Use of sanctions during and after the Cold War

Back in 2015, analyzing the results of the “post-Crimea” sanctions, Andrei Kolesnikov, head of the Russian Domestic Policy and Political Institutions Program at the Carnegie Moscow Center, wrote: “Western approach to Russia is based on the assumption that continued pressure on the country will force the government of President Vladimir Putin to make concessions or even scrap. But nothing could be further from the truth.”

There is nothing unique about this description of the Russian situation. Since the middle of the 20th century there has not been a single example where country sanctions per se have been able to stop a war or lead to political regime change.

Sanctions pressure on Russia has not collapsed its economy, just as it did not collapse the economies of other authoritarian regimes and did not lead to the dismantling of these regimes themselves — Saddam Hussein in Iraq, Muammar Gaddafi in Libya, Kim Jong-un in North Korea, Fidel Castro in Cuba, Chavez and then Maduro in Venezuela, the ayatollahs in Iran. The sanctions against Belarus are almost entirely compensated by economic assistance from and cooperation with Russia, in fact only strengthening the regime of Alexander Lukashenko.

The effectiveness of sanctions cannot be judged solely by their primary purpose. Moreover, the actual goals pursued sometimes differ from the declared ones: in the case of the sanctions against Iran, in addition to the stated goal of the United States to prevent Iran from becoming a nuclear power, there is in fact also the goal of regime change, which has existed since 1979. As we can see, both the overt and covert goals have not been achieved, despite the Iranian regime’s geographic location and ideological framing, which makes Iran much more vulnerable to economic blockade than Russia.

Céline Antonin

A scholar from the Center for Economic Research at Sciences Po

The long history of sanctions confrontation in Soviet-American relations culminated in the 1980s, when both the USSR was sanctioned for its invasion of Afghanistan and its largest satellite, the Polish People’s Republic. The U.S. imposed sanctions against Poland in response to General Wojciech Jaruzelski’s imposition of martial law in December 1981. The U.S. denied most- favored-nation status in trade and blocked Warsaw’s admission to the IMF, which prevented Poland from either restructuring old foreign debts or borrowing funds. In the 1970s, borrowing from the West, together with subsidies from the USSR, helped the PPR authorities muffle popular discontent after the mass protests and riots of 1970-71 over falling living standards. The depletion of the source of borrowing coincided with the worsening economic problems in the USSR, main donor to Poland.

According to estimates by the Polish leadership itself 1, U.S. sanctions cost PPR $15 billion over four years, roughly equivalent to 2.5% of the country’s GDP per year. This was probably a slight exaggeration by the PPR leadership, which sought to shift to the sanctions regime the effect of internal factors, particularly mass emigration and reduced aid from the USSR.

1 — Country Studies/Area Handbook Series sponsored by the U.S. Department of the Army 1986

The Soviet Union also found itself under U.S. sanctions in the early 1980s in response to the invasion of Afghanistan.

The most significant short-term move in terms of its effect was expected to have been the ban by President Carter’s administration on supplying 17 million tons of grain to the USSR. However, the USSR bought grain from countries that did not adhere to this restriction. Moscow circumvented the ban on supplies of high-tech and oil and gas equipment with the help of European countries. Notwithstanding this resistance of the Soviet leadership to economic sanctions, even their small effect led, inter alia, to more serious economic problems and internal political changes in the socialist bloc as a whole.

The experience of Libya can be considered as an example of successful application of sanctions in terms of their stated purpose and result. However, it should be taken into account that the sanctions against Libya were global (imposed by the UN) and at the same time very precise in terms of objectives. They did not imply the deposition of dictator Gaddafi but only required him to admit responsibility for the 1988 bombing of an American passenger plane over Lockerbie, extradite the suspects, and pay $2.7 billion to the families of the victims. When Gaddafi agreed to all these demands in 2003, the UN Security Council lifted the sanctions. It was not until much later, in 2011, that the Arab Spring, civil war and NATO military intervention on the side of Gaddafi’s opponents brought his regime to ruin.

(Let us remind ourselves that there are no UN sanctions against Russia today and under the current UN charter they cannot be imposed.) The fall of Saddam Hussein’s regime in Iraq was also caused not by years of sanctions but by direct international intervention, and moreover by repeated intervention.

The current modus operandi of enacting sanctions against Russia is beset with a variety of challenges. These challenges are two-fold: they pertain both to the overarching issues intrinsic to sanctions as a tool of policy as well as to the particularities of the sanctions regime against Russia.

Against the backdrop of a classical legal system, which predominantly operates through judicial proceedings, the political decision-making process associated with sanctions is notably more arbitrary. Sanctions effectively act as a form of quasi-criminal liability without due process. Moreover, within the European Union, the influence of individual states raises concerns about exceptions and priorities in sanctions policy.

Despite advocating for sanctions, many states are reticent to endorse initiatives targeting Russian and Belarusian officials for accountability measures, such as for crimes of aggression. This creates an ironic lacuna in accountability, exempting those most responsible while targeting secondary actors.

In the realm of international law, there exists a disparate logic: those in positions of significant influence within a state can be held liable for crimes of aggression. In the sphere of sanctions, however, senior officials often remain untouchable, leaving lesser actors vulnerable. This discrepancy manifests as a gap in accountability, further muddled by the inconsistent positions of states on international criminal justice.

Consequently, this complex landscape of challenges is easily exploited by propaganda, which portrays sanctions as an ineffectual tool of a geopolitical strategy aimed at containing Russia. This erodes trust in international institutions and norms, thereby diminishing the sanctions’ effectiveness and credibility.

The Russian economy has long been critically dependent on imports for various industrial goods. In 2021, up to 98% of all smartphones, 96% of personal computers, 75% of medical equipment, and nearly 60% of pharmaceuticals came from outside the Russian Federation, with a significant portion originating from the EU or the U.S. That year, 30% of new passenger cars sold in Russia were of European and U.S. brands, manufactured either domestically or abroad. Approximately 75% of passenger jets used by Russian airlines were either . Russian banks relied on European and American ATMs for 60-65% of all such devices used within the country. Russian movie theaters generated around 75% of their revenue from foreign films, and Russian breweries depended entirely on German and Czech hops.

Immediately following Russia’s invasion of Ukraine, regulators in Europe, the UK, and the US aimed to disrupt key import flows to Russia. Initially, they prohibited the sale or lease of airplanes to Russian companies, as air traffic to, from, and over Russia was suspended. All exports of weaponry, dual-use products, and military spare parts were banned, along with equipment used in oil and gas drilling, LNG production and distribution, and machine-building in the energy sector, among other areas.

Subsequently, the EU banned several types of services previously offered to Russian clients. These included accounting, auditing (including statutory audits), book-keeping and tax consulting services as of June 2022; IT consultancy, legal advice, architecture, and engineering services as of October 2022; and advertising, market research, public opinion polling, product testing, and technical inspection services as of December 2022.

Additionally, all repair and servicing work for previously purchased machinery and equipment was prohibited, including warranty repairs. Almost every subsequent sanctions package included a chapter listing additional banned products. The most extensive list came in the 10th package, affecting goods under up to 200 customs codes with a 2021 import value of approximately €11.4 billion, which constituted one-third of the value of goods sanctioned in all previous rounds.

The Russian government swiftly enacted the so-called “parallel import” legislation just one month after the onset of hostilities, in direct response to import sanctions. This legislative action permitted both Russian entities and individuals to import a wide range of goods from any global source without requiring manufacturer authorization.

This effectively dismantled the previously rigorous import control mechanisms overseen by agencies such as Rosstandart, Rospotrebnadzor, and Rostechregulirovanie, which mandated compliance with Russian technical standards and required Russian-language user manuals and consumer information. The initiative proved highly effective, catalyzing a surge of imports funneled through various intermediaries and shell companies in over 40 countries. Industrial equipment and large-scale goods predominantly arrived via Turkey, the UAE, and Hong Kong, while consumer goods were largely sourced through Kazakhstan, Armenia, Kyrgyzstan, and Georgia.

