By Eric Vandenbroeck and co-workers

Russian President Vladimir Putin was sworn in for his fifth term in office this week, even as his country is beset by sanctions, bogged down in a years-long war in Ukraine and cut off from capital markets.

But Putin has found a series of workarounds that have helped bolster growth, funded his country's war effort against Ukraine, and worked to thumb his nose at the Western countries using economic sanctions to punish Russia.

"We are a united and great people and together we will overcome all obstacles, implement all we planned," said Putin in a brief inaugural address this week. "Together we will win."

The Russian economy is now poised to grow at a faster pace than any other G7 nation. Not surprisingly, the key to its economic success is oil.

After Russia invaded Ukraine, the West banded together to impose sanctions, curtail Russian energy exports, and squeeze the Russian economy. And in many respects, it worked.

For decades, Russian exports centered on raw materials, primarily oil and gas, with the European Union as the key buyer. Oil revenues directly funded Moscow's budget, making the halting of exports a potential pressure point on the Kremlin. The West attempted to exploit this after Russia's invasion of Ukraine by imposing a price cap (above which Western insurers were banned from providing their services) and an embargo on Russian oil, all aimed at cutting off funds for Russia's military.

However, ongoing demand for Russian oil and Moscow's ability to maintain supply pushed part of the business into the shadows. Europe's reliance on Russian energy, particularly gas, meant an immediate halt to the relationship was unfeasible, and Russia wasn't willing to sacrifice revenue or market share. This led to the rise of a "shadow fleet" to keep oil flowing. By early 2024, Russia had acquired more than 600 old tankers to continue these operations. Market dynamics in the region have been slow to change, but the shadow fleet remains vulnerable to further sanctions, especially by the U.S.

More than a thousand Western companies have left the country, according to a database compiled by Yale University. Over a million young, Russian men have fled the country rather than be drafted. Russian companies and banks are cut off from global capital markets and more than $300 billion in Russian central bank assets have been frozen. 

But when it came to Russia's much-vaunted energy sector, there was a dilemma.

"We have this weird sort of compromise where we negotiate with ourselves into a situation which allows the Russians to completely cheat," said Bill Browder, the author, and CEO of Hermitage Capital Management.

On one hand, Browder says, plenty of non-Western countries were perfectly happy to buy up Russia's oil at prices well below market value. But he noted that Russia also found a way to skirt the price cap altogether with what's known as its shadow fleet.

"They bought a whole bunch of tankers," said Browder. "Those tankers are moving the oil, and the Indians and the Chinese and the Indonesians are very happy to get that oil at a discount of normal price."

Browder told CBC News that Russia is making between $500 million and $1 billion US every day by selling oil.

"They're rubbing it on our face and laughing at us."

 

Shadow Fleet's Importance To Russian Economy

In March, one of those shadow tankers collided with another ship off the northern tip of Denmark, according to the Danish Maritime Authority. Bloomberg reported that the 700,000-barrel capacity Andromeda Star was on its way to Russia to pick up oil for export.

Had the ship been fully loaded, the collision could have led to an environmental catastrophe.

But because the vessels don't use Western ports or report shipments through Western agencies, it's a painstakingly difficult task to determine who owns them and who would be responsible for clean-up.

All that also makes it difficult to know exactly how much oil is being shipped out of Russia and who is buying it.

"We know these vessels are there. We know they're operating in violation of maritime laws but there's nothing anybody can do about it," said Elisabeth Braw, senior fellow at the Atlantic Council think-tank. 

At first, Russia was clandestine in its efforts to use the so-called shadow fleet. But Braw says it has grown increasingly brazen, noting that there are now hundreds of shadow vessels moving oil to market every day.

That's money Russia desperately needs.

Late last year, the Kremlin's budget highlighted how much the war is costing. Russia will spend about six per cent of its GDP on the military in 2024. And for the first time in modern Russian history, defense spending will exceed social spending.

The budget calculates government revenue will grow by more than 33 percent, much of that coming via the energy sector.

That extra wiggle room means Russia can afford to expand its war effort in Ukraine just as Western countries including the U.S. begin to rethink how much money and how much equipment they're sending to Kyiv.

G7 leaders, the presidents of the European Council and the European Commission and Ukrainian President Volodymyr Zelenskyy announced a Joint Declaration of Support to Ukraine during the July 2023 NATO summit in Vilnius, Lithuania.

 

Waning Western Influence?

In a lot of ways, Braw says this will be an opportunity to examine the influence Western countries have when it comes to imposing sanctions to stop what they see as bad actors.

"It is a test of the entire United Nations system of global governance that we set up at the end of World War Two," she said.

Sanctions are only part of a successful strategy, says Ben Hodges, former commanding general of U.S. Army Europe. He says it is in the West's interest to see Ukraine defeat the Russian invasion.

After the Second World War, Western economies set up a system of rules-based global trade.

For decades, that system largely worked and even drew in communist countries like Russia and China to take part in an open market, capitalist system of global trade.

Braw's book Goodbye Globalization chronicles how that system has begun to crumble. And as it does, she says, the ability of Western powers to impose their will on the rest of the world is crumbling, too.

"I think we'll look back at this round as essentially, the swan song of Western economic sanctions against a powerful nation," she said.

 

 

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