“Fortress Russia” Weakens Sanction Threats

In light of rising tensions between Russia and NATO countries over Ukraine, we have seen multiple threats issued by both sides against the other in the event of potential escalations. Most commonly touted by NATO countries and particularly the US is the imposition of economic sanctions on Russia. However, Russia in recent years has stress-tested its economy and built a so-called “Fortress Russia” that aims to protect itself from potential sanctions. So what exactly are these sanctions, how do they impact Russia, and will they actually work? These are the questions that we’ll get into in this article

To explain exactly what sanctions are for the uninitiated, sanctions are penalties levied on other countries or individuals. They are instruments of economic pressure and foreign policy that aim to force a response or change in behaviour. Sanctions can take on many forms, with the more common ones being tariffs and embargoes, and also can be classified into two main types, import sanctions, and export sanctions. In the context of the Russia-NATO tensions, these tensions would aim to force Russia to withdraw troops from Ukrainian borders and reduce interference in Ukraine. So now that everyone is clear about what sanctions are, how will they potentially impact Russia? Well, the West is threatening to impose heavy sanctions on Russia, which would imply increased tariffs on goods and services as well as trade embargoes. Due to the Russian economy being smaller than many Western countries and their reliance on trade like most developed economies, these sanctions would heavily impact Russia’s economy. Potential impacts would include a potential recession, a major hit to Russia’s supply chain, and many other trickle-down effects. Hence, this is definitely a pressing issue that Russia is concerned about.

However, the potential impacts have subsided over the years, with Russia’s “fortification” and stress-testing of its economy. Ever since Russia’s annexation of Crimea in 2014, it has taken measures to insulate itself against sanctions by reducing its reliance on the global financial system. These measures range from hoarding and stockpiling currency — building enormous reserves, to trimming its annual budgets and even reorienting its trade to replace foreign imports. In particular, Russia’s central bank’s huge reserves of foreign currency are crucial in fortifying its economy and protecting it against sanctions. Total reserves have soared by more than 70% since late 2015 and now stand at $631bn, with foreign currency reserves being around $500bn. These reserves allow Russia huge freedom in its foreign policy and military actions as they allow Russia to cover the government’s balance sheets and prevent the fall of the Ruble if sanctions were to be imposed. Additionally, Russia’s finance ministry has also stress-tested worst-case scenarios and even set up a unit working to counter possible measures from the US Treasury’s Office of Foreign Assets Control. As such, Russia is now in a strong position to withstand any potential sanctions.

Another key aspect that has made Russia more sanction-proof is its reduced dependence on foreign imports whilst European nations continue to remain reliant. This is particularly true when looking at Europe’s reliance on Russian oil and gas exports, with imports of Russian Petroleum Oil and Natural Gas in the first semester of 2021 making up around 60% of total EU imports from Russia and 4.5% of total EU imports. What this means for NATO states is that sanctions are now a weakened tool and that they have to be willing to take a hit to their own economies in order to impose sanctions. Additionally, NATO states, particularly all those other than the US, will have to consider the ramifications of limiting Russian oil and gas exports before taking any action.

This “fortification campaign” embarked on by Russia has clearly strengthened its economic defence and made its economy extremely stable. However, this has come at the cost of sacrificing economic growth, as can be seen by its annual economic growth of around 0.8% since 2013 as compared to the global 3%. Whether this has paid off is yet to be seen, but one thing’s for sure, Russia is not to be trifled with.

Ethan Lee

Note: Article was written on 10th Feb 2022