By the close of 2022, Russian officials calculated that this mechanism facilitated the importation of approximately 2.4 million tons of assorted goods, valued at $20 billion. This sum accounted for roughly one-fifth of all imports to Russia between April 1 and December 31, 2022. Due to this regulation, new products from globally renowned IT companies, such as the iPhone 14 or MacBook Pro with M2 processor, arrived in the Russian market shortly after their U.S. launches. However, the prices for most of these products increased by 20-60% compared to preconflict levels. It was recently announced that the iPhone 15 would debut in Moscow on the same day as its U.S. release. This modification in Russian import regulation has arguably enabled tens of thousands of companies to endure by ensuring a continuous supply of vital spare parts and components. The notorious yellow-and-gray office paper, which emerged as an initial consequence of sanctions due to  a scarcity of whitening agents, reappeared on shelves in its original white hue just a few months after the legalization of parallel imports.

The most glaring examples of circumventing import sanctions involve the surge in Russian microchip imports vital for its military production. Initially listed as sanctioned items in the early days of the war, these microchips quickly became scarce, with imports dropping by over 60%.

However, by August, the situation had reversed, and in early 2023, Russia was importing at least 1.5 times more of these devices than before the war. Investigations revealed that Russian missiles and bombs used in Ukraine contained parts manufactured in the US, France, and Germany well after February 24, 2022. Some post-Soviet states were implicated in facilitating these trades, and there have been recent allegations against the Baltic states for violating sanctions. Despite efforts by the FBI and other Western security agencies to identify those responsible, the results have been lackluster, with only a few individuals arrested and charged for evading the sanctions regime.

Almost the same can be said about the spare parts used in the aviation industry: according to recent investigations, the Russian airlines spent anywhere between more that $200 million and a staggering $1.2 billion buying these parts after the start of the war. Shell companies registered in the UAE dominate among the suppliers making hundreds such shipments a month to Russia (many people linked to, or associated with, such companies had been identified, but to our knowledge no one was arrested).

Another topic of extensive discussion was the matter of vehicles imported into Russia through the South Caucasian republics, particularly Armenia, which saw a nearly 220-fold increase in car supplies to Russia in 2022. In June 2023, the European Union introduced legislation allowing for the halt of sanctioned goods shipments not only to Russia but also to countries serving as conduits for these goods into Russia.

220-fold

increase in car supplies to Russia from Armenia to Russia in 2022

However, such a decision requires unanimous approval from all 27 EU member states. As of now, no actions have been taken under this directive, which was initially described as an “exceptional, last resort measure.”

The surge in exports to Russia via Turkey, which emerged as a critical intermediary, was so significant that Turkish authorities sought to profit further from it. In March 2023, Turkey abruptly halted transit shipments to Russia. However, after complaints from Russia, the scheme was reinstated just ten days later, with a new condition. All goods cleared through Turkish customs would now be subject to import VAT paid to the Turkish budget. Additionally, these goods would be labeled as imports from Turkey when entering Russia. It should be noted that some products originating from the U.S. or Canada remained exempt from this new arrangement, and their importation to Russia via Turkey was completely prohibited.

The introduction of this scheme by Russian authorities suggests their doubt that local industries could fill the void created by sanctions. Their skepticism appears justified, especially in sectors most severely affected like automotive and aircraft manufacturing. The factories abandoned by Western automotive companies now largely stand empty, with the exception of the Renault-originated Moskvich facility where Chinese JAC cars are assembled from kits shipped from China. As for aviation, attempts to produce a wholly Russian passenger jet have been unsuccessful. The supposedly “all-new” and “free of imported parts” SSJ-100 made its inaugural flight in August 2023, albeit with French engines. Meanwhile, the timelines for new MC-21 and IL-114 aircraft deliveries have been pushed back from 2023 to 2024/25 and from 2024 to 2026, respectively. Tu-214 shipments continue to be in disarray.

In the current Russian economic landscape, the concept of “import substitution” has found its most visible manifestations within small and medium-sized enterprises. These businesses have shifted towards using domestically-produced equipment or creating products that, although tailored for the domestic market, often fall short in terms of quality.

It’s important to bring attention to the actions of the Russian government in this context. Almost immediately following the onset of the war, authorities revoked intellectual property rights held by Western companies across a broad spectrum of products. This started with essential items like foodstuffs and medicines and has since extended further. Consequently, many Russian enterprises now produce near-identical items under the guise of ‘generics’, frequently without disclosing this fact to the end consumer.

However, this practice of import substitution raises serious questions about its integrity and efficacy. For one, there are instances where goods imported from China are simply relabeled with Russian branding and then showcased at various fairs and exhibitions as ‘domestic products’. This practice borders on deception and dilutes the genuine efforts of actual Russian producers.

Moreover, there’s the issue of quality. In many cases, what is marketed as import substitution results in an inferior product that does not meet the quality standards of the original. Thus, import substitution in Russia can be described as either a facade or a hollow imitation, ultimately delivering products that are markedly subpar in quality to the consumer.

The conclusion must be that the Russian economy has weathered import sanctions relatively well, not so much due to parallel imports or successful import substitution, but largely because emerging industrial powers like China have not fully participated in sanction measures.

Except for highly visible restrictions, such as the ban on supplying spare parts for and servicing Russian jet aircraft, China has capitalized on new market opportunities. By mid-2023, the market share of Chinese passenger cars in Russia surged to 52% from less than 4% in 2021. Similarly, the market share for smartphones soared to nearly 80% from just over 20%. Even ATMs, previously dependent on Western technology, are now predominantly sourced from China.

Many Russian enterprises face challenges in utilizing both European and Chinese equipment, but it’s evident that the absence of countries from the “global South” in enforcing sanctions reduces their effectiveness. Another point to consider is the EU and US regulators’ willingness to maintain sanctions if they result in catastrophic outcomes, such as a series of fatal aircraft crashes. Aircraft failures in Russia have more than doubled in 2023 compared to pre-war times, indicating that a crisis may be imminent.

The absence of countries from the “global South” in enforcing sanctions reduces their effectiveness

Russia’s military actions in Ukraine prompted the imposition of Western sanctions against its energy sector, which is a crucial component of the country’s foreign exchange reserves and government revenue. Although the full consequences of these sanctions, coupled with war-related factors and the Russian government’s own initiatives, are difficult to quantify, they have undeniably had a short-term negative effect on state finances. The national oil and gas industry has been particularly affected.

Western sanctions against the Russian energy sector date back to 2014 following the annexation of Crimea. Initially, these sanctions restricted Russian oil producers from accessing international long-term capital and advanced Western technology, particularly for Arctic and deep-water exploration. Yet, despite frequent appeals to clamp down on Russian energy exports, no such measures have been implemented.

Confronted with a complex situation, Western nations had to weigh their intent to weaken Russia’s energy sector against their own dependencies on Russian fossil fuels.

• To maintain the flow of Russian oil into global markets to avoid accelerating an impending economic downturn.
• To curtail Russia’s revenue from oil sales, thereby either restricting its military endeavors or influencing public opinion within the country to reduce support for the Kremlin.

As an initial measure, some states and companies opted for a voluntary ban on purchasing Russian oil. BP, ENI, and Shell pulled out of their Russian projects in the first week of the conflict, and countries less reliant on Russian oil ceased their purchases. The United States imposed an embargo on Russian oil, as well as coal and liquefied natural gas, two weeks post-invasion. However, the U.S. was a minor market for Russia, accounting for only around 3% of its crude oil exports in 2021.

The European Union couldn’t take the risk of severing ties with Russian oil suppliers, given that Russia accounted for 25% of the EU’s crude oil imports and 33% of its refined product imports in 2021, totaling 71 billion euros.

It wasn’t until June 2022 that the European Council adopted its sixth package of sanctions against Russia. Among other measures, these sanctions prohibited the purchase, import, or sea transfer of crude oil and specific petroleum products from Russia to the EU. These restrictions went into effect on December 5, 2022, for crude oil and on February 5, 2023, for other refined products. The sanctions impacted 90% of all Russian oil exports to the EU, although some exemptions were granted for pipeline exports and spot market trades.

The sanctions forced Russia to pivot away from its traditional European market, which had consumed about half of its crude oil and refined products. As of March 2023, Russia’s share of EU crude oil imports had plummeted from 31% in January 2022 to just 3%. The United States took over as the EU’s top oil supplier at the end of 2022, providing 11% of imports, up from 9% in 2021. Norway and Saudi Arabia closely followed, accounting for 10% and 9% of the EU’s oil imports in 2022, respectively.

