When the West removed major Russian banks from the SWIFT messaging system in March 2022, it was described as deploying the “financial nuclear option.” This unprecedented move, part of a broader package of EU sanctions Russia imposed following the invasion of Ukraine, was expected to paralyze Russia’s economy and financial system. More than two years later, Russia’s financial sector has demonstrated remarkable resilience, raising serious questions about the effectiveness of financial sanctions as a geopolitical tool.
Russia’s Financial System Adaptation
Alternative Payment Infrastructure
Russia’s preparedness for financial sanctions predated the 2022 conflict. Following sanctions imposed after its annexation of Crimea in 2014, Russia began developing parallel financial infrastructure. According to CEPA, the country established a domestic financial messaging system (SPFS) to replace SWIFT and created a National Payment Card System (NSPK) that proved crucial when Western sanctions hit.
When Visa and MasterCard suspended operations in Russia, the NSPK immediately took over, allowing Western cards issued by local banks to continue working within Russia uninterrupted. The Atlantic Council reports that the ten major Russian banks banned from SWIFT moved over to SPFS, maintaining vital domestic and international payment capabilities.
Central Bank Resilience
Despite Western countries freezing Russian financial reserves totaling $300 billion, Russia’s central bank still has access to another $300 billion in gold and Chinese yuan, equivalent to the entire reserves of Germany’s Bundesbank, according to Monde Diplomatique.
The banking sector, far from collapsing under sanctions, achieved record profits of nearly $37 billion in 2023, as reported by Responsible Statecraft. This remarkable performance came after the central bank’s swift intervention in March 2022, which included capital controls and a 20% increase in interest rates that helped stabilize the financial system.
De-Dollarization Acceleration
The Yuan Alternative
International sanctions have accelerated Russia’s move away from dollar-denominated trade. Reuters reports that Russia has shifted substantial portions of its foreign trade to the Chinese yuan and other currencies. By late 2022, approximately 20% of Russia’s imports were invoiced in Chinese yuan, up from just 3% a year earlier.
This shift is part of a broader de-dollarization effort that has gained traction among several economies. Business Insider notes that countries like Saudi Arabia, the UAE, and Iran have increasingly discussed conducting oil trade in non-dollar currencies, while Brazil and Argentina have explored creating a common currency for bilateral trade.
Gold Strategy
Gold has played a critical role in Russia’s sanctions evasion strategy. According to The Conversation, Russia is now the world’s second-largest producer of gold at 324.7 tonnes in 2023, behind China at 374 million tonnes. This substantial domestic production provides a sanctions-resistant store of value.
The Kremlin has cleverly leveraged gold by pegging the ruble to this precious metal, creating a mechanism to stabilize its currency outside the dollar-dominated financial system. With 5,000 rubles now buying an ounce of pure gold, Russia has established a credible alternative to dollar-based international transactions.
Collateral Damage to Western Financial System
The financial sanctions have created unintended consequences for the global economy and Western financial institutions. For European banks holding Russian assets, complying with sanctions has proven complex and costly. Lloyd’s List reports that the ambiguous and loosely worded nature of EU sanctions legislation has created significant legal challenges for financial institutions.
The freezing (and potential confiscation) of Russian central bank assets has had broader implications for international finance. Valérie Urbain, executive director of Euroclear, which manages most of the frozen Russian funds, warned that seizing these assets “would have a severely negative impact not only on Euroclear but on the financial markets in general. If clients feel the law is no longer respected and their assets may be seized, that will open a Pandora’s box,” according to Monde Diplomatique.
Human Cost of Financial Sanctions
The sanctions have had significant consequences for ordinary Russians living abroad. VICE reports that Russian students in the UK have faced frozen bank accounts and financial hardship with little warning or explanation. Barclays Bank and other financial institutions have closed accounts of Russian nationals, even those who oppose the war, creating a humanitarian issue often overlooked in discussions of sanctions effectiveness.
The Times documented the case of Nerijus Kuskys, a Lithuanian estate manager for a Russian oligarch in the UK, who found his bank account frozen without explanation, leaving him without access to funds for basic necessities. The sanctions have thus impacted non-Russian nationals working for Russian entities as well.
Rethinking Financial Warfare
The Russian sanctions experience reveals the limitations of financial warfare in a world with alternative economic powers and multiple reserve currencies. While sanctions have imposed costs on Russia, they have not achieved their primary objective of crippling its financial system or forcing a change in policy.
The unintended acceleration of de-dollarization and the creation of alternative financial infrastructure may have long-term consequences for Western financial dominance. Countries now recognize the risk of over-reliance on Western-controlled financial systems, potentially undermining the very leverage that made sanctions powerful. This points to a future where financial sanctions may become less effective as the global economy becomes more multipolar and less dependent on Western-dominated financial architecture.