February 24, 2024 marks the third year of the Russo-Ukrainian War that started with the Russian full invasion of Ukraine. As the war reached a stalemate, the return of the territory taken from Ukraine seemed increasingly difficult. The Ukrainian counteroffensive stalled due to delays in military aid from the Western powers and the lack of weakening in Russia’s military might. Although US President Joe Biden’s announcement of “unprecedented sanctions” with great fanfare, sanctions against Russia, designed to freeze its ability to fund the war, have not produced decisive results. This paper overviews the sanctions that have been in place against Russia for the last two years, examines the reasons for their ineffectiveness, and discusses how to improve them.

1. Long-Awaited Secondary Sanctions

US military aid to Ukraine is in limbo, and the same can be said for the sanctions against Russia. On December 22, 2023, President Biden announced the implementation of economic sanctions that would close the US financial markets to all financial institutions worldwide engaged in foreign trade with Russia to halt Russia’s procurement of weapons from third countries. With this move, the White House put its might behind the first secondary sanctions related to the Russian war in Ukraine.

However, Russia began importing weapons from North Korea, which paid no heed to the US sanctions. Russia has imported military related goods from countries in Central Asia and the Middle East, but shutting out the small financial institutions of those countries, which are the main centers of Russia’s transit trade, was almost completely ineffective. Although the most effective sanctions would be those imposed against financial institutions in China, which expands its trade relationship with Russia, such sanctions are unlikely due to the enormous negative impact they would have on the world economy. Under these circumstances, the effectiveness of the secondary sanctions is being called into question. Given that military aid has stalled due to opposition in US Congress, it has strengthened one’s suspicion that the aim is to make an appeal for “strengthening sanctions,” which can be done on presidential authority alone.

In spite of the economic and financial sanctions the United States has imposed, along with the G7 countries and the European Union (EU), the Russian economy has not suffered major damage that would prevent it from continuing to fund the war. Supplies of Russian crude oil to China, India, and Turkey have increased, and although Russian financial institutions have been barred from participation in the Society for Worldwide Interbank Financial Telecommunication (SWIFT), Russian trade has continued due to increases in transactions using currencies other than the US dollar, a phenomenon which began in the early 2010s. Russian assets, including instruments such as foreign currency reserves amounting to 300 billion US dollars have been frozen, and although the ruble experienced a temporary crash, it recovered as a result of intervention by the Central Bank of the Russian Federation.

Naturally, the Russian economy has experienced a long-term slump as a result of being cut off from the US economy, which has led Western corporations—which have the most advanced technologies—to pull out of Russia. Nevertheless, largely unaffected energy exports continue to facilitate weapons production. Ukrainian estimates indicate that although Russia produced forty long-range missiles per month two years ago, current production has expanded to 100 missiles per month. They also claim that Russian soldiers’ pay is three times the monthly average. The International Monetary Fund (IMF) announced that the Russian economy grew 2.2 percent in 2023, partially due to wartime demand and predicts that the Russian economy will grow 2.6 percent in 2024.

Russian President Vladimir Putin’s statement that “the sanctions against Russia have failed” was not mistaken.

2. The “Third Country Trade Loophole”

One of the factors supporting Russia’s war against Ukraine are the military supplies entering the country via transit countries. According to a Ukrainian think tank, 30 percent of the machine parts imported into Russia in 2023 that can be diverted to military use were manufactured in Western countries, including Japan. Another think tank stated that 72 percent of the components used in Russian drones and missiles were manufactured by US corporations. Why do these materials continue to flow into Russia in spite of the trade embargo?

The materials are believed to enter Russia via countries such as China, Turkey, the United Arab Emirates (UAE), Kazakhstan, Uzbekistan, and Morocco. A New York Times article based on an analysis of 4,200 communications from Russian corporations reported that telecommunications and reconnaissance equipment, semiconductors, drones, and other types of equipment are being sent from China to Russia via Morocco’s Tanger-Med port.

The article indicated that supplies equivalent to 10 million US dollars reach Russia via the Tanger-Med port per year. Moreover, although 27 percent of the semiconductors imported into Russia originated in China (including Hong Kong) prior to the war, since the war started, that figure has sharply increased to 85 percent.