Concurrently, the G7 and EU introduced a price cap mechanism aimed at reducing Russia’s profits from oil trade with nations not participating in the embargo. The price caps restrict companies in member countries from offering transport or insurance services for Russian oil priced above the cap. This was intended to hamper Russia’s ability to export its oil globally, given the EU’s key role in providing such services.

By the beginning of 2023, new regulations governing Russian oil exports had been established. These rules not only restricted exports but also imposed limitations on new investments in Russia’s oil industry, exports of oil-related technologies and materials, and the utilization of Russian-owned tankers. The European Union’s delay in fully closing its market to Russian oil, along with the adaptability of global markets, helped prevent an extended oil price shock. Any surge in oil prices following Russia’s military actions, driven by concerns of severe market disruption, was relatively brief. The constraints placed on Russian oil exports did not lead to any considerable price imbalances.

The price ceiling, initially slated for reconsideration in line with global crude prices, remains unaltered despite a 15% increase in oil prices. At first, the redirection of export routes coupled with the price ceiling reduced the Russian budget’s oil revenues. However, by mid-2023, Russia modified its taxation of oil companies’ export revenue. It no longer bases these taxes on steeply discounted prices reported in the dwindling Urals trades to Western markets.

Consequently, the notional discount of Urals crude – Russia’s principal export grade – has narrowed relative to Brent. Importantly, Russia’s ESPO oil grade, primarily sold to China via pipeline and a non-Western tanker fleet, has not been discounted.

Exports of refined products experienced a modest decline of 3%. Overall, oil revenue in Russia is rebounding. For the first eight months of 2023, it was 38% lower than during the same period in 2022, but the gap is closing; it was 52% lower in the initial four months.

The price ceiling mechanism remains largely intact, albeit with diminished impact on Russia’s oil revenues. However, it has led to the unintended consequence of increased opacity in Russian oil trading, propelling it into a “gray zone.” The number of untraceable vessels and shadow traders is on the rise, often obscuring company ownership and the whereabouts of profits.

Secondary sanctions have not been aggressively enforced in relation to the price ceiling. Countries not supporting sanctions continue to purchase Russian crude, sometimes refining it and re-exporting to the West. Russia has largely adapted to this new oil export environment. While the long-term health of its oil sector may be jeopardized by limited access to advanced technologies and affordable capital, for now, the sanctions have notably failed to derail it.

Financial sanctions against Russia had a significant impact on the nation’s banking system, complicating both fiscal and monetary policies. Although these sanctions alone couldn’t topple the Russian economy, they acted akin to an immune system deficiency—aggravating existing issues and hindering economic activities.

Western allies exercised caution in imposing widespread sanctions on Russia’s financial institutions. Prior to the full-scale invasion of Ukraine in 2022, Russia’s integration into the global financial infrastructure and its willingness to leverage its energy and trade sectors constrained many of the proposed sanctions. This hesitancy allowed Russia some preparation time for milder restrictions, although it was caught off guard by the more severe ones.

In July 2014, the U.S. transitioned from sanctions targeting individuals to those aimed at corporations. The initial wave of sanctions focused on state-controlled entities like Rosneft, Russia’s largest oil producer; Novatek, the country’s second-largest gas company; Gazprombank, a bank linked to Russia’s gas-export monopoly; and Vneshekonombank (VEB), a state-owned development bank that had heavily funded projects like the Sochi Olympics.

For these four major Russian companies, the U.S. Treasury Department restricted access to equity financing and medium-to-long-term debt (exceeding 90 days) from investors and lenders connected to the U.S. However, these sanctions stopped short of freezing the companies’ assets or barring U.S. citizens and entities from conducting routine business with them. Soon after, the EU joined in on these restrictions, extending them to include VTB, Rosselkhozbank, Sberbank, and others.

The action, although appearing temperate on the surface, subtly laid down the groundwork for intensified restrictive measures. On one hand, it amplified the borrowing expenses for these corporations, rendering the longterm global growth blueprints unviable for numerous entities. On the other hand, it introduced an ambiance of unpredictability, leading to speculation about potential subsequent targets. This speculative atmosphere inadvertently curtailed the creditworthiness of even those enterprises untouched by the directive. Beyond the direct edicts of the US or EU officialdom, the internal risk and compliance units of global financiers recalibrated, elevating the risk assessment associated with Russian businesses.

Russia faced repercussions from the “Countering Russian Influence in Europe and Eurasia Act of 2017,” a segment of the broader “Countering America’s Adversaries Through Sanctions Act” (CAATSA). This was in response to Russia’s alleged meddling in the 2016 US elections and its activities in Ukraine. Though the act garnered significant bipartisan endorsement, the Trump administration hesitated, only submitting its list of Russian entities to face sanctions in October 2017, missing the set deadline by nearly a month. Although sanctions started being imposed on these entities in January 2018, the administration’s subsequent approach was languid, lacking a holistic strategy. At one point, there were even suggestions that the sanctions might no longer be essential.

Between 2015 and 2022, the most stringent sanctions package was enacted, fundamentally altering the landscape of economic engagement with Russia. Not only did these measures intensify restrictions on exports and investments, but they also ushered in a new era of targeting Russian billionaires and, by extension, their substantial assets. This shift culminated in April 2018 when the U.S. Treasury Department issued sanctions against a cadre of Russian ‘oligarchs,’ including Oleg Deripaska, the owner of the aluminum behemoth, Rusal.

The individuals targeted were added to the Specially Designated Nationals and Blocked Persons List (SDN), a move that automatically extended the sanctions to companies they owned or controlled. In the case of Rusal, this had cascading effects far beyond Russia’s borders, throwing the global aluminum market into unprecedented turmoil. The repercussions were so disruptive that the U.S. government eventually found itself in a quandary, forced to negotiate a compromise to mitigate the unintended consequences of its own policy.

Ultimately, the U.S. reached an agreement to delist Rusal on the condition that Deripaska would step back from direct management of the company. This concession highlighted the intricate interplay of geopolitical strategy and global markets, illustrating how the wide-reaching ramifications of sanctions often necessitate subsequent adjustments to attain the desired policy outcomes without causing collateral damage to other sectors or economies.

The Rusal embroglio showed the global markets and the Russian government how unpredictable the sanctions could be. Any sanctions-related legislative proposal by the US Congress jittered the Russian market. A bipartisan Defending American Security from Kremlin Aggression Act of 2018 envisaged a sweeping ban on US investment in Russian state-owned energy colonies and in its new sovereign debt (NB – no one proposed to hit the already issued debt, of which about a third at that time was owned by foreign funds). A mere publication of the proposal sent the Micex stock market index down by 2% in one day, while ruble declined by some 5% over a week.

Despite being approved by committees, being re-introduced a year later, and even included in a draft of a federal budget for 2021, the act has never been adopted, reportedly facing the opposition of the US administration. The only debt-related restriction was issued in 2019. It prohibited the US banks (and by extension, any other bank with operations in the US) from buying Russian newly issued FX-denominated debt, or Eurobond. Awashed with petrodollars and already on a course of reducing its exposure to foreign debt, the Russian government has hardly felt the impact.

In 2021, a new ban came into force, which banned US banks from participating in the primary market of both FX and ruble-denominated sovereign debt. However, as investing in the said debt hasn’t been banned, the foreign investors were able to buy it from the Russian market makers. The ruble-denominated debt market remained open for the foreigners.

Both the Trump and Biden administrations aspired to use what senators termed as ‘sanctions from Hell’ to deter Moscow. However, as became evident in the early hours of February 24, 2022, this approach was unsuccessful. The sanctions imposed prior to 2022 had a two-fold impact on the Russian economy. Firstly, they shaved off several percentage points from Russia’s economic growth and exacerbated the 2015 recession, which was primarily induced by a significant downturn in oil prices.

Secondly, these sanctions served as a wake-up call for the Russian government, offering time to adjust and prepare. Russian corporations downsized their foreign exchange debt, particularly those denominated in U.S. dollars, and minimized their asset holdings in the U.S. Similarly, the Bank of Russia shifted its reserves away from U.S. dollars, favoring assets in euros and Renminbi instead.

