The Trump administration has taken a hard line against China and Russia. Photo: IStock
The US, EU and others have intensified sanctions against Russia since it invaded Ukraine. Image: IStock

On February 24, Russian President Vladimir Putin announced a “special military action” against its eastern neighbor Ukraine. Putin’s military action brought unbearable misery on Ukraine, killing thousands of soldiers and common citizens and destroying massive amounts of property.

Many nations called it an unjustified and unprovoked act and slapped a set of tough sanctions, especially by the US and European Union, on Russia that were both diplomatic and economic in nature.

The EU decided to prohibit Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system used by banks and other financial institutions for quick and secure exchanges of information.

It is important to note that SWIFT is only a communication tool and not a medium to transfer funds or a payment gateway. The US has not banned Russian banks from transacting with banks from other countries, while the EU barred only three Russian banks from conducting financial transactions.

Barring Russia from accessing SWIFT would thus make it difficult but not impossible to conduct transactions. Financial communication can be sent via other comparative though less secure modes.

Delisting Russian banks from SWIFT by the US and the EU requires approval from the US Federal Reserve System and the European Central Bank.

Russia has already been using its internally developed Structured Financial Messaging Solution (SFMS) system since 2015. A wider application of this system would be useful for Russia to bypass economic sanctions. 

Options are also open for Russian banks to use the Cross-Border Interbank Payment System (CIPS) developed by China, which has a much broader network than SPFS. Moreover, a process to link SFMS to CIPS is already under way. 

One of the crucial limitations in the sanctions announced by the US Treasury Department is that it exempted eight crucial sectors including energy from its ambit.

On March 8, US President Joe Biden signed an executive order to include the energy sector in the list of sanctioned items. However, the US made it clear that it was not mandatory to follow the ban on energy imports from Russia for those nations that are highly dependent on the Russian energy sector.

Similarly, the EU’s list of sanctions also excludes the energy sector. The EU only banned the sale of technology to Russian energy firms.

It is unlikely that the US or the EU nations will buy Russian energy in a currency other than the dollar. Thus it keeps the door open for dollars to flow into the Russian economy.

Moreover, the US sanctions will come in force on March 26, while the EU has implemented all the sanctions it has announced so far. 

There is a possibility that China may come forward to help Russia, as it did in 2014, to cushion its economy from Western sanctions. China purchased billions of dollars’ worth of Russian gas for its energy-hungry economy, offering great relief to Putin, after the trade and financial sanctions imposed in 2014 over his seizure of Crimea from Ukraine.

Over the last few years the two nations have significantly expanded their trade across various sectors. During 2021, their bilateral trade amounted to US$147 billion, which included agricultural as well as industrial and energy items. 

Along with their expanding trade, China and Russia are increasingly using their own currencies to transact. This is helping them to reduce their reliance on the US dollar and exposure to the US and Western financial system. Chinese state media reported that China used the yuan to settle 17% of its total trade transactions with Russia last year. 

Though China came to Russia’s rescue in 2014, it will be difficult to repeat this in 2022 given its changing geopolitical equation with the US and its allies. China has been engaged in a trade war with the US since 2018 that has severely affected its economy.

Many countries perceive China as a threat that has obliged them to ban several Chinese firms, especially in the technology sector, from operating in their territories. Helping Russia to evade sanctions imposed by the Western powers would further weaken China’s relationships with them.

Hence China will extend support to Russia only if it wants to risk its own access to the US and European markets. And even it does help, it might well be limited.  

Though there are some possible ways to evade sanctions, it is more important to announce an end to the war. Sanctions are perceived as a tool to penalize an economy; however, its implications depend on the size and strength of the economy facing the ban.

Though the long-term effects of the sanctions on Russia could take time to materialize, their immediate effect has already hit several economies indirectly around the world. As the world heavily depends on Russia for energy needs, it will undoubtedly have serious consequences on the world economy, which is yet to recover from measures to control Covid-19. 

Rahul Nath Choudhury is a research fellow at the Indian Council of World Affairs, a think-tank in New Delhi.