John Whelan: Sanctions against Russia are not working
The elephant in the room, is the wide range of European and UK companies circumventing the current range of sanctions against Russia. Picture: Andrey Rudakov/Bloomberg
Western sanctions have not had the hoped-for impact on the Russian economy, as many companies have reassessed the risks to their investments and deferred exit decisions.
Russia’s economy has grown at the same rate as the US in the year to March 2024 according to the latest OECD report. The US Treasury Secretary Janet Yellen is only too well aware of this and sent a warning to European Banks during the recent G7 finance leaders meeting in northern Italy, that they face growing risks operating in Russia. Ms Yellen advised that the US is looking to cut off banks from the US financial system, effectively blocking their access to the US dollar if found to be aiding transactions that support the Russian war effort.
This would be a major blow to any Irish exporter who may be using foreign bank accounts and found to be in default on sanctions, as the US dollar is the premier trading currency worldwide for imports and exports.
After the warning, the Austrian Raiffeisen Bank International dropped plans for a $1.5bn (€1.4bn) funding of an industrial stake linked to tycoon Oleg Deripaska, known for his links with Limerick’s Russia-owned Aughinish Alumina Ltd.
With the European elections across the weekend, newly elected MEPs can expect increasing the sanctions against Russia to be a crucial policy issue for the future. However, the biggest dividing line in the outgoing parliament has been over Russia, and is likely to continue with hard right groups soft on Moscow, including the likes of Hungarian prime minister Viktor Orban denouncing the sanctions and dragging his heels on financial aid for Ukraine.
The elephant in the room, however, is the wide range of European and UK companies dodging the current range of sanctions against Russia. And whereas EU sanctions have wiped out the sales of Irish exporters directly servicing the market, many UK and European manufacturers continue to supply the market, and in many cases use parts and ingredients from Irish subsidiaries and sub-suppliers in the final goods exported to Russia.
Procter and Gamble, Colgate-Palmolive, Unilever, and Reckitt are amongst the UK and European groups still selling into the market, despite saying they would pull out when in 2022 Russian forces crossed the border into Ukraine. Overall, 2,100 western multinationals have stayed in Russia since the war on Ukraine, according to a study released by the Kyiv School of Economics. Many of these initially pledged to pull out of the country, but have found the Kremlin penalties of upwards of 50% reduction in valuations when selling to a Russian entity plus a 15% exit tax, too steep to swallow. The tribulations of those who have moved out such as Irish-based Danone and Danish-based Carlsberg, loosing brand control as well as investment, has also dampened the mood.
Combined with increased demand from China and India, the overall damage to the Russian economy has been relatively minor, with the OECD report on global trade indicating GDP growth in the Russian economy similar to that of the US at 2.6% year on year to the end March 2024.
Most Russian companies continue to operate business as usual, circumventing Western sanctions by forming greater trade and investment ties with countries such as China, India and many other countries who are not part of the sanction’s coalition, and are not blocked from trading with EU countries who show increased trade with many of these countries.
Central Asia and the Caucasus are a case in point. After trade sanctions were imposed on the Russian economy, EU exports to Central Asia and the Caucasus increased sharply. “There are more countries that have not applied sanctions to Russia than have applied sanctions to Russia. That makes the impact of sanctions limited as Russia can simply divert trade flows to other willing partners,” the chief executive of Pareto Economies, the international research consultancy, stated in a recent release.
In an effort to close down loopholes in the existing sanctions system and ensure pain is inflicted on Russia, the United States is now focusing on ‘following the money’ by threatened secondary sanctions on foreign banks aiding transactions with Moscow. And whereas this will have some impact, there is clearly a need for EU and UK politicians to also step up to the plate and ensure greater compliance by companies within their own territory, as well as targeting defaulting banking corporations.