Consequently, both the Russian economy and its banking sector have become less vulnerable to foreign exchange fluctuations.

Simultaneously, the level of foreign involvement in Russia’s sovereign and corporate debt, equities, and newly issued shares has been on a downward trajectory. In some respects, both parties approached the turbulence of 2022 with some level of preparedness. It’s reasonable to posit that although the sanctions regime from 2014 to 2021 failed to dissuade Russia from initiating an aggressive conflict, it might have served to delay it.

Even before the onset of the full-scale invasion, the United States had already taken financial measures in response to Putin’s recognition of the ‘people’s republics’ in Donbas. One significant step was the long-discussed prohibition on any new investments in Russia’s newly issued ruble-denominated debt, commonly known as OFZ. As a result, the market for new Russian sovereign debt became largely inaccessible to most foreign investors. Existing debt holdings remained legal; an outright ban would have primarily harmed the holders rather than the issuer, i.e., the Russian state. Nevertheless, Russia’s capability to raise capital on international markets was effectively curtailed. Further repercussions for debt holders due to other actions will be discussed subsequently.

In the aftermath of the armed incursion, the United States, in concert with its global confederates, enacted punitive sanctions that enshrouded the preponderance of Russian financial institutions.

Save for a meager collection of foreign-owned lenders and a smattering of Russian banks, these entities were expurgated from the SWIFT communicative matrix and subjected to an asset freeze in Western territories. This metamorphosed them into parochial entities, circumscribed in their capacity to partake in global financial exchanges, dispatch or receive fiscal currents from a broad swath of nations. A mere smattering of geopolitically amicable states acquiesced to the ingress of rubles from these fiscal institutions, an endeavor that has grown increasingly Sisyphean in the face of augmenting Western coercion.

A conspicuous exemption in this scenario is Gazprombank, the financial conduit through which Russia orchestrates its gas exports to the European continent. Despite clamorous appeals to encumber it likewise, the allies demur, ostensibly to safeguard the vested interests of certain Central European nations.

The sanctions levied upon the financial architecture hamstrung Russian corporations, attenuating their capacity to secure external loans and conduct customary commerce. Yet, these constraints were partially mitigated: the former by a repatriation of Russian capital, and the latter through an intricate network of intermediaries.

Extricating Russia’s financial titans from the global payment nexus thwarted the Bank of Russia from honoring its Eurobond obligations in the annum 2022, notwithstanding its ample liquidity. This precipitated a technical default, though that proved to be a development rendered inconsequential in the grander tableau, given the wholesale disarray that pervaded its debt market.

Subsequent to the United States’ initiative, its global allies have effectuated the immobilization of Russian financial assets, valued in the hundreds of billions of dollars—a sum inclusive of the assets held by Russia’s Central Bank. In a formal pronouncement disseminated in May of the year 2023, the nations comprising the G7, in addition to the European Union, articulated a collective resolve. They declared that the Russian assets, approximated at $300 billion or €275 billion, which have been consigned to a frozen state within the jurisdictions of these aforementioned nations, shall persist in this inert condition. This measure will endure “until such time as the Russian Federation renders appropriate financial redress for the harm it has inflicted upon the sovereign state of Ukraine.”

$335
billion

financial assessment approximated the cumulative sum of Russian assets geographically concentrated in Europe, the United States, Japan, etc.

By the latter portion of July, a financial assessment approximated the cumulative sum of Russian assets, subjected to a frozen state within these respective nations, at an estimated $335 billion. The preponderance of these immobilized assets is geographically concentrated in Europe; the United States retains but a modest fraction, with Japan also holding a non-negligible portion.

In counterpoint to the assertions propagated by Russian state-controlled media, which proclaims these assets as unlawfully expropriated, the actuality is somewhat divergent. The allied nations have yet to formulate a pragmatic mechanism for the transference of even the interest accrued on these frozen assets to Ukraine, let alone the principal sum itself.

Furthermore, the legislative initiative introduced by U.S. senators in July does not advocate for an outright expropriation of these frozen assets in favor of Ukraine.

Instead, their proposal stipulates that these assets shall continue to be conserved in their frozen state until such time as the Russian Federation voluntarily accedes to allocate these resources for the restoration and reparation of the Ukrainian state. Accordingly, although the legislative text presupposes eventual transference, this would transpire solely with Russian acquiescence.

Actions taken by Western nations vis-à-vis the freezing of assets are in consonance with historical precedents. Assets belonging to a nation deemed hostile have traditionally been subject to freezing only for the duration of military hostilities, to be subsequently released upon the normalization of bilateral relations.

The notion of expropriating Russian assets finds little favor among Western political leaders, central bank governors, and financial regulatory bodies. Such an action would necessitate sweeping legal amendments and could precipitate a substantial exodus of foreign-held capital from Western financial systems. This could have a cascading effect, escalating borrowing costs for developing nations for years to come. Furthermore, it would have far-reaching implications on regulations surrounding banking confidentiality. In the current framework, a financial institution holding frozen assets is not obliged to disclose details to legal authorities. However, transfer of such assets would intrinsically violate both confidentiality norms and the sanctity of asset ownership. Though such a violation may be legitimized if underpinned by a judicial decree, as of now, no such legal endorsement exists.

Currently, there is active deliberation on imposing a one-time levy on interest accrued from Russian assets. Belgium’s government was the first to make a concrete step in this direction.

Euroclear, a Belgium-based financial services company, is in custody of €196.6 billion (approximately $209.09 billion) in Russian assets, which includes €180 billion belonging to the Russian Central Bank. According to Euroclear’s own disclosure, revenues generated from Russian financial assets—both from the Central Bank and other entities such as banks under sanctions—in the first half of the current year amounted to €1.7 billion, and another €0.8 billion in 2022. While this figure might decline in the future due to more stable interest rates, the frozen assets may generate about $4 -$5 billion a year. Belgium Prime Minister Alexander De Croo said on 11 October 2023 that €1.7 billion would be transferred to a special fund aiming at financing Ukraine. The sum indicates a 100% levy on the immobilized assets’ revenue. The policy is more probable than not would be replicated by G7 nations. US Treasury Secretary Janet Yellen backed the introduction of a “windfall tax” on profits generated by the frozen assets. However, the move is yet to be formalized, and countries like Switzerland and Luxembourg are yet to join the initiative. There is little chance of the frozen assets being transferred to Ukraine or invested with higher risk, than that existed prior to the immobilisation, to generate more profit.

New debt issuance prohibitions inflated the Russian government’s borrowing costs by an estimated 0.5% points, as per our calculations. Coupled with curbs on the capital account, these sanctions decimated the once-profitable carry trade, where foreign investors capitalized on the higher rates and full convertibility of the ruble. Asset freeze concerns and the looming threat of personal sanctions spurred a massive repatriation of around $50 billion by affluent Russians in 2022.

In an environment fraught with risk—ranging from asset freezes and counterparty defaults to enhanced regulatory scrutiny—global banks opted for caution, eschewing Russian assets and transactions, even those not explicitly blacklisted. Compounding this, the withdrawal of international payment systems like Visa and MasterCard rendered all locally-issued cards inoperative abroad.

Ironically, such circumspect Western policies inadvertently aided the Bank of Russia in mitigating capital outflow, particularly as repatriated funds from the West bolstered the capital account. Russia reciprocated with stringent countermeasures, trapping any proceeds from securities owned by Western investors in specialized ruble accounts, effectively cordoning them off from external markets.

This labyrinthine regulatory framework, along with the ruble’s constrained convertibility, not only blunted some of the sanctions’ adverse impacts but also contributed to modest inflationary relief. Additionally, it shielded the Russian economy and currency from global fluctuations, with oil prices reverting to their 1990s role as Russia’s singular channel to global financial market volatility.

Initial assessments of the financial sanctions’ impact, compounded by trade restrictions, appear to have been overly pessimistic. As per the IMF’s report dated April 11, 2022, the Russian economy is projected to contract by 8.5% in real GDP terms for 2022, accompanied by an inflation rate of 21.3%. This hasn’t happened mostly due to the swift reaction of the Bank of Russia and the Finance Ministry.

