“The most severe sanctions are those imposed on the financial sector, which aim to affect 70% of the Russian banking sector. The assets of the five financial institutions subject to US sanctions exceed USD 1 trillion. This will hamper the Russian economy, cause panic and the mass withdrawal of cash from banks, push up interest rates, and slow down economic activity. However, Russia has a financial cushion against these costs, with foreign reserves accumulated over the years and low debt,” says Piotr Arak, the director of the Polish Economic Institute.

Russia’s potential expulsion from  the SWIFT system – the international system providing fast and secure interbank payments – in the next few days will cause temporary chaos on the financial market and increase transaction costs. These kinds of sanctions cut off Iran from international financing and contributed to the measures that forced the country to sign the nuclear deal. In 2014, Russia’s former minister of finance estimated that the annual effects of this step amount to around 5% of GDP; the exclusion of payments for energy materials means that the actual losses would be lower. Russia’s alternative clearing and settlement system, SPFS, covers about 20% of payments in Russia, but it only operates domestically and is not ready for international payments. Lack of access to the SWIFT system would prompt Moscow to expand the Russian SPFS and the Russian–Chinese CIPS payment system.

In the long term, technological sanctions will significantly hamper the development of the sectors prioritised by the Kremlin, such as the arms industry. Yet the effectiveness of those sanctions will largely depend on whether other countries agree to observe the restrictions. Russia imports semiconductors and microchips worth USD 1.7 billion, with USD 403 billion (24%) delivered by the EU, US, Japan and Taiwan. The Russians will strive to increase imports from China, which accounts for one-third of imports of those technologies. The EU’s ban on exports of other technologies – for example, those related to crude oil processing – will have long-term effects.

“Symbolically, it is very important that the EU has imposed sanctions on Russian President Vladimir Putin and Foreign Minister Sergey Lavrov,” says Jan Strzelecki, an expert at the Polish Economic Institute.

What should be included in the sanction package?

A heavier blow would be imposing sanctions on all the Russian banks and freezing their assets. In recent years, as protection from the consequences of sanctions, Moscow has been moving away from payments in dollars, mostly in favour of the euro (for example, in commodity contracts with China). At the end of 2021, Russia’s total debt was USD 253 billion, approximately 21% of GDP. Foreign debt amounted to about 3% of GDP.

A further step should be unifying and expanding the lists of people subject to the sanctions imposed by the US, the UK and the EU. They include representatives of the regime, oligarchs and individuals involved in Russia’s attack on Ukraine. The sanctions should also be extended to their family members, like in the most recent US and UK sanctions. The US sanctions list currently includes 13 billionaires, with assets estimated at USD 66.4 billion.

“Sector-specific sanctions that aim to hit Russia’s most profitable industries are needed. The most severe losses for the Russian budget would be caused by sanctions that affect oil and gas exports. In 2021, profits from oil and gas exports accounted for 36% of Russia’s budget revenue; in previous years, this percentage has often been higher. The sanctions should also target other profitable export products, such as precious and semi-precious metals, iron and steel, and fertilisers,” says Jan Strzelecki.

Further measures could address the transport sector: restrictions on aviation (for example, a flight ban on Russian airlines, like that already introduced by Poland and some other countries), restrictions on technology provision by SITA, and restrictions on Russian railways and vessels. In the financial sector, Russia could also be cut off from the Visa and MasterCard international payment card systems (which will not impair the functioning of Russia’s domestic system, Mir). Other options include broad restrictions on Russian investments in sensitive and strategic sectors in the West, visa restrictions, and exclusion from membership in international organizations..

It is necessary to continue decoupling Russia from the global economy. In recent years, exports of goods and services have represented around a quarter of Russia’s GDP – below the EU average, but still far from an autarky. Final demand of Western countries for Russian value added in imported goods and services account for around 14% of Russia’s GDP. The EU is the leading destination for Russian exports: 33.8% in 2020, more than double the figure for China (15%).