This report is based on interviews with Russian business representatives involved in foreign economic transactions. The interviews primarily sought to identify the costs of international transactions for Russian businesses, as well as the main mechanisms behind transactions. The study involved the polling of 29 subjects: 19 representatives of Russian importers, 11 Russian exporters, and three representatives of businesses providing services in cross-border transfers from Russia. (A number of respondents acted in two capacities.)
To double-check the data obtained from the respondents, we used the information available from the websites of Russian banks and entities offering cross-border funds transfer services and called such companies to clarify the terms and conditions of their services. That being said, the researchers had no opportunity to independently verify individual facts reported by the respondents. Cases when the information obtained appears plausible to the authors but was obtained from a single source will be marked with (*) and (**) for two sources.
Key findings. The difficulties faced by the Russian businesses—the focus of this paper—were caused by the restrictions on direct mutual transactions selfimposed by banks and companies around the world. The challenges associated with paying for the goods the U.S. and E.U. authorities made sure to steer the sanctions away from (e.g., food items and medications) are overwhelmingly identical to those involved in transactions over the products officially and specifically targeted by the sanctions (e.g., oil and dual-use items). The banks and companies’ compliance departments from various countries chose to refuse to vet the risks associated with Russia and, bar rare exceptions, banned any direct Russia-related operations with no adjustments for the specific clauses of the legislation adopted by the E.U. and the U.S.
Hence an alternative international transaction system designed to accommodate Russia’s foreign trade operations. The system in question involves several contours as well as a multitude of operators and proves to be highly adaptable to the changing external conditions, including the steps undertaken by Western regulatory authorities. And even though there are still alternative tactics that could be employed to attack said system, the previous steps attempted by the E.U. and the U.S. only resulted in short-term disruptions to the payment pipelines. Meanwhile, the infrastructure and institutions that help conduct the transactions outside the control of Western regulators and the conventional banking system are getting increasingly more robust and less transparent.
The increased complexity of international transactions caused by the sanctions has led to a surge in transaction costs for Russian businesses. The study participants consider the costs of international transactions to be the most monetarily taxing of all the costs prompted by the sanctions. The transfer commission fees along with other transactional costs exceed $10B a year. Russia’s foreign trade players was forced to use a lump-sum amount of around $200B to repay trade loans, step up stockpiles, and amass receivables in the face of foreign customers1. Russian businesses also had to hire more people or increase the time their employees had to spent handling the legal and bookkeeping aspects of the same number of transactions. The damage being inflicted on the Russian businesses is highly differentiated by industry and company size. The losses incurred on the exporters are smaller than those incurred on the importers. Smaller businesses prove to have been affected more than the larger ones. The losses experienced complex product manufacturers trump those seen by the exporters of raw commodities etc.
1 — According to respondents, the biggest they had to resort to other sources for this money was the stance adopted by the foreign banks and companies’ compliance departments rather than the specific measure of the sanctions policy itself.
The use of conventional economic indicators does not yield any accurate assessment of the damage caused to the Russian economy by the restrictions in international transactions. The biggest negative effects either regard labor productivity or are intrinsically institutional. However, the erosion of institutions and negative incentivization brought on by the sanctions policy can be seen not only in Russia—it also affects Western economies, albeit on a smaller scale.
The first section of this report describes the technicalities of international transactions under the sanctions. This information will hardly come as a surprise to the E.U. and U.S. intelligence and other agencies, but we maintain that the current public political discussion in the West exhibits a lack of understanding of the mechanisms behind the transactions as well as the way they can evolve in the future. The second section focuses on the impact the facts described have had on Russian businesses and the economy as a whole.