While the immediate ramifications of the financial sanctions haven’t led to economic collapse, long-term effects on Russia’s economy may well to be crippling. The asset freeze has placed a strain on several Russian corporations, VTB being the most significant among them. It has also hamstrung the ability of Russian exporters to acquire foreign currencies like dollars and euros, a critical component for trade in commodities such as oil. Additionally, the Bank of Russia has been forced into a monolithic reliance on the Chinese RMB as its primary reserve currency. As a result, by the end of 2022, the ruble transitioned from a convertible currency to one principally governed by the trade balance.

Preliminary calculations suggest that the prohibition on new debt issuance has elevated the government’s borrowing costs by approximately 0.5%. When coupled with restrictions on the capital account, these measures obliterated the once lucrative carry trade. This strategy had previously enticed foreign investors with the allure of higher interest rates and full ruble convertibility.

By the conclusion of 2022, the ruble had metamorphosed from a freely convertible currency to one almost solely tethered to trade balance dynamics, which in Russia’s case is synonymous with oil trade.

Fast-forward to 2023, and Russia’s economy appears to be more insular and inward-looking than it has been in three decades. The budget for the year indicates that inflation—and consequently, the cost of borrowing — will persist at elevated levels. While financial sanctions haven’t been cataclysmic, they’ve rendered the economy highly vulnerable to external shocks. A downward shift in oil prices, increased restrictions on Russia’s oil commerce, or a faltering demand from key trading partners like China and India could amplify the sanctions’ impacts in an unpredictable but certainly detrimental manner.

The ramifications on investments from sanctions have been vast and two-sided, initiated by both Western nations and Russia itself.

While on February 24, 2022, the US and the EU imposed prohibitions preventing Russia (on a sovereign level) and its various corporations and banks from seeking funds in their capital markets, Putin categorized nations into “allies” and “adversaries.” Subsequently, he instructed Russian businesses to halt loan repayments to entities based in the “adversarial” nations from March 1, 2022. Moreover, by July 2022, dividends from Russian companies to overseas stakeholders were restricted. By August 2022, any trade involving stocks that corporations from “adversarial” countries held in Russian energy and finance sectors was prohibited. And, by the following year, pre-existing agreements to avoid “double taxation” with 38 of these “adversarial” countries were nullified.

While the strategies employed by the Kremlin might seem comprehensible – as they aimed to halt the outflow of foreign currency – the West’s actions appeared somewhat puzzling. For instance, the US Treasury granted a distinct permit allowing US banks to manage Russian external debt repayments until May 25, 2022. However, once this allowance concluded, it effectively triggered Russia’s default on both its foreign sovereign and corporate debt. Under the current structure, Russian bondholders are somewhat shielded given that all transactions are executed in rubles. In contrast, holders of Eurobonds located in overseas territories appear to be struggling to reclaim their investments.

This marked a staggering rise of almost 70% from the previous year. These earnings inadvertently bolstered the Russian national treasury, indirectly underwriting Putin’s military campaign against Ukraine.

The tally of corporations ceasing operations in Russia displays considerable variation. According to the data gathered by the Institute for Senior Executive Management at Yale University, over 1,000 foreign firms had withdrawn from Russia by the start of September 2023. This count encompasses companies that officially declared discontinuation of their brand’s presence but might still engage in supply operations. A case in point is Diageo: while the company formally exited Russia, their products, like Guinness beer, continue to flood the Russian market, with volumes reaching up to 1.5 million liters in the first half of 2023 alone. Contrasting estimates present a different narrative. Joint research by the Re: Russia analytical platform and the iStories website indicates that merely 20% of the businesses active in Russia before the war’s inception actually departed. Meanwhile, Swiss analysts Niccolo Pisani and Simon Evenett have estimated this figure to be just 120 companies (or a mere 8.5% of the total) that offloaded their Russian holdings or subsidiaries by December 2022.

Unsurprisingly, Ukrainian-based estimations present a more conservative picture. Out of the roughly 3,500 Western businesses that were active in Russia at the war’s onset, a mere 276 companies, translating to around 6% of the total, fully retreated from the Russian market. Over 700 opted to put their operations on hold without formally announcing a departure, while an additional 500 appeared to be navigating their exit strategies. Conversely, a significant portion, numbering over 1,900 companies, either curtailed certain operations (such as dealings with Russian governmental bodies), proclaimed a moratorium on fresh investments, or remained unresponsive to the unfolding conflict and subsequent sanction impositions.

Individual (targeted) sanctions have recently appeared in the practice of States and international organizations. Traditional international sanctions were not aimed at individuals since the traditional subjects of international law and international relations and sanctions’ targets remained exclusively states. In this context, a mechanism of international security has been created that gives the United Nations Security Council a unique power to deal with threats to international peace and security. The Security Council can deal with such threats by imposing sanctions against the source of the threat. But it was never thought when the UN Charter was drafted that the UN Security Council would deal with individuals. Individual states were also reluctant to impose measures on individuals due to dubious efficiency and potentially high costs of retaliation.

Although, in parallel, the international criminal responsibility of individuals emerged, its application was limited to German and Japanese war criminals in the Nuremberg and Tokyo trials. The system of international criminal liability is not yet complete. Even now, with the permanent International Criminal Court, the international criminal justice system is still far from universal. The ICC jurisdiction is limited and self-restricted by the crimes committed on the territories of state parties. In the case of the crime of aggression, the hands of the ICC are especially tied.

For example, in the case of the Russian Federation, the International Criminal Court does not have jurisdiction to prosecute the crime of aggression against Ukraine, which gave rise to a discussion related to the initiative of a special international tribunal for the crime of aggression. With regard to other international crimes (war crimes, crimes against humanity and genocide), the real capacity of the ICC, as well as the courts of national jurisdictions, to bring the perpetrators to justice is also limited, as demonstrated by the case of the ICC arrest warrants for Vladimir Putin and Maria Lvova-Belova.

Thus, individual sanctions were intended to fill the accountability gap and address the obvious inefficiencies of “traditional sanctions.” The idea of targeting personal foreign assets and access to foreign financial markets of members of the Government, the ruling elite, or military members can be traced to discussions in the 90s, during the relative ease of international relations. In the wake of many sanctions regimes, problems became apparent. Sanctions with a very broad effect on whole populations came under scrutiny.

Sanctions against individuals and other non-state actors identified as a more direct threat to international peace and security than entire state populations were the logical consequence. Targeted sanctions are designed is to shift the costs of violation of international law from the general population of targeted countries to the persons responsible for those violations. Carefully targeted sanctions, it is argued, can also reduce the harm done to third-party States, thus removing incentives to defy the sanctions. Sanctions might impact state policy by affecting specific individuals who influence the states’ decisions.

Since the start of the “war on terrorism”, personal sanctions have been increasingly applied by the UN Security Council and, respectively, by various states and international organizations. The practice of imposing and applying personal sanctions has been constantly and consistently criticized in terms of its effectiveness and compliance with the norms of international law, especially human rights. The main problems also manifested in the practice of sanctions against Russia, are their extrajudicial character and the fact that sanctions are the result of extremely politicized, arbitrary, and untransparent processes, lacking effective legal remedies both at the international and national levels. As such, sanctions, unfairly and proportionately applied to the wrong targets, often discredit the idea of accountability for the grave violations of international law.

In the 2005 World Summit declaration, the General Assembly called on the Security Council, with the support of the Secretary-General, to ensure that fair and clear procedures are in place for imposing and lifting sanctions measures. The policy of individual sanctions has become “contagious” for states. First, the very practice of the Security Council has become authoritative for States that are not afraid to resort to these measures. This has led to an almost uncontrolled increase in the number of persons subjected to these non-judicial measures of an exceptional nature. Sanctions have become the rule instead of an exception (in a situation where judicial action is impossible). In particular, they are imposed on persons not outside the jurisdiction of the States of which they are nationals and permanent residents. Personal sanctions are “cheap” and their introduction does not impose significant costs on states. The grounds for the imposition of sanctions are also often vague. Individuals are referred to in terms of the actions of States, which describe collective actions in an essentially generalized manner devoid of the specificity inherent in individual responsibility. Inclusion on sanctions lists is often justified by membership in a particular “amorphous” group or even by a simple association (e.g., a family connection with another sanctioned individual).

