Gas, oligarchs, finance… How Russia protects itself from Western sanctions

Published on : 02/22/2022 – 17:51

The Kremlin persists and signs. While Vladimir Putin announced on Monday (February 21st) Russia’s recognition of the Republics of Donetsk and Lugansk, two self-declared secessionist republics in eastern Ukraine, the Russian Foreign Ministry on Tuesday called on “other states to follow his example.”

If Vladimir Putin has so far been careful not to launch a massive invasion, the threats of “severe” Western sanctions seem to have little hold on him. Already faced with a number of punitive measures decreed after the annexation of Crimea in 2014the Russian president has taken several initiatives in recent years to cushion the impact of sanctions on his country’s economy.

Partnership with China

On May 21, 2014, barely two months after the annexation of Crimea by Russia, Vladimir Putin carried out a real coup by signing a historic gas agreement with China worth 400 billion dollars over a period of thirty years. If the negotiations were started well before the Russian incursion into Ukraine, this contract nevertheless marks a major strategic turning point according to Jean-François Di Meglio, expert in finance and president of Asia Center.

“The two countries have many historical rivalries over Kazakhstan, Mongolia or even Siberia which greatly complicate their relations. But Vladimir Putin has understood that developing this economic partnership could allow him to maintain an aggressive position in his sphere of influence in the west. China, which despite its economic power remains isolated, is gaining an ally against its American rival.

In 2021, Beijing and Moscow conducted several joint military exercises raising the possibility of a military alliance between the two countries, in the context of growing tensions with the United States.

Control of the oligarchs

Despite the strengthening of this economic partnership between Russia and China in recent years, Europe remains Moscow’s number one customer. If Germany agreed on Tuesday to suspend the commissioning of the Nord Stream 2 gas pipeline, yielding to American demands, European leaders remain much more favorable to targeted sanctions targeting Russian personalities, in particular the small circle of oligarchs linked to the Kremlin who own financial and real estate assets in Europe.

However, according to the Russian doctor in economics Vladislav Inozemtsev, the Kremlin has managed in recent years to counter this threat. “Even before the invasion of Ukraine, Vladimir Putin had launched an ‘elite nationalization’ program intended to induce officials and businessmen close to power to reduce their dependence on Western assets and legalize their possessions abroad,” reads his report for the French Institute of International Relations (Ifri).

“This policy has been crowned with success: an increasing share of the income from corruption is now invested in the country, and former officials no longer buy castles in France or ocean-going yachts, but chain stores, office complexes, factories and restaurants in Russia,” continues the researcher, who believes that Europe’s targeted sanctions now risk penalizing “the representatives of the Russian private sector who are the most critical of of the current regime.

A Russian financial system to bypass Swift

A major problem for Vladimir Putin remains, his dependence on the Swift financial system (Society for Global Interbank Financial Telecommunications), from which the United States has threatened to disconnect Russia in the event of an invasion of Ukraine. This international dollar payment network is used by almost all financial institutions in the world for the transfer of sums of money.

>> To read also: “Ukrainian crisis: the strategy of American sanctions to counter Moscow”

To counter this system used as a pressure tool by Washington, in 2018 Russia launched its own tool, the Financial Message Transfer System (SPFS), now connected to the Chinese interbank network CIPS (China International Payments System). A tool which, of course, would offer an alternative in the event of exclusion, but remains far from being able to compete with Swift, as explained on France 24 François Heisbourg, special adviser to the Foundation for Strategic Research.

“In markets where transactions are almost 100% in dollars – which is the case for gas and oil – having to do without this currency overnight is very difficult”, analyzes the expert, who considers that a period of adaptation would in any case be necessary for Russia to relaunch its transactions.

“Even if it may be subject to a certain number of state influences, Swift is a supranational institution which leaves a form of independence to its members. However, this is far from being the case with the Chinese and Russian models which, controlled by the state, necessarily arouse more mistrust and therefore attract fewer partners”, specifies Jean-François Di Meglio. “This is the problem today when we talk about excluding Russia, because such a sanction, decided by Washington and applied by Swift, could have a very negative impact on the image of the network itself. .”

If, since the annexation of Crimea, the United States have several times said they are ready to exclude Moscow from Swift, they have so far never carried out their threat.