But one thing is certain: there are two major holes in the sanctions regime that are fundamentally undermining it.
First, Russia is still allowed to sell whatever fossil fuels it wants, and second, it seems able to use the dollar proceeds from those sales to prop up the ruble if it wants, or even import tools of war if others countries have this. t signed at the sanctions are ready to deliver them.
The only solutions are either sanctioning all energy trade with Russia, which remains unpalatable for European countries that depend on its gas for now, or a credible threat of secondary sanctions against countries or companies outside Russia that support Russia through trade.
Russia’s energy trade has suffered, but not nearly as much as initially expected. Aside from selling gas to Europe and China via pipelines, Russia still exports oil by ship from ports on the Baltic and Black Seas. The oil could be traded at discounts to currently high prices, but most of it is still moving, according to economists at the Federal Reserve Bank of Dallas. According to my colleague Javier Blas, Russia’s global oil and gas exports bring in about $900 million a day.
According to Bloomberg News, President Vladimir Putin will begin requiring enemy countries to pay for gas exports in rubles. However, this is more of an annoying tactic than an objection to receiving dollars or euros. However, if Russia were paid for gas in rubles, it could avoid financial sanctions entirely.
Where the sanctions and economic restrictions have had a bigger impact has been Russia’s imports, which have plummeted, according to the IIF. That means Russia’s current account surplus — the excess of its earnings from exports over its spending on imports — could reach $250 billion this year, up from $120 billion last year, already the largest annual surplus in more than two decades was, according to the IIF.
And Russia can use this income. When the US, Europe and other countries imposed sanctions on Russia’s central bank, they froze the foreign currency it held in accounts at other central banks — for example, the dollars it held at the Federal Reserve Bank of New York. Up to half of Russia’s $640 billion in foreign exchange reserves are held in such accounts and are therefore unreachable.
However, the CBR also has foreign currency accounts with commercial banks in Russia such as Gazprombank. The CBR can continue to receive dollars into these accounts.
The US also prohibited any bank with a US arm from doing business directly or indirectly with the CBR. However, banks are still allowed to conduct trades with Russia’s largest banks and the Central Bank, which are permitted under licenses, including, for example, energy and related products and services, as well as food and medicines.
After the sanctions were imposed, Russia introduced capital controls to prevent Russians from sending their wealth out of the country. It also said exporters must sell 80% of their foreign exchange earnings to the central bank. These dollars can flow into the CBR’s accounts with commercial banks, and it appears that the CBR can then return these dollars to banks or corporations.
The scale of ongoing energy exports and the CBR’s ability to receive and deliver the resulting foreign exchange flows means that being cut off from its existing reserves is not as painful.
These facts, combined with capital controls, explain why the ruble not only has not collapsed but has recovered from its lows.
The sanctions imposed on Russia are designed to disrupt its economy and limit its access to equipment supporting its invasion of Ukraine. Russia is rapidly building up the funds it could spend on weapons or other invasion tools. The question is who could sell this equipment to Russia. The candidates are coming to China, possibly India and maybe some Middle Eastern countries. The problem is that money is fungible: dollars can be exchanged for renminbi or rupees and then spent on maybe anything else.
What the US is counting on is that payments in dollars must ultimately reach the US. Because at some point US central bank reserves have to be transferred in order to balance the money movements in the banking system – and that is only possible with the participation of US clearing banks. However, the network of banks that may be involved in Russia and elsewhere means that those banks that are directly connected to the US system will mostly only see the net result of many underlying transactions. That could hide the gross amount of deals the CBR may make with Russian companies to protect the ruble and finance Russian imports, according to Jerome Legras, banking specialist and head of research at Axiom Alternative Investments in Paris.
If other countries are working with Russia to help it use the dollars it earns from energy trading, then secondary sanctions against countries or organizations believed to support Russia’s invasion would be the only option.
That would be a clear escalation of Russia’s isolation and a truly global stalemate.
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.