A typical example is the criteria for imposing sanctions by the European Union, which the eleventh sanctions package has amended. Among the objectives of the sanctions were the following: ”leading businesspersons or legal persons, entities or bodies involved in economic sectors providing a substantial source of revenue to the Government of the Russian Federation, which is responsible for the annexation of Crimea and the destabilisation of Ukraine”. Although the economic actors assisting the Russian regime are legitimate targets of sanctions, formulations like this blur the line between legal measures and political retaliation and are incompatible with the principles of legal certainty.

Such criteria do not require any proof of a connection between specific business persons’ activity and international law violations.

This blurred the criteria of responsible individuals and gave Russian authorities and their propaganda the basis to claims that all sanctions imposed by the European Union are purely political deterrence and have nothing to do with the alleged grave violations of international law committed by Russia. As a rule, there is no formal and transparent procedure for making decisions on personal sanctions. Unlike the judiciary, the executive branch and international bureaucrats are not bound by the requirements of a formal fact-finding procedure. International organizations also rely excessively on data provided by Member States (this is how international legitimation of de facto national measures occurs) and domestic bodies.

The most critical problem for personal sanctions is the lack of a mechanism for restoring a lawful position as a condition for lifting sanctions; in other words, they are different from sanctions against states with a clear goal of stopping violations. In this regard, personal sanctions have a much more punitive character, which, at the same time, is imposed on individuals outside the criminal procedure. In particular, UN sanctions are characterized by a complex and almost impossible delisting procedure, carried out in rare cases – through the state of residence or citizenship.

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The issue of personal sanctions, often the most publicly visible and debated aspect of a sanctions regime, frequently becomes the focal point of legal disputes, journalistic scrutiny and lobbying efforts. These sanctions can be wielded by various parties for purposes other than their intended political or security objectives, such as settling internal economic disputes or combating political opposition.

It is in this context that the authors of this report wish to underscore that the observations regarding personal sanctions are consistent with the overarching thesis of this analysis: that a transparent, lawful, and logically coherent sanctions policy is likely to be more effective in countering aggressive behaviors than broad-brush approaches that lack clear rationale and are poorly understood by affected communities, including the Russian populace. Specific cases highlighted in this section are not intended to signal either endorsement or critique of any particular sanctions decision; rather, they serve to illustrate the complexities, inconsistencies, or anomalies often inherent in the implementation of personal sanctions.

In sum, while sanctions targeting specific activities with the potential for restricting or even damaging them may be effective, application of personal sanctions raises a series of legal and ethical questions. Most notably, personal sanctions often violate the principle of non- retroactivity, a cornerstone of justice that prohibits punitive measures for actions undertaken prior to the establishment of the law which later made them as illegal.

For example, sanctions levied against Russian oligarchs for attending a meeting with President Putin on February 24, 2022 raise questions concerning fairness and legality of such punitive actions. These individuals were sanctioned because their mere attendance was interpreted as supporting actions that undermine the territorial integrity and sovereignty of Ukraine. However, this interpretation retroactively criminalizes actions — such as meeting with the President or being a wealthy businessman — that were not identified as wrongdoings prior to the announcement of sanctions between March 9 and April 8, 2022.

Thus, this approach undermines the legal principles that should ideally govern the application of sanctions and risks eroding the credibility and effectiveness of such policy measures.

The practice of implementing personal sanctions that target broad groups, such as the “Putin’s list”, by OFAC in 2018 that included all 97 Russian billionaires from the Forbes list challenges the principle of individual responsibility that is a cornerstone of Western legal systems. This wholesale categorization veers into collective punishment, a tactic that has questionable ethical and legal standing.

Comparing this tactic to historical examples like Nazi Germany’s persecution of Jews or the Communist-era “class struggle” highlights severe ethical and ideological problems embedded in such approaches. While these are extreme examples, the point stands that casting wide nets of punishment based on group identity contradicts principles of individual justice and opens the door to abuses and miscarriages of justice.

Furthermore, sanctions targeting family members of those already sanctioned raises even more troubling ethical questions. Such sanctions could be perceived as guilt by association, another concept fundamentally at odds with the idea of individual responsibility and due process. Therefore, the use of personal sanctions, especially when applied broadly to groups or extended to family members, not only risks undermining Western principles of justice but also casts doubt on the legitimacy and efficacy of sanctions as a policy tool.

The current sanction regime’s one-size-fits-all approach indeed appears to be flawed. Treating all individuals implicated by sanctions as if they were equally culpable undermines the nuanced nature of justice. The broad-brush approach, where the likes of military commanders directly involved in conflicts are subject to the same restrictions as businessmen who have no such involvement, fails to honor the principle that punishment should be proportionate to the crime committed. A diversified approach to personal sanctions, aligned with the role and involvement of each individual, would not only be fairer but also potentially more effective in achieving the intended outcomes.

Additionally, the objectives behind the imposition of personal sanctions remain unclear, further muddying their efficacy and ethical standing. In traditional punitive law sanctions or punishments have a clearly defined purpose, whether deterrence, retribution, or rehabilitation. But personal sanctions seem to have a murky, unstated goal of perhaps influencing the behavior of an entire elite class, not just the individuals targeted. This strategy could be likened to hostage-taking, where the fate of one or a few individuals is used as leverage to influence a larger group.

Furthermore, the change in terminology from “oligarch” to “influential Russian businessman” suggests that the authorities recognize the impact these individuals have beyond their personal deeds. The idea seems to be to exert pressure on these influential figures in hopes of affecting broader political and economic policies. Yet, this strategy runs the risk of unintended consequences, including the hardening of attitudes against Western policies and institutions. In summary, current sanction practices raise multiple concerns related to proportionality, ethicality, and the ambiguity of objectives. For them to be a useful and just tool these issues must be carefully considered and addressed.

Analysis indicates that sanctions aimed at individuals, with the exception of state leaders from countries engaged in aggressive behavior, constitute extrajudicial actions initiated by the executive branches of certain states. These actions are often implemented with the objective of influencing the political course of a targeted nation. Notably, the criteria for selecting these individuals for sanctions may not always be linked to specific actions or deeds but rather to their perceived ability to affect their country’s power structure.

Such extrajudicial measures pose significant challenges to societies founded on the rule of law, as they may not be as effective as conventional punitive actions. In contrast, criminal proceedings aimed at persons involved in committing international crimes, including crime of aggression, are often more equitable and effective. Conducted even in absentia, these proceedings uphold principles of individual responsibility and proportionality in punishment.

It might be prudent to consider historical precedence set by international tribunals, ranging from the Nuremberg and Tokyo trials to contemporary cases in international courts. These precedents indicate that more nuanced approaches, such as legal proceedings, could result in the acquittal of individuals not directly implicated in crimes, while effectively penalizing those who are. Therefore, it could be advisable for policymakers to examine the efficacy and ethical implications of sanctions in comparison to established judicial procedures.

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The subject merits specific attention as it highlights a critical shortcoming in the policy of sanctions, with considerable practical implications. In 2014 Western nations imposed sanctions on approximately 150 Russian individuals for their roles in the annexation of Crimea and the conflict in Donbas. Notably, these measures were highly selective, focusing primarily on officials and military personnel directly involved in the conflict, along with a limited number of business figures involved in projects within the occupied territories, such as Boris and Arkady Rotenberg.

During this period the selective nature of the sanctions led members of the Russian elite to seek ways to circumvent these punitive measures, effectively causing the sanctions to function as a deterrent. This historical context could offer valuable insights for policymakers in refining the criteria and scope of sanctions to improve their efficacy and precision.

Beginning in 2022, sanctions imposed on Russian entities and individuals have broadened significantly in scope, encompassing diverse groups including approximately 40 military commanders, 180 bureaucrats, 700 elected officials such as deputies and senators, 420 business leaders, and 75 individuals involved in scientific, media, and propaganda activities. These constituencies represent core pillars of the current Russian administration. When subjected to uniform sanctions, these disparate groups may find a strong incentive for consolidation behind the leadership, a phenomenon that had been anticipated prior to the implementation of these measures.

