How effectively will economic sanctions on Russia work?

Russia produces over 10m barrels per day of oil, OPEC’s second largest producer, Europe buys 40 percent of its gas from Russia and Germany buys over 60 percent of its gas from Russia. The country has over the past decade moved its foreign exchange reserves away from the USD towards gold, Yuan and other currencies. All this means that for sanctions to have any impact they have to be in place for the long term. Javed Hassan, Chairman Economic Advisory Group and former Investment banker explains.


What started with expectation of a Russian Blitzkrieg into Ukraine soon turned into a war of nerves between Russia and the West. The United States, the European Union, and the United Kingdom starting February 24, agreed to put in place varying sanctions against Russia and cut several “select banks” from SWIFT (Society for Worldwide Interbank Financial Telecommunication) – a system for global payments used by over 11,100 financial institutions across the world.

The announcement came on February 26, along with a new round of economic sanctions by the West on Russia. Along with a few others, the western countries froze Russia’s internationally held foreign reserves, currently valued at around $630 billion.

Javed Hassan, the Chairman of the Economic Advisory Group (EAG) and a former investment banker in London and Hong Kong sitting down with GVS, opined that although these actions, including removal of selected Russian banks from SWIFT, may seem and are being portrayed as being very significant, or even be described as a ”nuclear option,” in reality, while they may have some impact on the Russian economy, to say they will have a “crippling effect” is an exaggeration.

The Russian economy, he pointed out, has a balance of payments surplus, around $40bn in 2021; most of its exports are energy-related – oil and gas, and a large part are exported to China, close to $23bn.

Read more: Russia-Ukraine Conflict and its impact on Pakistan

After the Russian annexation of the Crimean region in 2014, the country had previously faced similar threats from the West. Still, severe measures such as removal from the SWIFT mechanism or freezing Central Bank reserves were not implemented at that time.

However, as President Putin pointed out during his televised national address, the country is used to sanctions and knows how to deal with them. Since 2014, Russia has reduced its foreign exchange reserves from dollars and shifted to other currencies. Currently, Russia has only around 15 percent of its reserves in dollars, 22 percent in gold, and 14 percent in Yuan.

Furthermore, the former investment banker argues that much of Russian exports are energy or food-related exports, a large proportion of which goes to countries in Europe. They are unlikely to have alternatives, especially in the short term.

The European Union imports approximately 40 percent of its energy from Russia, making it largely dependent on the country for its energy needs, and close to 60 percent in the case of Germany.

Javed Hassan argues that imposing a ban on select Russian banks was done precisely to ensure that it would unlikely affect European countries’ energy-related transactions with Russia. The SWIFT ban on select banks is more of an optics game, where NATO countries had to be seen doing something. Similarly, he argued that the freezing of Russian Central Bank assets would not significantly impact the Russian war effort as it would impact only a small percentage of the total Russian reserves.

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However, the Russian ruble has plunged nearly 30 percent against the dollar since the Russian invasion of Ukraine started. The Russian stock market has been closed since the start of the Russian invasion – for several days now (still closed at the time of writing) for fear of massive selling by internal and external players.

The Russian central bank has responded to the ruble’s devaluation by increasing interest rates from nine percent to 20 percent overnight to support the currency. According, to Javed Hassan, the fundamentals of the economy remain the same, and the central bank responded “very sensibly” by trying to control the outflow of dollars.

To this effect, Russia has also currently banned foreigners from selling assets. In the short term, they want to support their currency. He also mentions that unlike countries like Pakistan, devaluation does not hurt the domestic consumer so much, given that energy and foodstuff are not imported in Russia, a food surplus nation.

When mentioning what role the OPEC countries might play in mitigating the energy crisis by increasing supply, if Russia decides to stop its energy supply to Europe, or if sanctions are imposed by the West which inhibit import of energy resources from the country, Javed Hassan explained that it is improbable, and deemed it an unrealistic expectation that the OPEC oil-producing countries, which only account for approximately 30 million barrels per day, could fill in the vacuum that would be created as a consequence if Russian energy exports are stopped (Russia produces around 10 million barrels per day).

Read more: Russia-Ukraine conflict: Can OSCE replace NATO?

Discussing China’s potential role in the current scenario, while stating they will remain cautious, Javed Hassan explained how it had set up a similar system, CIPS, which it could offer to many countries, especially those that are not a part of the NATO, an alternative mechanism for international transactions, which countries such as Russia, Iran, and even Pakistan could start using.

This will particularly look attractive when western countries make arbitrary decisions to remove countries from global financial architecture. Countries would look to other avenues to reduce reliance on one mechanism for international transactions. The decreased reliance on one system could also help reduce the use of SWIFT and other similar modes of global payments as a tool for imposing economic sanctions.

Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He is an investment banker by training. He Tweets @ javedhassan

The views expressed by the writers do not necessarily represent Global Village Space’s editorial policy

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