The Washington PostDemocracy Dies in Darkness

The loophole that’s keeping Russia’s economy alive

The ruble has recovered some of the value it lost immediately after sanctions because of oil and gas exports

Exchange rates on display in Moscow on Feb. 28. (Andrey Rudakov/Bloomberg News)
7 min

Even as Western sanctions start to hit the Russian economy, the nation’s oil and gas exports are softening the blow, helping blunt the ruble’s fall and giving the Kremlin continued resources to wage its war in Ukraine.

The dynamic is most visible in Russia’s currency, which has regained some of the value it lost after the sanctions first hit. The ruble initially lost about half its value against the U.S. dollar but has since partly rebounded to a rate about 30 percent below its prewar level, according to Russia’s central bank.

That’s still a big hit, and there are many others. Russian banks are blocked from carrying out many transactions, global shipping companies have stopped delivering goods to Russian ports, and a spate of Western corporate departures is depriving the country of consumer products and jobs. Inflation is rising at 2 percent a week, and some economists estimate Russia’s gross domestic product will contract by as much as 15 percent this year.

Still, oil and gas revenue is easing some of the pain, sparking growing calls by Ukraine and its supporters for a full Western embargo on Russian energy purchases. The United States and Britain have stopped buying Russian oil and gas, as have some global energy companies and traders, but European nations remain heavily reliant on Russia and are reluctant to cut off the tap.

“I think the sanctions we’ve done are super effective,” said Robin Brooks, chief economist of the Institute of International Finance, an association of global finance companies. But “in principle they have not addressed the main driver of Russian growth, which is exports of energy and raw materials,” he added. “If the goal is to make this war as costly as possible for Russia and Putin, you want to go after those.”

Russia’s business ties to the West took 30 years to build and one week to shatter

President Biden and European leaders will discuss ways to reduce the continent’s dependence on Russian gas when they meet in Brussels on Thursday, including by supplying Europe with more liquefied natural gas from the U.S.

But Biden won’t pressure European allies to immediately stop their Russian energy purchases because he recognizes the move would be tough for them, national security adviser Jake Sullivan said this week.

“From [Biden’s] perspective, what we have achieved with our European partners — in terms of financial sanctions, export controls, and other measures to hit the Russian economy hard — have had unprecedented impact on a large economy at a scale we have never seen before,” Sullivan said.

The European Union unveiled a plan to slash Russian gas imports by approximately two-thirds this year, but questions remain about how quickly member nations can achieve that goal.

German Chancellor Olaf Scholz on Wednesday said an immediate ban on Russian energy imports would plunge Europe into recession and put hundreds of thousands of jobs at risk.

Western sanctions were designed to clobber Russia’s economy in a variety of ways, including by weakening the country’s banks and currency and by depriving it of precious imports. But Russia’s continued gusher of oil and export earnings, combined with new currency controls mandated by the central bank, have acted as a partial counterweight.

Russia bars purchases of dollars by citizens in sign of hard-currency pinch

In the days after Russia’s invasion began on Feb. 24, the ruble fell from about 80 to the dollar to a low of 120 to the dollar, according to the central bank’s official rate.

But in recent days it has climbed back up to 103 to the dollar, restoring at least part of Russians’ purchasing power.

One of the toughest sanctions imposed by the United States and its allies was a freeze on the Russian central bank’s foreign currency reserves. That was designed to stop Russia from using its stash of dollars and euros to buy rubles to prop up the ruble’s value.

But Russia has found a partial way around that punishment: The central bank in late February began requiring exporting companies to exchange 80 percent of their hard-currency revenue for rubles, creating new demand for Russia’s currency.

“Overall, it seems that the emotional shock of the first wave of sanctions in Russia has already passed — among the authorities, businesses, and the population,” Sergey Aleksashenko, a top official in Russia’s central bank and finance ministry in the 1990s, wrote in his Substack newsletter this week.

“The freezing of the Ministry of Finance and the Central Bank accounts led to a short-term destabilization of the currency market, for which the Russian authorities compensated with the introduced currency restrictions,” he wrote.

Economists caution that the official exchange rate doesn’t necessarily reflect the ruble’s real value because the central bank has placed limits on the ability of Russian individuals and companies to exchange rubles for dollars.

Maxim Mironov, a Russian economist at IE Business School in Madrid, said those restrictions have caused a black market to develop, where the ruble is much weaker, trading at 140 to 200 rubles to the dollar.

The Russian newspaper Kommersant last week reported that this black market is unfolding on social media networks such as Telegram and VKontakte, the Russian equivalent of Facebook. One posting by a hard-currency seller told buyers they could meet “near McDonald’s on Kievskaya Street and buy dollars at 150 rubles,” the newspaper reported.

Russia’s continued flow of export revenue isn’t guaranteed to continue at the same pace. Even if there is no formal Western embargo, some buyers are already starting to avoid Russian oil because they fear reputational risk or other problems.

To protest the war, French energy company TotalEnergies this week said it will stop buying Russian oil and petroleum products by the end of 2022 at the latest, following a similar statement by Shell.

And the number of oil tankers arriving at Russian ports to fill up with oil has dropped significantly in recent weeks, as sanctions make it harder for trading companies to insure their Russian cargoes, analysts say.

The Biden administration is examining private industry data showing that sales of Russian crude oil by vessel went from roughly 2 million barrels a day to close to zero between March 15 and March 20, The Washington Post reported this week.

“The companies are ahead of governments in cutting back,” said Jeff Schott, a senior fellow at the Peterson Institute for International Economics.

Lower demand for Russian crude means it is now trading at a discount of $30 per barrel compared with Brent crude, the international benchmark, according to Sergei Guriev, an economics professor at Sciences Po in Paris. Brent is selling for $121 a barrel.

Russia’s long-term energy output could also be harmed by the decision of several Western oil-field services companies, including Halliburton and Schlumberger, to scale back their work in Russia, analysts say.

The impact of sanctions is likely to worsen in the coming weeks and months as more of the trade restrictions take full effect, economists say. Some big Russian manufacturers have already reported trouble importing semiconductors and other electronic components due to a U.S.-led ban, and more are probably to follow.

Some imported products are disappearing from store shelves and prices for food and medicine are rising fast, squeezing regular Russians “beyond belief,” Guriev said during a webinar hosted by Columbia University’s Harriman Institute on Wednesday.

Still, oil and gas will blunt the pain so long as the West keeps buying, economists say.

“Sanctions were designed to starve the Russian economy, but the carve-out for oil and gas exports is a very large feeding tube,” Schott said. “They are getting significant economic nourishment from oil and gas.”