The Russian economy is currently avoiding a financial crisis. However, the sanctions coalition can significantly increase pressure on the aggressor by strengthening existing restrictions and improving compliance in other countries, for example through secondary sanctions. This is stated in a new study by KSE Institute senior economist Benjamin Hilgenstock “How Russia avoided a financial crisis and what to do next. Analysis of international financial sanctions against the Russian Federation”.

Due to sanctions, almost 60% of the Russian financial sector was deprived of access to US and EU financial markets. About 70% of Russian banks have been disconnected from SWIFT. Importantly, up to  50%, or $315 billion, of the Bank of Russia’s gold and currency reserves, were frozen, and the remaining funds have decreased by more than $70 billion since the beginning of the war.

However, favorable trade dynamics  have allowed the Russian Federation to preserve or rebuild buffers in recent months. In addition, long before the start of the invasion, the central bank had significantly reduced the share of reserves in dollars and euros and increased yuan and gold holdings in anticipation of additional sanction.

The Russian Federation also managed to stabilize the ruble exchange rate after a short, stressful period in March and reduce headline and core inflation to 12.6% and 16.2%, respectively.

In general, the financial system of Russia turned out to be relatively resilient and the central bank managed to absorb the shock. Because a full-scale financial crisis did not occur, a GDP contraction of 3-6% is now considered a realistic expectation. However, there is room for additional sanctions against the Russian financial sector.

To increase the pressure on the financial system, restrictions should be applied against banking institutions that have not yet been subject to sanctions. They currently make up approximately 23% of the system. With the oil embargo now in effect, the petroleum products embargo coming in February, and a reduction of Russian gas sales to Europe, arguments for why Gazprombank should not be subject to sanctions are disappearing. Regulators should also establish clear deadlines for the withdrawal of foreign banks that continue to operate in the Russian Federation.

In addition, it will be crucial to address the evasion and circumvention of restrictions through countries that have not joined the sanctions coalition. Secondary sanctions can be applied, for example, to financial centers such as Dubai or Hong Kong. Increasing pressure should continue as long as the Russian Federation is capable of waging war.

The full text of the study is available via the link