Brief Assessment of the Impact of International Sanctions on the Russian Federation

Several months have passed since the beginning of Russia’s special military operation, and the European Union has introduced several packages of sanctions against Russia. The latest sixth package of sanctions was introduced on June 1st, 2022. In this article, we will consider and evaluate the impact of sanctions on the Russian economy. 

Introduction 

The unprecedented scale of sanctions imposed by Western countries on Russia has indeed had an impact on the global economy. The imposed sanctions include large-scale restrictions on the Russian financial system (including the Central Bank and major commercial state-owned and private banks), the activities of a number of Russian companies and certain sectors of the economy, as well as the closure of airspace and seaports, personal sanctions against Russian politicians and major entrepreneurs. 

Russia has now overtaken Iran in terms of the number of sanctions imposed on it. The Russian media (Russian TV channels and news websites) have also been largely banned in the West. Among other things, cultural events held under the auspices of the Russian Federation have fallen under the sanctions. Also, restrictions on Russia in some European countries, as well as in the USA and Canada, were introduced at the municipal level. 

Sixth Package of Sanctions 

Starting from February 2022, the European Union has introduced six packages of sanctions against the Russian Federation. The most recent, sixth package of sanctions provides: 

• Sanctions against certain legal entities 
• Partial embargo on Russian oil 
• Disconnecting several banks from SWIFT 

• Expansion of export restrictions on the list of goods and technologies 
• A ban on the provision of certain services 

Economic Situation in Russia 

Undoubtedly, the imposition of sanctions against the Russian Federation has had a tremendous impact on its economy. However, it should be noted that the initial panic in the Russian market has given way to moderate optimism. The exchange rate of the Russian ruble has greatly strengthened against other currencies. If, for example, at the beginning of the special operation on February, 1st, 1 EUR cost 150 rubles, then the price of 1 EUR in mid-June is 58 rubles. This shows the resilience of the country’s economy which has been severely impacted by the sanctions in place. 

The second indicator of the sustainability of the economic model of the Russian Federation is the continuing rise in energy prices. Despite the imposition of sanctions, some countries continue to buy oil through various channels proposed by companies from Russia. The Russian Federation also encouraged various Eurozone countries to open accounts with Gazprombank to pay for Russian gas imports. In Russia, this settlement scheme is called “gas for rubles”. Among other avenues, according to experts, the Russian Federation earned about $98 billion from the sale of energy resources to Western countries in the first 100 days from the start of the special military operation. 

Thirdly, from May 25th, 2022, the United States refused to extend the license which allows servicing external debt to the Russian Federation, which in turn would lead to a technical default. The Russian Ministry of Finance indicated that in the absence of a license they would service the public debt in rubles, and the announcement of a technical default would not affect the Russian economy. The full effect of this remains to be seen, as financial market participants are closely monitoring the situation. 

Conclusion 

The impact of the sanctions on the economy of the Russian Federation cannot be fully assessed in this period, as the sanctions will affect the Russian economy in the long run. Furthermore, businesses and individuals dealing directly or indirectly with the Russian Federation shall implement a full assessment in order to understand whether they are fully in compliance with their domestic and international sanctions and regulations. This assessment is essential when engaging in import/export activities, financial services, and provision of other services to Russian individuals and legal entities.  

At D’Andrea & Partners Legal Council we are able to assist you and your business in order to better understand how to be compliant with all the relevant regulations and international sanctions. For more information, please contact our Russian Desk professionals at russiadesk@dandreapartners.com.