Russia is exploiting two big holes in financial sanctions

But one thing is certain: there are two major flaws in the sanctions regime that fundamentally undermine it.

First, Russia is still allowed to sell all the fossil fuels it likes, and second, it seems able to use the dollar revenue from those sales to prop up the ruble if it chooses or even import the tools of war. if other countries that have signed sanctions are willing to provide them.

The only solutions are either to sanction all energy exchanges with Russia, which for the moment remain unpleasant for the European countries which depend on its gas, or to credibly threaten secondary sanctions against countries or companies outside Russia, who support it through trade. .

Russia’s energy trade has suffered, but not as much as initially expected. In addition to selling gas to Europe and China through pipelines, Russia still exports oil by ship from Baltic and Black Sea ports. According to economists at the Federal Reserve Bank of Dallas, oil could be traded at discounted prices from current high prices, but most of it is still on the move. Russia’s global oil and gas exports bring in about $900 million a day, according to my colleague Javier Blas.

President Vladimir Putin will start demanding that hostile countries pay for gas exports in rubles, according to Bloomberg News. But this may be more of an inconvenient tactic than an objection to receiving dollars or euros. Although if Russia was paid for gas in rubles, it could avoid financial sanctions altogether.

Where the sanctions and economic restrictions have had the most impact is on Russian imports, which have collapsed, according to the IIF. This means that Russia’s current account surplus – the excess of its export earnings over its import expenditures – could reach $250 billion this year, up from $120 billion last year, which was already the biggest annual surplus in more than two decades, according to the IIF.

And Russia can use these revenues. When the United States, Europe and other countries sanctioned the Central Bank of Russia, they froze the foreign currencies it held in the accounts of other central banks – the dollars it held at the Federal Reserve Bank of New York, for example. Up to half of Russia’s $640 billion in foreign exchange reserves are in such accounts and are therefore out of reach.

However, the CBR also has foreign currency accounts with commercial banks in Russia such as Gazprombank. CBR can still receive dollars in these accounts.

The United States also prohibited any bank with a US branch from dealing directly or indirectly with the CBR. However, banks are still allowed to deal with Russia’s largest banks and the central bank for licensed authorized trade, which includes energy and related products and services, as well as food and medicine, for example.

After the sanctions were imposed, Russia established capital controls to prevent Russians from sending their wealth out of the country. He also said that exporters must sell 80% of their foreign exchange earnings to the central bank. These dollars can be paid into CBR accounts at commercial banks, and it appears that the CBR can then return these dollars to banks or businesses.

The scale of continued energy exports and the CBR’s ability to receive and distribute the resulting flow of foreign currency means that being cut off from its existing reserves is not so painful.

These facts, combined with capital controls, explain why the ruble not only did not crash, but rebounded from its lows.

The sanctions imposed on Russia are aimed at disrupting its economy and restricting its access to equipment that contributes to its invasion of Ukraine. Russia is rapidly replenishing funds it could spend on weapons or other tools of invasion. The question is who could sell this equipment to Russia. Applicants are from China, possibly India, and possibly some Middle Eastern countries. The problem is that money is fungible: dollars can be exchanged for renminbi or rupees and then spent on maybe anything.

What the United States is counting on is that dollar payments must eventually reach the United States. This is because at some point US central bank reserves must be moved to match the movement of funds through the banking system – and this can only be done with the involvement of US clearing banks. . However, the network of banks potentially involved in Russia and elsewhere means that banks connected directly to the US system will mostly only see the net result of many underlying transactions. This could hide the gross amount of transactions the CBR might carry out with Russian entities to protect the ruble and finance Russian imports, according to Jérôme Legras, banking specialist and head of research at Axiom Alternative Investments in Paris.

If other countries are going to cooperate with Russia to help it use the dollars it collects from the energy trade, then the only option would be secondary sanctions against countries or entities suspected of aiding the invasion. of Russia.

It would be a significant escalation of Russian isolation and would represent a real global standoff.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.

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