How Russia’s Economy Dodged Western Sanctions

Russia’s economy has shown a surprising ability to dodge Western sanctions imposed after it invaded Ukraine in 2022. Thus, nothing has changed regarding the Russian economy in the three years since Russia’s invasion. It continues to trade with Africa, Asia, Latin America, and others to dodge Western sanctions. 

Several key factors explain how it has managed to withstand and even adapt to these sanctions:

Stronger Economic Ties with China and the Global South

According to the Observatory of Economic Complexity (OEC), almost 50% of Russia’s exports went to European countries, including Ukraine and Belarus. Most of those exports were energy products, mainly crude oil and gas. However, the picture was utterly altered by the end of 2023, less than two years after the invasion commenced on February 24, 2022.

The OEC’s recent publication shows China and India out in front as Russia’s two major export markets, accounting for 32.7% and 16.8%, respectively, half the total.

In 2021, while China accounted for 14.6% of Russian exports, India accounted for just 1.56%. The two countries have swept up the export market share previously taken by European countries. The 2023 stats show that Europe accounts for barely 15% of Russian exports, a massive drop from almost 50% two years earlier.

Although the OEC has not yet published figures for 2024, data from the Russian foreign trade tracker, published by the Bruegel economic think tank, shows that export destinations remain broadly in line with the 2023 figures.

Energy Exports to the East to Dodge Western Sanctions

Western countries, especially the US and the EU, imposed sanctions on Russian oil and gas, including a $60 per barrel price cap on seaborne crude exports.

However, to dodge the Western sanctions, Russia has redirected energy exports to countries like China, India, and Türkiye. These countries have increased their purchases of Russian crude oil, helping sustain Russia’s economy. All three account for up to 95% of Russia’s oil purchases.

• China is the largest buyer of Russian crude, often paid in yuan to bypass dollar-based transactions.
• India imports discounted Russian oil, refining it and selling it to Europe as non-Russian-origin fuel.
• Türkiye doubled Russian oil imports.

However, the EU’s imports of Russian crude oil have decreased by 90%. It has also significantly reduced the amount of Russian gas it imports, from 40% in 2021 to 15% in 2024.

To avoid Western sanctions, Russia utilizes shadow fleets and alternative payment methods. Its shadow fleet of tankers transports oil outside Western-controlled shipping and insurance networks. Tankers are registered under unknown ownership in places like Dubai, Hong Kong, and Liberia to avoid tracking. According to the Kyiv School of Economics, at least 70% of Russia’s total seaborne crude oil exports are via the shadow fleet.

Furthermore, it uses Chinese yuan, UAE dirhams, and Indian rupees for transactions, avoiding SWIFT-based payments blocked by Western sanctions. In addition, some oil trades are conducted using the MIR payment system (Russia’s alternative to Visa/MasterCard).

Read: How Western Sanctions Are Reshaping Russia’s Economic Future

Parallel Import Networks

Western countries had banned the sale of high-tech goods, microchips, industrial equipment, and consumer products to Russia.

However, Moscow has developed parallel import routes through countries like Türkiye, Kazakhstan, the UAE, and Armenia. These intermediaries allow Russia to indirectly purchase sanctioned goods, including technology, semiconductors, and car parts. Thus, Western sanctions were bypassed through alternative supply chains.

In addition, Western products like cars, smartphones, and luxury goods are funnelled into Russia using re-exporting networks in Dubai and Central Asia.

Furthermore, China has played a massive role in supplying Dual-Use Goods to Russia to dodge Western sanctions. Chinese firms, like Huawei, despite Western sanctions, provide semiconductors, drones, and machine tools, often labelled for civilian use but deployed for military applications.

Increased Military and Government Spending

Russia has significantly ramped up military production, boosting economic activity and employment. Consequently, by increasing military production and state spending, Russia transformed its economy into a war-driven system. Russia’s military expenditure rose to 5.9% of GDP in 2023. Also, the Russian government conscripted over 300,000 men, leading to labour shortages. To address labour shortages, Russia allowed migrant workers from Central Asia and freed many prisoners to work in defence plants.

Domestic Economic Adjustments

Despite losing access to goods due to Western sanctions, Russia has made economic adjustments to sustain its industries. For instance, Russia nationalized Renault and IKEA operations, rebranding them under Russian control. In addition, it began producing local cars with Soviet-era designs after Western firms left the economy following its invasion of Ukraine. Furthermore, Russia expanded domestic food production, increasing exports of wheat, fertilizers, and metals to new markets. As a significant wheat and metals exporter, Russia has benefited from high global prices. Higher prices helped stabilize its revenue streams despite Western sanctions.

Central Bank of Russia’s Response to Western Sanctions

The Russian ruble collapsed after sanctions hit in 2022. However, the Central Bank of Russia (CBR) took emergency steps to stabilize the economy. For instance, the CBR hiked interest rates from 9% to 20%, on February 28, 2022, to curb inflation and stabilize the rubble. Also, it prevented capital flight by restricting foreign currency transactions. Thus forcing exporters to convert USD earnings into ruble. Furthermore, Russia moved away from the US dollar and Euro to the Chinese Yuan and the UAE dirham. The Moscow Exchange now settles most trade in Yuan and Ruble, reducing exposure to Western financial sanctions.

Loopholes & Sanctions Enforcement Gaps

Western sanctions enforcement has been inconsistent, allowing Russia to exploit loopholes. For instance, while the European Union banned most Russian oil & gas, it continued importing Russian LNG. Russia’s liquefied natural gas (LNG) exports in 2024 reached a record high of 33.6 million tons (45.7 billion cubic meters). European countries were the largest consumers, accounting for 52% of Russia’s total LNG exports, about 17.4 million tons. This represents a 4% point increase from 2023. The import surge occurred despite the EU’s efforts to curb reliance on Russian energy.