It has been reported that, in the past, Russia used semiconductors and other components taken from washing machines and other types of machinery made in Europe and imported via countries such as Kazakhstan for weapons construction. This fact used to be for jokes about the severity of Russia’s situation. However, Russia is now said to be obtaining the most advanced devices—including artificial intelligence semiconductors—manufactured by companies such as Nvidia, Intel, and Google.

Presently, two years after the start of the invasion, the entire Ukrainian territory is being brutally attacked by ballistic missiles and drones, and Russia has retained the land it obtained from Ukraine. One of the reasons of Russia’s military strength is its ability to get materials necessary to build weapons.

An executive order signed by President Biden on December 22 is to impose sanctions barring financial institutions involved in the export of military supplies to Russia via third countries from US financial markets. Previously, only Russian importers and exporters were sanctioned, but from now on, financial institutions in third countries are also to be targeted.

As aforementioned case of Morocco shows, if a Moroccan bank is involved in the transshipment of cargo at Moroccan ports during the exportation of semiconductors from China to Russia, the Moroccan financial institution will be sanctioned and lose the ability to use US dollars.

Since many more financial institutions are involved in trade via third countries, the secondary sanction is designed to have numerous other targets and achieve the aim of stopping the targeted type of trade. Secondary sanctions on Iran since 2007 are thought to be a major success, and led to the decision to implement the current secondary sanctions on Russia.

According to the US Treasury Department, the military supplies the sanctions are targeting include a wide range of basic components that can be used for everything from advanced equipment compilation to basic weapons production, for example, machinery, machine parts, semiconductor components such as silicon wafers, machinery used in the production of semiconductors, testing equipment, propellants, lubricating oils, optical equipment, navigation-related equipment, and bearings.

The drafter of the sanctions, Deputy Secretary of the Treasury Wally Adeyemo, stated that banks will be targeted by these sanctions even if they were unaware of the fact that the money transfers were for the purpose of military supplies bound for Russia. This is severe indeed, because banks are now required to examine the details of each money transfer to determine if the payment is related to items on the abovementioned US Treasury Department list. The US administration is demanding that banks simply abide by the obligation to make appropriate efforts, but from the banks’ perspective, the requirement significantly increases the burden placed on them.

Most European and Japanese banks have already withdrawn from all business related to exports bound for Russia, and US government officials have stated that there are no reports of Western banks involved in such exports.

3. Are Sanctions Against China Possible?

There are many Chinese banks which are very active in international business. Given that some of Chinese banks are believed to be involved in the exportation of military supplies to Russia, they should be targeted by sanctions. However, US government officials’ comments regarding this issue have been inconsistent.

The secondary sanctions that target financial institutions worldwide are the most severe of all US-imposed sanctions. The imposition of such severe sanctions on any bank would be tantamount to a death sentence since most of the world’s trade and investment is conducted using US dollars. The decline of the United States has long been predicted, but the power of the US dollar as a key currency is overwhelming in the financial world.

Bur at a press briefing on these sanctions, a US government official stated that the US government would rather not impose them and further stated that it would like banks to conduct their own surveys and cease handling regarding Russian military supplies.

There is no mistaking that removing banks in China, the UAE, Turkey, and other countries from the US dollar financial system would have a major effect on the global economy. However, the comment gives a glimpse at the lack of enthusiasm in the United States that the Russian war against Ukraine has repeatedly revealed. Prior to the Russian invasion of Ukraine, America made it clear that “the US military would not be sent” to Ukraine. Subsequent to this declaration, the provision of weapons to Ukraine was also delayed due to “fears that [such a move] would lead to nuclear war.” These facts make the United States’ lack of enthusiasm apparent.

In particular, given the endless sources of tension with China, including high tariffs, restrictions on the export of cutting-edge technologies, and the Taiwan issue, the United States would like to keep to a minimum the number of matters being disputed with China. Consequently, if possible, the US would avoid imposing sanctions on Chinese financial institutions, which would negatively impact the global economy.

In the past, the United States sanctioned senior members of Chinese communist party in response to its suppression of both the democracy movement in Hong Kong and the human rights of Muslims in the Xinjiang Uyghur Autonomous Region, but so far, America has refrained from imposing full-scale sanctions on Chinese financial institutions. If the world’s second largest economy’s financial institutions were removed from the US dollar system, the enormous shock that would spread throughout the global economy would not be beneficial to US interests. The basis of the current US policy toward China is the so-called “small yard, high fence” approach that targets only advanced technologies, and financial sanctions with a worldwide impact would hardly be “small.”

