Treasury and Justice department officials defended the effectiveness of wide-ranging U.S. sanctions placed on Russia following the country’s invasion of Ukraine despite indications that Russia’s economic pivot toward Asia has buoyed the country.
Officials told the Senate Banking Committee Tuesday that Western sanctions have siphoned money away from the Russian war effort and helped Ukraine achieve significant military gains, like the 8,000 square kilometers wrested back from Russian control in recent weeks.
“The sanctions that the United States and over 30 countries have put in place alongside export controls have had a powerful economic effect in achieving our goal, depriving Russia of revenue and of military equipment to wage its brutal war,” Elizabeth Rosenberg, assistant secretary for terrorist financing and financial crimes in the Treasury Department, told the committee on Tuesday.
“Half of Russia’s foreign exchange reserves have been locked up. Russia has been forced to resort to draconian capital controls. It is burning through its fiscal buffers, heading toward fiscal deficit by the end of the year,” she said.
Andrew Adams, the director of a Department of Justice task force targeting assets of Russian officials and businesspeople, said that the U.S. sanctions regime has gotten stronger and more effective as cooperation and intelligence sharing with European allies has increased.
“As the European Union, as our partners in the United Kingdom and elsewhere around the globe, have come into alignment with our sanctions regime, it has greatly increased our ability to effect seizures, to effect requests for searches, to request arrests,” he said. “That, I think, will only continue.”
But despite recent territory losses by the Russian army, many economic metrics for Russia are showing that the country is faring better than expected in the face of Western sanctions, suggesting that Russia could continue its military campaign well into the future.
Lawmakers on Tuesday expressed concern that Russian energy exports, which are one of the country’s primary revenue sources, are largely unaffected by Western sanctions.
Despite decreases in export volumes of about 15 percent in the months following the invasion, high crude oil and fuel prices even allowed Russia to increase its energy export revenues in May.
And despite an embargo on Russian oil enacted in the U.S. in March and various European and Russian measures that have resulted in fewer natural gas shipments to Europe, India and China have picked up the slack in oil markets and allowed Russia to keep export volumes at levels comparable to what they were before the war.
“The outlook for world oil supply has been revised upward, with more limited declines in Russian supply than previously forecast,” the Paris-based International Energy Agency (IEA) wrote in its August report.
“While Russia’s exports of crude and oil products to Europe, the US, Japan and Korea have fallen by nearly 2.2 [million barrels per day] since the start of the war, the rerouting of flows to India, China, Türkiye and others, along with seasonally higher Russian domestic demand has mitigated upstream losses,” the IEA report found.
This rerouting has caught the attention of U.S. lawmakers assessing the impact of sanctions.
“We’ve seen a huge increase in Indian and Chinese purchases of oil just as U.S. and European purchases have declined. In fact, those purchases have fully offset the decline of the U.S. and the EU,” Sen. Pat Toomey (R-Pa.) said during the Banking Committee hearing Tuesday.
“My concern is that China and India will continue to buy Russian oil,” he added.
Democrats have also taken notice of the fact that global energy markets have found a way to skirt U.S. and European sanctions.
“India’s importation of Russian oil has skyrocketed, helping it to maintain Russia’s exports,” Senate Foreign Relations Committee Chairman Bob Menendez (D-N.J.) said.
To deal with the issue of global energy markets getting around Western sanctions, the Group of Seven major world economies has introduced a price cap on Russian oil, a complex policy that is in various phases of implementation. However, industry analysts say that the policy will be difficult to enforce.
“I call this a price cap fantasy,” Phil Flynn, an analyst with the Price Futures Group, said in an interview. “Sure, it would be beautiful to say, ‘Hey, Russia, we’re only going to pay you X amount for your oil.’ But to assume Russia’s going to be OK with that is ridiculous. Already we’ve heard from the Kremlin that any country that’s involved with the price cap just won’t get any oil.”
Rosenberg, the assistant Treasury secretary, said that even though India and China don’t have to join the group of countries setting the price cap on Russian oil, they can still take advantage of its existence.
“By design of this policy, it’s not essential for such countries, such major importers of Russian oil, to formally join this group. They can nevertheless use the existence of the price cap to leverage lower prices from Russia,” she said.
Another part of the Russian economy that’s doing well despite sanctions is the currency.
The Russian ruble is stronger today than it was before the invasion of Ukraine in late February, despite Russia being denied access to many of its foreign currency reserves.
Over the summer, the ruble maintained a ratio to the dollar of about 60-to-1, climbing back from a deficit of more than 130-to-1 in the immediate onset of the war. Between 2020 and the February 2022 invasion, the ruble had an exchange rate with the dollar of about 73-to-1.
The International Monetary Fund revised its 2022 GDP forecast for Russia up a remarkable 2.5 percent points from April to July, though it still expects Russia’s economy to shrink by 6 percent on the year.
“It seems that the sanctions, specifically with regard to their ability to produce and to market oil, doesn’t seem to have worked as well as we hoped,” Sen. Mike Rounds (R-S.D.) said.