Sanctions on Russia have had mixed results after two years of war, inflicting real pain on the Russian economy, but the lack of effective enforcement has muted their effect, a panel organised by Brussels-based think tank Bruegel to assess the efficacy of the sanctions with experts Elina Ribakova of the Peterson Institute for International Economics (PIIE) and Ben Higlenstock of the Kyiv School of Economics (KSE) said on March 6.

Extreme sanctions were imposed in the first week of the war, but Ribakova lamented there was a lack of a coherent framework for setting objectives and communicating the goals of the sanctions in the early days and both experts pointed out that the really pain sanctions on products like oil were only imposed after the first year in 2023, so it remains too early to judge the efficacy yet.

“We don’t have a clawer framework to set up objectives and how to communicate on that,” said Ribakova. “ The message has been a little confused, especially in 2022.”

Nevertheless, both speakers conceded that enforcement of the existing sanctions remains an issue and “more work needs to be done,” said Higlenstock.

Part of the problem has been that Russia has been quick to find work-arounds to avoid the oil sanctions in particular largely by investing heavily in its so-called shadow fleet that has put all of Russia’s oil transport outside the reach of the oil price cap sanctions regime. As a result the oil embargo and price cap failed to have a significant impact on the Russian economy, especially in 2022. That is starting to change in 2023 after the G7 imposed the twin oil embargos on crude on December 5 2022 and oil products on February 5 last year.

“Lots of key sanctions were not in place in 2022 like the oil embargos so it was raining foreign exchange. It was a wonderful situation for Russians ,” said Higlenstock. “That has dramatically changed in 2023. Then there was a significant decline in oil gas revenues also as Russia failed to weaponize its gas flows to the EU.”

Conversely, Higlenstock presented a more nuanced view. While acknowledging the media's scepticism regarding sanctions' effectiveness during the recent round of articles on the second anniversary of the start of the war. However, he went on to argue that sanctions have significantly impaired the Russian economy by curbing foreign exchange inflows and inputs for military production. He also pointed out that while Russia benefited from the spike in oil and gas prices in 2022, lead to a new all-time record current account surplus of $268bn, that surplus fell to around $50bn last year after the oil sanctions and oil price cap sanctions were imposed last year and so sanctions were having a significant impact on the Kremlin’s finances.

Higlenstock also took issue with the widely publicised fact that Russia’s GDP growth was a robust 3.6% in 2023 - far more than was expected at the start of the year – especially compared to the recession many of the Western countries are facing as a result of the bounce-back effect of the sanctions. Higlenstock pointed out that the strong Russian growth should be no surprise as the economy is benefiting from a very big fiscal stimuli of massive military spending, but the data does not accurately reflect the sanctions' impact, especially as major sanctions were not fully in place in 2022. Despite the strong growth, the situation in 2023 has seen a notable decline in Russia's oil and gas revenues, alongside restricted access to approximately $300bn of Central Bank of Russia (CBR) reserves that is severely constraining the central bank’s ability to stabilise the economy.

Both speakers concurred on the need for heightened enforcement and implementation to counteract Russia's evasive manoeuvres and their constant revision to counter Russia’s evasions.

“It's a game of cat and mouse,” said Higlenstock. “We have to step up enforcement. Sanctions is a moving target. Russia is very good at adjusting; reworking supply chains, finding ways to evade sanctions and we have to respond to that.“

Ribakova specifically critiqued the oil price cap's implementation, arguing it aimed to serve multiple objectives but ultimately had limited success in rerouting oil flows and inadvertently bolstered Russia's investment in a shadow fleet for oil transportation.

However, after a year of oil sanctions the Department of the US Treasury's Office of Foreign Assets Control (OFAC) has recently introduced some much more effective sanctions on the shadow fleet.

“The OFAC sanctioned 27 ships as while most of these ships carry Liberian flags, they outsourced the registration process to a firm in North Vagina which puts them in reach of sanctions. These ships have been effectively put out of business and are now circling around India with full loads, unable to land,” Higlenstock said. “And since then another 14 ships have been added to the list.”

However, he acknowledged the ongoing challenge of balancing sanctions enforcement with market stability. Higlenstock admitted that “sanctions alone won’t end this war,” but added that they were a necessity to limit the resources available to limiting the resources president Vladimir Putin has at his disposal to perpetrate the war.

Ribakova pointed out that while it was possible to completely isolate a country like Iran with sanctions, those sanctions had no effect on the US economy and only marginal effects on Europe and suggested that Russia is too big to sanction completely.

“But with a country as large and well integrated as Russia that is not possible,” says Ribakova, adding that the idea of the oil price sanctions are a compromise to allow Russian oil to continue to be sold on the market, while limiting the amount of revenue Russia earns.

However, as almost all Russia’s oil deliveries are operating outside the oil price cap restrictions, with better enforcement it should be possible to squeeze the shadow fleet out of oil shipment and into the transparent shipping where the west can operate its oil price caps thanks to international shipping dependence on Western maritime insurance.

“In the early days all that was needed from shipping companies was to see a contract that shows price under cap. But they thought of it as a piece of paper that no one will ask for,” says Ribakova. “We went way too far in trying not to upset the commodity markets. In the meantime Russia has been investing in the shadow fleet, not G7 shippers or insurance providers,” adding that by tightening the enforcement of these sanctions that shipping of Russian oil can be forced back into the transparent shipping of Western companies where the oil price cap can be enforced.

The dialogue also touched on military equipment trade, where both experts noted Russia has also managed to largely circumnavigate the restrictions by trading via third countries and indirect supply chains.

“Over 90% of components in military equipment come from our countries. Ukraine is getting more bombed by our countries than it is getting aid,” said Ribakova.

Ribakova emphasised that a significant portion of components in Russian military equipment originates from Western countries, paradoxically making the West indirectly complicit in the conflict.

Higlenstock pointed out that holding Western producers to become more active in carrying out the necessary due diligence was a question of carrot and the stick.

“The [Western] banks understand that if they are implicated in facilitating sanctions busting they are liable to hundreds of millions of dollars in fines, but the same is not true to producers. It's a cost benefit trade-off for them, weighing potential profits and the costs of non-compliance.… When these companies are asked to do this sort of due diligence for things like environmental issues they have shown they can.”