(CNN) A year of unprecedented US-led sanctions aimed at isolating one of the world’s largest economies has weakened, but not incapacitated, Russia.
Instead of the forecast double-digit drop in GDP, Russia’s economy shrank by around 3% last year. After an initial plunge announced by President Joe Biden, the country’s currency has stabilized. And while US export controls have limited Russia’s ability to source the necessary components to manufacture some sophisticated military hardware, Russia has found countries willing to help keep its war machine running.
If the first year of the US-led sanctions campaign was all about cutting off Russia from the world economy and degrading its military-industrial complex, the second year will focus on healing the cracks.
Biden administration officials say they will place a laser-like focus on cracking down on Russia’s efforts to circumvent sanctions that include adversaries like China as well as allies and partners like Turkey, India and the United Arab Emirates.
That focus will include an important shift: After a year of focusing on getting countries to comply with US sanctions through a combination of technical assistance and delicate diplomacy, the administration now plans to direct its efforts at individual companies .
The government will present these companies with “a clear choice,” Deputy Finance Minister Wally Adeyemo told CNN in an interview.
“If they continue to sell Russian materials in support of their war effort, they will not have access to our coalition’s economies, which frankly represent a far larger customer for them,” Adeyemo said.
Those efforts began on Friday when the government announced sanctions against “over 200 individuals and entities, including both Russian and third-country actors, across Europe, Asia and the Middle East who support Russia’s war effort.” These sanctions were imposed in conjunction with US partners in the G7 and other allies.
Still, the one-year macroeconomic impact is less than what Biden administration officials publicly forecast at the outset. But while Russia has successfully mitigated some of the near-term pain, Biden administration officials and sanctions experts are predicting devastating long-term consequences for an increasingly isolated Russian economy.
“The contraction this year is less than I’ve publicly predicted, but I think Putin has propably supported this year’s growth in an accounting sense by sacrificing long-term growth potential,” said Daleep Singh, Biden’s former deputy national security adviser and one of the principal architects the Russia sanctions.
“The lasting consequence of this war will be that Russia has lost Europe and the G7 as energy consumers, and that will dry up the remaining main source of export earnings. And it will leave Russia as a smaller, weaker and more isolated economy,” Singh said.
This new effort comes at a critical juncture in the war — both Ukraine and Russia appear to be preparing for a spring offensive, and costly artillery-based warfare draws attention to dwindling Western ammunition supplies. That has upped the ante for the West to deal a mighty blow to Russia’s defense industry and its ability to fund its war effort.
Russia finds nations willing to make a deal
A recent price cap on Russian oil is severely cutting Russia’s revenues. But amid Western sanctions, Russia has found alternative sources of revenue by increasing exports to China, Brazil, India and Turkey. Some of these countries are also refilling Russian demand for key products and technologies that the US and its coalition have cut off.
Lawmakers on both sides of the aisle are increasingly urging the government to be more aggressive towards countries that help Russia evade sanctions.
“I think we need to put more pressure on these countries and not allow them to become an outlet for Vladimir Putin and his efforts to fund the war machine,” said Senator Chris Van Hollen, a Maryland Democrat who has been assigned to the US said should hold back advanced F-16s from Turkey.
Several government officials declined to say whether they are considering further coercive measures to include friendly countries like Turkey and India in the sanctions effort. Instead, they emphasized a combination of rigorous diplomacy and increased enforcement of sanctions to plug existing gaps.
“I wouldn’t say we’re standing here and gritting our teeth in frustration. Instead, we’re just doing the hard work to ensure our sanctions are effective,” said a senior administration official.
The latest round of sanctions, expected this week around the first anniversary of the war, is intended to underscore this point and focus on sanctions-evasion networks and Russia’s military production.
Treasury and Commerce Department officials have traveled to countries crucial to Russia’s evasion and backfill efforts in recent months to ensure greater cooperation. Just last month, Treasury Department Undersecretary for Terrorism and Financial Intelligence Brian Nelson traveled to the United Arab Emirates and Turkey — two close US security partners that have also been hubs for circumventing Russian sanctions — and warned of new measures the US could take could take raid.
“Countries around the world trying to replenish the Russian war machine should attempt to evade our controls at their peril,” Deputy Secretary of Commerce Don Graves said.
“Deglobalization of a Large Economy”
Sanctions experts say the scale of US sanctions against an economy as large and interconnected as Russia’s is unprecedented.
“This is a significant example of the deglobalization of a large economy that we have never seen before,” said Vladimir Milov, a Russian economist and opposition politician who served as deputy energy minister in 2002.
In the first few days after Russia’s invasion of Ukraine, the US and its allies quickly worked to impose devastating sanctions on Russia’s central bank and its main private banks, freezing about $300 billion in Russian reserves and disconnecting those banks from the known global financial intelligence system as SWIFT. Since then, the US has sanctioned more than 2,000 Russian companies and individuals.
Russian industrial production has suffered, the country’s military is struggling to source key components to make some weapons, and hundreds of international companies have exited the Russian market, compounding the impact of US sanctions.
Anastassia Fedyk, assistant professor of finance at the University of California-Berkeley and member of the International Working Group on Russian Sanctions, pointed to the long-term effects of the war and sanctions regime on the Russian economy.
“These will be cumulative effects,” she said. “I think looking ahead, the prospects for the Russian economy are not positive at all.”
While a senior government official conceded that the government did not anticipate the extent to which energy prices rose after the Russian invasion – which in turn boosted revenues from Russia’s primary exports – officials are convinced that the price cap on Russian oil will deal a blow to Russia’s capabilities to fund its war effort.
Western oil sanctions are already starting to make their mark, causing Russia’s oil and gas revenues to fall 46% year-on-year last month and leaving Russia with a $25 billion budget deficit.
When asked to reflect on key moments in the year of US sanctions against Russia, both Adeyemo and Singh cited the first round of devastating financial sanctions within days of the invasion as the moment that sealed Russia’s economic fate.
“I vividly remember waking up at 3am, speaking to my EU counterpart, Bjoern Seibert, and saying, ‘It’s time,'” Singh said. “At 5 p.m. the package was released and it was a moment when the world’s great democracies moved faster and stronger than they have in decades.”
“If we look back in a decade, this will be the moment when Russia’s economy, from opening up, growing and becoming more European, and Russia’s economy began to deteriorate and began the slow decline that will be with it in ten years what the Iranian economy looks like,” said Adeyemo.