditionally accounted for roughly 40 percent of annual government income.
But Russia seems to have successfully bypassed these trade barriers through the use of intermediaries, ‘shadow fleets’, and alternative payment systems.
Two kinds of sanctions
Sanctions against Russian energy exports are mainly of two types. The first type of sanctions prevents Russia from selling its seaborne oil to EU members. Around 90 percent of EU oil imports from Russia were covered under this embargo.
The second kind of sanctions aims to limit Russia’s income from energy sales while ensuring no sudden supply shocks in the global market.
The Western powers tried to strike a balance between the twin objectives by placing a price cap of $60 a barrel on Russian oil exports.
Under these sanctions, companies operating in European and G7 nations are not allowed to provide shipping and insurance services for Russian crude oil trade unless the transaction is verifiably below the price cap of $60 billion a barrel.
To compensate for the loss of the EU market, Russia turned to new buyers, like China, that are not completely aligned with the Western sanctions regimes.
Use of a ‘dark fleet’
After 2022, Russia resorted to using a so-called ‘dark fleet’ to transport oil to buyers in China. This fleet consists of old vessels with no insurance and obscure ownership, and it has grown to an estimated 1,400 ships.
Russia has reportedly invested $10 billion in developing its shadow fleet to continue trading Russian oil at market prices.
These vessels use “flags of convenience” from Gabon, Liberia, Malta, the Marshall Islands, and Panama – countries that are either less inclined or unable to enforce Western sanctions.
In exchange, Russia receives payments in the yuan as opposed to the dollar, mitigating the impact of sanctions.
Even though the yuan isn’t among the world’s leading reserve currencies – such as the dollar, the euro, and the yen – it is arguably the “only relatively stable, widely traded currency” issued by a non-sanctioning authority.
Russia used the proceeds of its energy sales to China to import Chinese goods worth $111 billion in 2023.
The ultimate winner in the drawn-out sanctions game appears to be China, which let Russia leapfrog Saudi Arabia in 2023 to become its biggest crude oil supplier.
A market for ‘sanctioned oil’
According to a report by the Atlantic Council, Russia along with Iran and China have created an “alternative market of sanctioned oil”. Payments are denominated in the Chinese currency while oil is transported via tankers that operate outside of maritime regulations.
“Oil revenue from China is propping up [the Russian economy] and is undermining Western sanctions,” it said.
Moscow also appears to be helping China in its effort to make the renminbi an international reserve currency. A growing number of countries seem to be realising the importance of moving their international reserves into currencies and institutions, which are perceived to be less vulnerable to possible sanctions.
The realisation came after Russia’s central bank was refused access to $300 billion of its international reserves due to the sanctions imposed after the Ukraine invasion.
Analysts say sanctions would have been effective had non-Western economic powers like China and India also joined the Western bloc’s attempt to subdue the Russian economy.
“Most of the Global South perceived the war in Ukraine as a regional European conflict and the West as hypocritical and self-interested… it saw absolutely no reason to sacrifice its own economic interests to shore up Western ones,” says Alexander Libman, a professor of Russian and East European politics at the Freie Universität Berlin.
