During the International Economic Forum in St. Petersburg last month, Russian President Vladimir Putin gave a public address praising Moscow’s ability to withstand economic sanctions orchestrated by the West after the invasion of Ukraine. The event, sometimes referred to as the Russian Davos, was skipped by key Russian businessmen, oligarchs, and companies. Western businesses and investors were also notably absent, which suggests that despite President Putin’s claim of economic resiliency, financial restrictions are successfully tightening Russian finances. With signs that Moscow is feeling the impact of sanctions and the ruble collapsing, now is the time for the U.S. to reassess its approach.
Part of the aim in coordinating sanctions is to starve the war chest that is funding the Kremlin’s campaign. The current international sanctions regime is doing well in restricting Moscow’s economic arm, primarily by freezing access to the approximately $300 billion it holds in foreign reserves that are located in the G7 countries.
Yet, Moscow still holds yuan reserves that China has declined to freeze, worth roughly ¥310 billion, or about $45 billion U.S. dollars. Since China has not joined the international sanctions regime, the yuan provides a viable, sanctions-proof alternative that Moscow can hold as a bulwark against financial restrictions. Economic analysts predict that under the current circumstances, it will take roughly 2 to 3 years to deplete these yuan holdings.
Although the reserves provide Moscow a buffer, Putin is developing new methods to generate reliable revenue streams that can prolong the timespan that analysts predicted. The European Bank for Reconstruction and Development reports that while exports to Russia decreased dramatically after the 2022 invasion, exports to central Asia saw an equally dramatic increase, hinting at a possible sanctions evasion network that Moscow likely has in place.
Domestically, Putin is revamping Moscow’s legislative body with decrees that grant authority to seize assets of Western companies operating in Russia and tax $3 billion from its oligarchs. While the amounts will likely not total enough to add a substantial contribution, they allow the Kremlin to stretch its economic power and prolong its war efforts.
Moscow’s recent domestic legislation and suspected evasion network signal its intent to adjust to ongoing financial pressure. As Western countries reassess their sanctions programs to close loopholes that the Kremlin can exploit, the U.S. should consider certain areas that are serving as lifelines to Moscow’s war machine.
One such lifeline is the oil price cap that the G-7 insists on keeping at $60. The goal behind the policy is to restrict Russia’s oil revenue while keeping the flow of Russian oil to the global economy consistent. The price cap is an effective tool, but it can – and should – be tightened to reach maximum effectiveness.
Economic analysts at Citigroup estimate that by lowering the price cap to between $30 and $40 a barrel, Moscow will begin to deplete its yuan reserves as early as this year. Otherwise, the West runs the threat of the Kremlin enduring fiscal pressure and increasing its yuan reserves. Ukrainian President Volodymyr Zelensky and other coalition members have also called for similar action to stump Moscow’s ability to finance its war.
Furthermore, Western and Russian state-linked businesses also fund Moscow’s invasion, mainly due to dependency from Western companies. Rosatom, a Russian state-owned nuclear energy company, continues to operate and supply several countries in the European Union and the United States. Despite the fact that it provides Moscow with a dependable financial stream, its prominence in the global economy has allowed it to avoid being directly sanctioned, with only a few of its subsidiaries being targeted.
The West should wean itself off such relationships and levy sanctions, especially considering Rosatom’s history of aiding Moscow’s war efforts. It is difficult to generate the political will to do so without financial restrictions in place. Similar steps can be taken against other Russian companies critical to its economy. One such example is gradually lifting exemptions on Gazprombank, which finances Russian military personnel and equipment. Likewise, the U.S. can leverage secondary sanctions for businesses that fail to comply with current measures and enhance its information-sharing practices with its partners.
Following Yevgeny Prigozhin’s short-lived mutiny, it is unclear what will happen with the various shell and front companies that Wagner Group has in place. Assuming that the multi-sectoral structure will fall entirely under Putin’s control, it’s all the more reason to ante up the pressure on Moscow’s finances. The Biden administration has already begun to impose sanctions on the private military company’s operations in Africa. The strategy should also apply to other financial streams during Putin’s invasion.
Sanctions have had a significant impact on the Kremlin’s war chest, and we should anticipate that the Kremlin will attempt to develop mechanisms to soften the blow to its financial resources. Western sanctions have been and continue to be effective, but steps can be taken to increase the pressure. Lapses in the U.S.’s sanctions program allow Moscow to build up its resiliency to fiscal pressure. Given that Ukraine’s military counter-offensive is officially underway, now is the time for Ukraine’s allies to launch an economic counter-offensive as well.