Sanctions often escalate following significant events, such as newly documented military offenses or activities targeting Russian dissidents. This escalation tends to reverberate across all targeted groups, regardless of their recent actions or lack thereof. Recent developments have also seen sanctions extend to more nebulous entities, like the Valdai Club or the Higher School of Economics, organizations with which thousands are affiliated in some capacity. A discussion of their connivance or inaction in allowing Putin to start the war in one way or another is certainly legitimate, but whether they should be subject to the same type of sanctions or restrictions as other categories of individuals is questionable.

This development raises questions about the efficacy and strategic implications of such broad-based sanctioning policies and suggests that a more nuanced approach may be warranted to avoid unintended consequences, such as the consolidation of political power.

The report “Moscow’s Gold: Russian Corruption in the UK”, prepared by the UK House of Commons, states directly “… You have to look at the Russian oligarchs as a class. No matter how different they seem to you—one owns a football club, another donated money to Oxford for a school of government, another sat in a Russian jail for six years under communism, another was a civil servant—they all have very particular things in common. They can all be measured with the same yardstick …”

Such a statement not only doesn’t align with reality and contradicts the fundamental legal principle of individual accountability, but the absence of a nuanced approach to sanctions might unintentionally strengthen Russia’s centralized governance system, further solidifying the leadership’s control over various elite factions. This homogeneity in sanctioning strategy may pose a challenge for advocates who call for a more differentiated approach that aligns punitive actions with the scale and nature of the infractions committed. It is also noteworthy that European Union directives have expanded the purview of sanctions to encompass not only the primary subjects but also their familial connections and business associates. Such a broad scope is reminiscent of Russian legislation targeting “foreign agents,” a policy that has elicited critical commentary from Western specialists.

The unintended outcome of such a broad-based sanctioning strategy might be the strengthening of social cohesion within the targeted country, rather than fostering internal fissures or promoting desired changes. In light of these factors, a reconsideration of the existing approach could be considered prudent to better align the sanctions with their ultimate objectives and to mitigate unintended ramifications.

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One can observe instances of inexplicable selectivity in the imposition of sanctions against Russian policymakers, public figures, and business leaders. While a comprehensive analysis would necessitate a dedicated report, a few examples may serve to illustrate this phenomenon.

For instance, when the European Union and the United Kingdom imposed sanctions on the owners of Russia’s Alfa-Bank in March 2022, much attention was directed towards Pyotr Aven’s historical relationship with Vladimir Putin, dating back to a 1992 export-import deal when Putin was vice-mayor of St. Petersburg and Aven served as Russia’s Minister of Foreign Economic Affairs. In contrast, Alexey Kudrin, who played a significant role in bringing Putin to Moscow in 1997 and who has since occupied key government positions, including that of Finance Minister and Chair of the Accounting Chamber, was only included in the sanctions list in July 2023. This inclusion occurred after Kudrin had left government service to join Yandex Corp., which raises questions regarding the timing and rationale for his belated inclusion in the sanctions list.

Such inconsistencies might warrant further examination to ensure that sanctions are being applied in a manner that aligns with the objectives they are intended to serve, and that they are free from arbitrariness or undue selectivity.

Another example that calls attention to potential incon- sistencies in the sanctioning process involves Mikhail Prokhorov, a businessman who was once the richest in Russia. Despite his long-time ownership of key Russian enterprises and his active role in legitimizing Vladimir Putin’s return to the Kremlin—having run for President in 2012 with Kremlin backing and advisors from Sergey Kirienko’s team—Prokhorov has not been included in any sanctions lists. This stands in contrast to individuals like Farkhad Akhmedov, who divested from his main Russian assets approximately a decade prior and mostly resides in Azerbaijan, yet was included in both EU and UK sanctions lists. Akhmedov was only recently removed from these lists following a protracted legal battle with European authorities.

Additionally, entrepreneurs such as Oleg Tinkov was been included in the sanctions lists, despite public condemnations of the conflict and significant financial losses. Tinkov was forced to sell his bank, which was once the second-largest in Russia by market capitalization, for a fraction of its worth.

These examples suggest a degree of variability and apparent inconsistency in the application of sanctions, which may well benefit from further scrutiny to ensure alignment with the intended objectives and equitable treatment of the individuals concerned.

The existing sanctions policy exhibits a range of shortcomings that manifest themselves in both over-inclusion and under-inclusion of targeted individuals. On the one hand, there are cases where individuals have been placed on sanctions lists despite having exhibited behavior that might be considered to be in opposition to contentious activities. For instance, already mentioned Oleg Tinkov and others have expressed critical positions or even resigned from their corporate roles following the onset of hostilities, yet they were still subjected to sanctions.

On the other hand, there are instances where individuals who might reasonably be considered as supportive of contentious activities have either not been sanctioned or have had sanctions lifted. An example of this is Grigory Berezkin who was recently cleared of all sanctions despite his ownership of several major Russian media outlets known for disseminating propaganda, such as Komsomolskaya Pravda daily.

Mr. Berezkin’s colleague, Alisher Usmanov, owner of the Kommersant Publishing House, is under sanctions, whereas Yuri Milner, who invested Usmanov’s money in American tech assets, is a respected figure in Silicon Valley, and the founder of the Breakthrough Prize, which leading Western scientists are not hesitant to accept. Yuri Milner is also known as a co-founder of Mail.ru and Vkontakte, large Russian internet social networking and media companies, which gradually came under the state’s unofficial control and censorship. Meanwhile, Arkady Volozh, the founder of its main competitor, Yandex, who moved from Russia to Israel years ago and condemned the military aggression, still remains under sanctions.

Another example is the sweeping and, in our view, inaccurate generalizations one finds in the House of Commons report (mentioned above). In fact, the actual situations of the individuals pointedly hinted at by the report’s author or authors vary: Roman Abramovich is under sanctions and was forced to sell the football club his owned at a loss, while Leonard Blavatnik continues to see his name not just on an Oxford college, but also on the Tate Museum. He remains unaffected by sanctions.

Such inconsistencies indicate areas for potential improvement in the sanctions policy to ensure that it effectively serves its intended objectives while maintaining fairness and proportionality.

In conclusion, it is noteworthy to mention that the motivations behind some sanctions appear to be driven by commercial interests rather than principled policy considerations. Ukraine serves as a compelling example in this regard. In contrast to freezing assets, the Ukrainian government has opted to confiscate and transfer to the state the property of sanctioned Russian businessmen. Cases in point include the seizing of Sense Bank, previously owned by Luxembourg-based ABHH, and the assets of Russia’s LSR Group.

Moreover, the Ukrainian government’s sanction lists include individuals who have served in Russian state institutions, regardless of their individual actions or declared positions on controversial issues. An illustrative example is Sergei Petrov, a former State Duma deputy. In 2014 Petrov was one of only three deputies to abstain from voting on the annexation of Crimea. Despite this, he has been subjected to sanctions solely by the Ukrainian government.

Unfortunately, the Ukrainian position on sanctions, due to the obvious sentiments in society, is populist, often tactical in nature, including instances, as in many developing post-Soviet countries, not free from biased, even corrupt, influence. Given these observations, it could be advisable for Western powers to exercise caution when considering Ukraine’s recommendations in shaping the sanctions policy. A thorough and nuanced analysis is imperative to ensure that sanctions serve their intended objectives, are seen as just and fair, and do not generate unintended negative consequences.

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One of the perhaps unintended (but yet predictable) consequences of personal sanctions has been the coalescence of various Russian elite groups around the Kremlin. Previously segmented into distinct categories— political, business, military, security, and artistic—these elites found a new commonality as their options for residence and business operations abroad became increasingly restricted. Subsequently, their alignment with the Kremlin’s directives has become more pronounced. In light of the sanctions, many have relocated their secondary residences from European countries to Israel, the United Arab Emirates or Turkey.

An additional point warranting consideration is the altered economic calculus, colloquially referred to as the “relative price” of sanctions. Historically, Russian businessmen have shown a preference for Western jurisdictions as repositories for their wealth, viewing Russia as an environment fraught with financial risks and an unpredictable tax system. However, this perception underwent a notable shift in 2022. Assets held by affluent Russians in Western countries were either frozen or endered immobile. Concurrently, some proposals emerged suggesting that a considerable portion of these assets should be transferred to Ukraine as a condition for lifting of the sanctions.

