On February 21, Russia announced its recognition of the “independence” of two republics in eastern Ukraine, prompting the United States, the European Union, Britain, Canada and other parties to introduce multiple rounds of “devastating” economic sanctions against Russia, with unprecedented intensity and breadth. Russia’s financial, defense, energy, industrial, aviation and other pillar industries were hit with precision, assets of relevant departments and institutions in the United States and Europe were frozen, access to Western funds, technology, and key equipment was shut off, and some institutions have been restricted in their ability to trade in U.S. dollars, euros, pounds, and yen. The goal of the West’s economic sanctions is to isolate Russia from the global economic and financial system through external pressure without resorting to military means, and in turn affect Russia’s economic and social stability, thereby curbing the actions of the Russian government. As sanctions gradually escalate, the Russian economy will come under increasing pressure.

Since the Crimea incident in 2014, the United States together with other Western countries have imposed hundreds of rounds of economic sanctions on Russia, and have repeatedly threatened to kick Russia out of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), cutting Russia off from the global financial system. Facing a long-term financial and technological blockade, Russia has taken systematic counter-sanction measures, aggressively strengthened its defense capabilities, built an “anti-crisis firewall,” and significantly improved its economic security.

On one hand, Russia has established a crisis prevention “airbag.” The Russian government has adhered to prudent and conservative fiscal policies, strictly controlled budget expenditures, converted a large amount of oil and gas revenues into strategic reserves, and accumulated sufficient anti-crisis funds. Currently, Russia’s gold reserves total nearly US$650 billion, or about one-third of its GDP, which is enough for it to cope with its foreign debt. In the event of economic turmoil, Russia will use these reserves to support residents and businesses and maintain basic macroeconomic and financial stability.

In response to the threat of “disconnection from SWIFT,” Russia has established an alternative financial infrastructure, including a Russian version of SWIFT—the Financial Message Transfer System (SPFS)—and a Russian national credit card payment system (Mir). The SPFS serves more than 300 financial institutions and businesses in Russia and over 20 institutions from Eurasian Economic Union countries, Turkey, and other countries. Mir credit cards account for about one-third of the credit card market in Russia.

On the other hand, Russia has shifted its financing and trade channels to domestic and non-Western markets. With its access to Western markets blocked, Russia has adjusted its development strategy to rely more on domestic resources and non-Western markets. Internally, Russia is actively developing financial resources, stimulating domestic investment, and steadily promoting import substitution in industry and agriculture, thereby significantly increasing local production and reducing dependence on the West for food, technology, and key components. Externally, Russia has built a network of economic partners based on security needs. While strengthening economic ties with its main trading partner, the European Union, it has vigorously explored non-Western markets and developed cooperation with partner countries on payment system docking and local currency settlement, so as to minimize the proportion of dollar settlements.

In addition to preparing a counter-sanctions toolbox, Russia’s strength in dealing with economic sanctions lies in its close and intricate ties with the world economy. As a leading exporter of energy, food, metals and other commodities, Russia is deeply involved in the world economy and has become an important link in the global supply chain. This makes Russia’s economy highly vulnerable to the external environment, but at the same time it gives Russia strong bargaining chips for influencing world markets, and an effective “weapon” against being “delisted” from SWIFT.

If Russia is kicked out of SWIFT, or if other sanctions are imposed on Russia affecting energy and raw materials transactions, global markets will be affected by the collateral effects, and the “double-edged sword” of sanctions will hurt their initiators. This is the fundamental reason why the United States, Europe, and other Western countries are reluctant to completely isolate Russia. For the above reasons, under conventional sanctions conditions, Russia’s precautionary measures can partially weaken the effectiveness of Western sanctions. According to Russian Prime Minister Mikhail Mishustin, the government has been preparing for its operation in Ukraine for months, and is ready to deal with the economic consequences of Western sanctions.

However, the sanctions war between Russia and the West is intensifying as the war between Russia and Ukraine escalates. The threat of the West taking extreme measures appears to be moving toward reality. On February 26, the United States, together with the European Union, Britain, and Canada, issued a joint statement announcing measures to exclude sanctioned Russian banks from the SWIFT system in the coming days, as well as plans to sanction the Russian central bank and “paralyze” Russia’s foreign exchange reserves. The introduction of harsher sanctions by the West in the future is not ruled out. Once the statement becomes a reality, Russia will be hit hard.

First, Russia’s alternative measures still has many limitations. Currently, only 20.6% of Russia’s total financial information is handled by the Russian SPFS system, and most transactions are still handled by SWIFT. At the same time, although the SPFS can provide services to the majority of Russian banks, not many foreign institutions have joined it, and its coverage abroad is not high either. This means that Russia’s alternative measures can only guarantee basic transactions within Russia, and cross-border transactions by sanctioned institutions will not be possible.

Second, Western sanctions against the Russian central bank will weaken Russia’s ability to maintain financial stability. As of early January 2021, the Russian Central Bank’s total assets in the United States, Germany, France, Britain, Austria, and other Western jurisdictions amounted to about one-third of Russia’s gold and foreign exchange reserves. The structure of foreign exchange assets in 2022 will not have changed significantly. If the Russian Central Bank’s assets in Western countries are frozen, the funds that Russia uses to support the ruble exchange rate and to assist financial institutions and businesses will be severely curtailed. Financial risks, such as ruble devaluation, high inflation, and reduced solvency of governments and enterprises, will rise accordingly.

Overall, Western sanctions against Russia thus far have not reached a level that will do Russia serious bodily harm. Russia is still able to maintain normal energy trade and maintain basic ties with the world financial system. However, against the background of financial sanctions and export controls, the business environment in Russia will further deteriorate, and international investors are bound to reduce their business in Russia and withdraw their investments there. Russia will need to digest the consequences of Western sanctions over a relatively long period of time, and economic revitalization will encounter greater resistance and uncertainty.