Economic Sanctions and the Collapse of Trade: The Unintended Consequences of Targeting Russian Warfare Financing

In December, the US Treasury Department imposed economic sanctions on foreign banks supporting Russian warfare. This led to a significant drop in exports from Turkey to Russia, as well as other countries with increased trade with Russia following the aggression against Ukraine.

The sanctions targeted banks financing equipment crucial to Russia’s warfare and disrupted the flow of money in Russia significantly. For example, Turkey’s exports to Russia dropped by a third from the previous year to $2.1 billion. Exports of high-priority products from Turkey, critical for warfare but intended for civilian use, fell by 40% to $93 billion from the previous quarter.

Russian companies are now resorting to smaller banks and alternative currencies due to fear of US sanctions. Experts believe that the drop in war-related exports is a result of banks’ fears of potential sanctions. The US can track dollar transactions and penalize banks working with companies tied to warfare, leading Russian companies to increasingly use rubles for trade, with the share of exports paid in rubles rising from 15% to 40%.

The use of rubles in imports has also increased, causing a significant shift in Russia’s trade practices. This change is attributed to the sanctions imposed by the US on foreign banks aiding Russian warfare. The US Treasury Department aims to disrupt Russia’s ability to fund its military operations through economic sanctions on foreign banks supporting Russian warfare. However, this has also had unintended consequences such as a collapse in trade between Russia and countries with increased trade following the aggression against Ukraine and a shift in Russia’s trade practices towards using rubles for trade.