If the US continues to be reluctant to impose secondary sanctions on financial institutions in China and other countries, Biden’s “unprecedented sanctions” will never produce significant results. Russia utilizes the loopholes in trade with third countries, and China plays a key role to facilitate the trade with Russia. The lack of any punishment of China in connection with the Ukraine war shows America’s weakness and Russia’s strength.

4. Russia’s Meticulous Preparations

President Putin of Russia has worked hard in building a nation that is sufficiently strong to withstand economic sanctions. His long-lasting efforts have clearly paid off.

Putin has displayed his antagonism toward the United States and Europe ever since a speech he delivered in 2007, in which he strongly criticized the expansion of the North Atlantic Treaty Organization (NATO). The United States, which believed that Russia had been moving toward a Western-style democratic form of government, was surprised by his hostile statement. Then he moved quickly to take actions. In 2008, Russia invaded Georgia, a country that had been increasingly oriented toward the West. Russia began increasing energy exports to Asia. It built a series of natural gas pipelines to China “Power of Siberia,” and started operations of energy projects “Sakhalin-I” and “Sakhalin-II” as part of its attempts to have close energy ties with Asian countries and distance itself from the United States and Europe.

Prior to this, in 2004, Russia’s border demarcation negotiations with China concluded, forming the basis for the current preliminary alliance between the two countries. Russia has compensated for the consequences of its invasion of Ukraine through exports to China, India, and Turkey that replaced the exports to European countries, but the foundation for this move was laid much earlier.

In the wake of the Ukraine war, sanctions leveraging access to the US dollar, such as financial sanctions and the recently approved secondary sanctions, have attracted a great deal of attention, but Putin was prepared for such moves. He previously spoke forcefully about “danger of the world economy falling victim to the monopoly of the US dollar,” and in 2018, Russia sold enormous amounts of its US bonds, drastically reducing its currency reserves from 46 percent at the beginning of the year to 23 percent. The total currency reserves remained unchanged, but instead of US dollars, Russia increased its holdings of gold, euros, and renminbi. Moreover, it is estimated more than half of Russia’s US dollar currency reserves in the form of “cash” are held in countries other than the United States. This was used as a method to prevent the currency from being frozen due to US financial sanctions.

Russia also rapidly shifted the currency it uses to settle its trade from the US dollar to the euro, renminbi, ruble, and other currencies. In the early 2010s, US dollars were used to settle over 90 percent of Russia’s trade accounts with China, a major trading partner, but in 2020, the use of US dollars was drastically reduced to around 10 percent of exports and 60 percent of imports. Furthermore, the percentage of export accounts with the EU that were settled using US dollars was also reduced from 70 percent to 40 percent, and the percentage used to pay for imports was reduced from just under 30 percent to just under 20 percent. Payments in euro, renminbi, and rubles are on the increase.

In November 2014, Russia initiated a global financial messaging system known as the System for Transfer of Financial Messages (SPFS) in opposition to SWIFT. The aim of this move was to create a system that would allow international money transfers that could not be traced by the United States, as America has been monitoring SWIFT ever since the September 11 attacks. Initially, the scale of SPFS was nowhere near that of SWIFT. However, Putin undoubtedly implemented SPFS early on to reduce the effect of decisive sanctions imposed by the United States and Europe to a minimum.

Russia is not the only country that made such preparations. China approached BRICS and the Persian Gulf nations for discussions with the offer of settling a variety of trade accounts using the renminbi. In October 2015, China initiated a global financial messaging system for the renminbi known as the Cross-Border Interbank Payment System (CIPS). Although only 20 banks initially utilized this system, that number has increased to 1,300 banks, and its daily volume, which is mainly concentrated in Asia, Africa, and the Middle East, has increased ten-fold to the equivalent of 46 billion US dollars.

Although CIPS can hardly be compared to SWIFT, which boasts a daily volume of 5 trillion US dollars, China’s intention to counter US financial sanctions and challenge the US dollar’s hegemony is unmistakable. The issuance of digital renminbi currency is another attempt to avoid US monitoring and sanctions.

