How Russia might wiggle past western sanctions

In 2014, after Russia annexed Crimea, it was hit with a barrage of international sanctions. And that taught the Kremlin a valuable lesson. So before launching a full-scale invasion of Ukraine, Moscow took measures to brace itself for a fresh round of sanctions. 

The first measure it took was to slash its dollar reserves to just 16% of the central bank's stockpile in 2021, down from more than 40% just four years prior. That has meant aggressively cutting down its holdings of US treasury securities, shrinking ownership by almost 98% from what they held in 2010 (Russia owned as much as $176 billion in US treasury securities in 2010 - the highest ever)  -  and doing away with dollar assets from its sovereign wealth fund over the years. 

A sovereign wealth fund, (SWF), is a fund owned by a state composed of financial assets such as stocks, bonds, property or other financial instruments. Currently, Russia does not hold any dollar asset in its sovereign wealth fund. 

Ehsan Khoman, head of emerging-market research for Europe, Middle East and Africa at MUFG Bank in Dubai told Bloomberg, "Russia has taken considerable steps to diversify away from the dollar." He explained how "that has led to a degree of resilience, though full-blown economic sanctions is triggering meaningful market volatility and a recession should not be overlooked."

However, it is almost impossible for Russia to part ways with the dollar entirely. Their primary exports are oil, petroleum-based products and natural gas - all usually traded by global markets in the dollar.

Infograph: TBS

Meanwhile, Europe is still heavily reliant on Russia for its energy needs. Europe gets approximately a third of its natural gas from Russia. The gas is used for electricity generation as well as home heating. A total economic blockade would likely hurt them as much as it would Russia.

Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance told Time, "in the short and medium-term, it is almost impossible for Europe to phase out Russia's energy." 

Other changes in the Russian economy's structure have also occurred.

It has gradually reduced its reliance on foreign loans and investments, and it is actively seeking new trade opportunities outside of Western markets. China is an important part of that strategy.

The Russian government has also taken preliminary steps to develop its own international payment system to bypass SWIFT, the global financial messaging service that seven Russian banks now find themselves blocked out from. Using China's Cross-Border Interbank Payment System (CIPS) is also in the cards. 

It has also reduced the size of its budget, emphasising stability over growth. As a result, the Russian economy has grown at a rate of less than 1% per year on average over the last decade.

In an interview with the BBC, Dr Rebecca Harding, chief executive of Coriolis Technologies, said, "What Russia is doing - in effect - is building almost an alternative financial system so that it can withstand some of the shocks of sanctions that the West might impose. 

But there will be some short-term pain in all of this, and the vulnerabilities in the Russian system are that they have a web spread very thinly across the globe."

Russia will not be unaffected by these sanctions that is for sure but the sanctions might not be as effective as the West thinks they will be. So all that remains to be seen is whether Russia can weather the sanctions imposed upon them or do they buckle under the pressure.