In contrast, within the Russian Federation the government implemented what is considered to be a reasonable tax on “excessive profits,” leaving substantial fortunes largely undisturbed. This has led to a newfound sense of security among Russian businessmen who display loyalty to the state. For the first time Russia appears to serve as a relatively “safe haven” for significant capital. Preliminary data from 2023 indicates that this shift has been accompanied by an uptick in domestic business activity and tax revenue generated from local sources.

In summary, the landscape for Russian elites has been substantially altered by the imposition of personal sanctions, resulting in both political and economic realignments. These developments raise questions about the intended and actual outcomes of Western sanctions policy, suggesting a need for further review and possibly recalibration of existing measures.v

Navigating the labyrinthine geopolitical landscape, one is compelled to recount the saga of Ukrainian-born magnates of the Alfa Group, Mikhail Fridman and German Khan. Their tale is emblematic of the nuanced dynamics that play out in the wake of grand political gestures.

Migrating to Britain in 2015, post the annexation of Crimea, their trajectory appears more as a denouncement of political actions than the pursuit of capitalist ventures. Alfa-Bank, under their stewardship, conspicuously abstained from expanding into Crimea. Instead, their overarching holding entity, the Luxembourg-domiciled ABHH, channelled resources into Ukraine. Their investment portfolio, both commercial and philanthropic, exceeded $400 million in the nation. Beyond the Ukrainian frontiers, their Western forays, either directly or via the LetterOne conglomerate, amassed investments surpassing the $2 billion mark during the same period.

Mikhail Fridman, as the group’s helmsman, publicly condemned Russia’s militaristic endeavors in Ukraine, showcasing a firm stance that belied his Russian origins. Whispers and more concrete evidences allude to their covert support for the Ukrainian military apparatus during these tumultuous times.

Yet, the international sanctioning machinery, in a sweeping act, ensnared the entirety of Alfa Group’s shareholders. Engulfed by the maelstrom of European, British, and American sanctions, these magnates found themselves embroiled in prolonged legal battles. Their plea wasn’t solely about economic salvages; it was a fight to retain their adopted homestead under pre-existing terms. And while sections of the Russian opposition and diaspora rallied behind them, the overpowering might of geopolitical machinations ultimately coerced their exodus from Europe.

Conversations with affluent Russian individuals in recent months indicate a pervasive sense of discontent and disillusionment with Western sanctions. Many of these individuals consider at least some sanctions unjustified and lacking substantive grounds. Notably, this sentiment appears to prevail even among those who privately oppose Russia’s military actions. The emotional repercussions are such that a majority express a reluctance to re-engage with Europe, even under hypothetical conditions where sanctions might be lifted and assets unfrozen. The current trend suggests a pivot towards alternative jurisdictions such as the United Arab Emirates, Israel and Turkey for the placement of financial assets and real estate investments.

This shift in sentiment and behavior among Russia’s financial elite points to a longer-term erosion of trust and credibility in Western institutions. The time span for this reputational damage is not easily quantifiable but appears likely to extend over decades rather than years. Consequently, this could inadvertently bolster President Putin’s earlier policy agenda of “nationalization of the elites,” which was articulated upon his return to the Kremlin in 2012. The recent developments necessitate a thorough evaluation of the efficacy and unintended consequences of Western sanctions policy.

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The final aspect meriting attention is the repatriation of capital into Russia, a perhaps unintended outcome of personal sanctions. Based on certain estimates, upward of $50 billion has reportedly been funneled back into the Russian Federation since the onset of the conflict. It should be noted that the actual figure could potentially be higher, given that not all financial flows are meticulously documented. Interestingly, this amount is on a par with the approximately 4 trillion rubles that Russian citizens have deposited in personal bank accounts in post-Soviet countries, Turkey and the United Arab Emirates. These deposits are primarily aimed at obtaining functional payment cards and safeguarding financial assets. Thus, the restrictions imposed by Western etities appear to have inadvertently contributed to Russia’s financial stability.

It is advisable to view this phenomenon as an indirect effect of the sanctions. The individuals repatriating these funds are generally not the subjects of the sanctions themselves; rather, they are motivated by concerns that their assets could be frozen or seized. It is a well-established fact that Russian nationals currently face significant challenges in operating bank accounts within European jurisdictions.

Thus, the restrictions imposed by Western entities appear to have inadvertently contributed to Russia’s financial stability.

A broader implication of this trend raises questions about the efficacy of the sanctions strategy. What was initially conceived as a punitive measure targeted at specific individuals responsible for the conflict is at risk of transforming into a tool that fosters alienation among the entire Russian citizenry. Whether this outcome was an inadvertent miscalculation or a deliberate choice within the original sanctions design, it certainly merits further scrutiny. The effect dilutes the intended impact of sanctions, shifting focus from culpable individuals to the general population, thereby undermining the original objectives of these measures.

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In the context of the existing sanctions framework, it may be beneficial to explore various amendments aimed at enhancing its effectiveness and scope. First of all, people who do not meet the sanctions criteria, who have been included in the sanctions lists by mistake, by hearsay or for other reasons that do not correspond to the objectives of sanctions pressure, should be removed from the lists — sanctions pressure is too important an instrument to be discredited by its erroneous or indiscriminate use.

For individuals residing and working in Russia—regardless of their views on the war, financial status, or tax contributions—exemption from sanctions could be considered. To be eligible for such exemptions, particularly for activities like travel or business operations in European countries, a public denouncement of the war could be set as a prerequisite. Some experts suggest that this may not be the most effective approach. Such declarations could be difficult to harmonize and may subject signatories to persistent accusations of being “forced” or “insincere.” A more pragmatic approach may lie in shifting the emphasis from symbolic gestures to concrete legal and financial actions, also confirming the break or leading the entrepreneur to break with the system.

For sanctions to be lifted, it might be more effective if businessmen and women — provided they are not criminally implicated in war crimes — align themselves with foreign companies operating in Russia. This could involve renouncing Russian citizenship, divesting from Russian business interests, and contributing to a specially established humanitarian fund. The parameters of such contributions could be determined by independent humanitarian organizations with a sterling reputation, thereby adding a layer of accountability and legitimacy to the process.

As mentioned, there may be merit in identifying a separate category of individuals, actively sought by Western governments for offenses that range from war crimes to evasion of sectoral sanctions or actions undermining Western security. Instead of imposing traditional sanctions, issuance of confidential arrest warrants could be contemplated as a strategic measure for facilitating their capture. It is worth noting that recent actions by Western governments have included public sanctions against Russian nationals for a broad spectrum of offenses such as identity theft, financial misconduct and cybercrimes. This strategy could be perceived as an expansive, as opposed to focused and detailed, and potentially counterproductive application of sanctions policy. Therefore, a more focused and discreet approach might yield better results in aligning with the goals of both sanctions and arrest warrants.

Moreover, personal sanctions could be reserved for those who, although not directly involved in war crimes or hostile activities against Ukraine and Western countries, nonetheless publicly endorse or profit from the war or the regime initiating it. It is advisable that these sanctions be applicable to actions committed after key milestones, such as annexation of Crimea or invasion of Donbas post-2014.

Lastly, the procedure for lifting sanctions requires a comprehensive and detailed framework. One might argue that the primary objective of personal sanctions is not necessarily regime change—given the current limitations of even affluent Russians to challenge the Kremlin—but rather the fragmentation of Russian elites to induce alignment with Western interests. Accordingly, a well-defined mechanism should be developed for individuals currently under sanctions to have these lifted or sanctions regime may be relaxed depending on compliance with a certain list of parameters. Such a policy could incentivize high-profile figures like oligarchs, wealthy individuals, artists and media personalities to distance themselves from the current Russian administration.

This could serve as a highly valued “exit option,” especially within the context of authoritarian regimes. Therefore, the focus of Western policies might more pragmatically be on punishing war criminals, isolating regime supporters within Russia and facilitating the departure of those willing to sever ties with the current regime.