5. A Game of Cat and Mouse

How will Russia counter the initial announcement of the secondary sanctions? Based on the ways that Russia has previously outmaneuvered sanctions, several possibilities come to mind. For example, beginning in December 2022, the international sale of Russian crude oil for more than 60 US dollars per barrel was prevented due to a price cap adopted by Japan, the United States, and the nations of Europe. Russia has gotten around to avoid the price cap by strengthening ties with other countries.

According to the Finnish think tank CREA, in 2023, Russia sold to India two to three times the amount of oil it had sold to that country in the previous year. The same is true for China and Turkey. These countries then refined Russian crude oil and sold the resulting petroleum products to the nations of Europe. In those sales Russian crude oil was often purchased around 70 US dollars or more per barrel, which were violations of the price cap, there were only a few cases in which the violators were detected and charged. Traders in oil business in those countries simply don’t heed the price cap rule.

Similarly, Russia will likely continue importing military supplies from third countries through financial institutions with no relation to the United States. Small banks of the third countries are little affected by the United States’ secondary sanctions because they are unlikely to engage in business in America or settle accounts using US dollars.

In spite of the variety of sanctions that have been imposed on Russia, including the freezing of its assets, restrictions on its oil exports, being cut off from the advanced technologies and military supplies, and being subjected to financial sanctions, Russia has demonstrated use of a variety of loopholes and minimize any impact. Countries in the “anti-American coalition,” including Iran, North Korea, Venezuela, and China, among others, have learned these techniques from Russia and will use them to blunt the effectiveness of any future US sanctions.

These countries are also investing efforts into creating global financial systems that are not dependent on the US dollar to elude US sanctions. This was even discussed at last year’s BRICS summit. Dmitri Trenin, a professor at Russia’s National Research University Higher School of Economics, stated that “For China and Russia, on whom US sanctions have been placed, the most important thing is the creation of a global financial payment system via BRICS that is not dependent upon the US dollar. The United States, which uses the dollar like a weapon against countries that oppose it, will eventually completely demolish its own economic position.” There is a possibility that this will actually come to pass.

An effective strategy for expelling Russia from Ukraine would be the provision of support to the Ukrainian army, whose soldiers directly encounter the Russians on the battlefield. However, because public opinion in the United States is focused on domestic issues and the Republican Party is unwilling to cooperate with the Democratic Biden administration, the budget allotted to such support has been exhausted. There is certainly a perception that the secondary sanctions, which are the easier option to implement. Because sanctions require only the president’s signature, but the provision of meaningful support to Ukraine has to be passed in US Congress, which is uncertain. This seems to portend America’s lack of determination to lead the liberal camp and the decline of its hegemony.

6. Making Sanctions Effective

We cannot allow the war in Ukraine to end with a Russian victory. Thus, it is necessary to maintain and bolster the sanctions, as well as lasting military support to Ukraine. Below is a list of ways to improve the sanctions’ effectiveness.

The first is to avoid creating any further sense of solidarity among the members of the “anti-sanction coalition” that aids Russia. Central to this is stopping China from supporting Russia above and beyond what has already been done by imposing secondary sanctions against Chinese financial institutions. Denying huge Chinese banks access to the US dollar economy will affect the world economy. This can be avoided by focusing on small to mid-sized local institutions. The sanctioning of small and mid-sized institutions would have a sufficient deterrent effect to curtail China’s support of Russia as a whole, including support from major Chinese banks.

The next strategy is strengthening sanctions on oil and natural gas, the revenue from which is funding Russia’s war effort. Monitoring and punitive measures associated with the price cap implemented in December 2022 on Russian crude oil trade that limits the price of a barrel of oil to under 60 US dollars have been insufficiently implemented. Import prices must be strictly reported, and a mechanism that will impose sanctions on those who do not abide by the price cap is needed. Additionally, Europe continues to purchase large amounts of natural gas from Russia, and its nations should reduce these purchases.

Finally, bolstering monitoring of corporations of G7 and other western countries is necessary. Those corporations and the affiliated companies they established in third countries have to be prevented from exporting weapons-related technologies to Russia. The Foreign Direct Product Rule (FDPR), which prohibits the undesirable secondary use of products, is unique to the United States. Although expanding the targets of the FDPR should be imprudent, when one considers that the war in Ukraine violates international rules in many different senses, the current status of the War in Ukraine is clearly inadequate. Every country should thoroughly investigate whether the technologies it produces are ending up in Russia via third countries and should halt any such flow.