The Sanctions Have Been Imposed. Now The Workarounds Begin.

The U.S. and its allies in the EU, and others around the world have imposed the harshest economic sanctions on Russia that have ever been used. Russia has been kicked out of the SWIFT global financial telecommunications system.

A long list of Russian banks, oligarchs, and major companies have been listed among those who cannot transact with western parties. These include Gazprom (the major Russian natural gas company), Russian Railways, Rostelecom (the phone and internet company), Alrosa (diamond mining), and Sovcomflot (shipping operations). Biden has also prohibited exports of semiconductors, high-tech equipment, and other technology to Russia.

To a great extent, the Russian economy has been cut out of the global economy. We should expect a decline on the order of 25% in Russian GDP in the first half of 2022. Even when the kinetic war is over, probably in a month or so, the economic war will continue and the effects on the global economy (not just Russia) will last for decades.

Still, Russia is not a punching bag. They’ll fight the sanctions both with retaliatory measures of their own and with inventive workarounds designed to defeat the sanctions. This article describes one method. Russia will be teaming up with China to roll out the Chinese credit card system (UnionPay) for Russian consumers.

This comes after Visa and MasterCard ended all business with Russia. Their efforts won’t end there. Russia is working with banks in China and India to reestablish hard currency payment channels.

Russia has implemented capital controls that will shift the pain of sanctions from Russian borrowers to western lenders who will now suffer defaults on the Russian bonds they own. And Russia has announced that it will cut-off exports of important chemicals, metals, and processed gases to the west.

These exports are indispensable to Western manufacturing processes including semiconductors, automobiles, and agriculture. Russia may be the first victim of sanctions, but it won’t be the last.

In the end, most of the economic pain will fall on Western manufacturing and farming. The Biden administration will find out the hard way that in a globalized densely connected world, what happens in Russia doesn’t stay in Russia.

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