As G7 Convenes, West Looks to Shore Up Sanctions Against Russia

When the leaders of the Group of Seven (G7) nations sit down this weekend in Hiroshima, Japan at their annual summit, one of their primary goals will be finding ways to increase the pressure on Russia's already battered economy to compel Moscow to end the war in Ukraine.

But finding new methods to confront Russia is a daunting challenge, as the United States and its allies have already enacted the harshest economic sanctions regime ever leveled against a major economy.

The G7 Summit will serve as a reminder to President Joe Biden and other leaders of the world's wealthiest nations that their control of global trade is slipping, as rising powers like China and India offer Russia alternative economic lifelines for survival.

"The G7 no longer has the economy heft it once did," said Niels Graham, the assistant director of the Atlantic Council GeoEconomics Center. "You have these other economic actors that can step in" and help keep the Russian economy afloat in the face of severe sanctions from the West.

Those sanctions have still had a significant impact, achieving many of the objectives that U.S. and European policymakers had hoped for when Russia launched its invasion in February, 2022.

"Russia's economic prospects are bleak," Daleep Singh, the former deputy national security adviser who led U.S. sanctions policy toward Moscow, told Newsweek. The overarching goal was to drive Russia into "isolation as a smaller, weaker" economy, Singh said. "The sanctions are doing their job."

The Russian economy shrank by 2.1% last year, according to the World Bank and International Monetary Fund. Consumer spending and wages are down, and the economy has suffered from high inflation and a devaluation of the ruble since the start of the war, said Elina Ribakova, the deputy chief economist at the Institute of International Finance.

Russia's economy ministry last month predicted a slight boost in growth for 2023, but most independent forecasters and analysts believe the sanctions will continue driving an economic slowdown as Russia remains isolated from a major portion of the global economy.

Russian trade with the United States, the Europe Union, Japan and other Western allies has declined since the invasion. Over 1,000 companies have withdrawn from Russia or announced plans to reduce business activities in the country, according to a tracker run by the Yale Chief Executive Leadership Institute.

Still, Russia is surviving the sanctions regime by reorienting its economy away from the West.

"China has become a crucial economic partner for Russia at this point," said Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs.

Chinese exports to Russia increased 67% in the first four months of 2023, according to China's official customs data. Russian exports to China have also increased dramatically. Trade between the two nations increased 30% in 2022 and is growing at an even faster pace this year, said Alexander Gabuev, the director of the Carnegie Russia Eurasia Center​.

Russia has also strengthened its economic ties with India by offering discounted oil prices to make up for a drop in revenue from Western energy sanctions, which include a ban on seaborn crude oil imports and a price cap on Russian oil. India imported 20% of its oil from Russia in 2022, up from just 2% in 2021.

Overall, Russia's oil and gas revenues were down 40% at the start of 2023, compared to the same period last year, right before the invasion of Ukraine. But Moscow still generates billions in profits each month from energy sales to emerging trade partners like India and some European countries like Hungary that continue importing Russian natural gas.

"There is still a significant amount of Russian oil in the global economy," and that won't change anytime soon, said Anna Mikulska, an energy studies fellow at Rice University's Baker Institute.

That revenue has helped subsidize Russia's war effort, ensuring President Vladimir Putin can continue financing the fighting in Ukraine.

"The Russian economy has been hit, but the political system is still stable," Gabuev said. "The economy is adapting, and the Kremlin has the resources to continue the war."

Gabuev and others said Russia's economic resilience doesn't mean that the sanctions regime should be viewed as a failure. Singh, the former senior White House official, argued that it will take time for the full effect of the sanctions to take hold.

"There was no plausible way to disconnect a $1.7-trillion economy from the world in weeks or months," said Singh, the chief global economist at PGIM Fixed Income.

White House officials have echoed the sentiment.

"Sanctions are a long-term tool," National Security Council spokesman John Kirby said on a call with reporters ahead of the G7 Summit. "You often don't see an immediate reaction to sanctions once they're in place. But over time, they can build."

The U.S. and its allies can also add new sanctions and bolster existing ones to try to tighten the screws on the Russian economy and military.

Russia has long relied on high-end technology from the West like microchips for sophisticated weapons systems such as precision-guided munitions. Western sanctions on technology have forced Moscow to import military equipment from U.S. adversaries like Iran, which has provided Russia with artillery, tank rounds, and more than 400 attack drones since last August, Kirby said.

The West can also do more to enforce existing sanctions designed to block countries and companies from supplying Russia with military technology, said Graham, the Atlantic Council analyst.

"Closing loopholes, that's the real challenge of export controls and sanctions enforcement going forward," Graham said.

The G7 nations may also consider lowering the price cap on Russian oil, which currently stands at $60 per barrel, in an effort to further reduce a key source of revenue for Moscow.

Other potential measures to squeeze Russia are reportedly on the table. In talks before the summit, the Biden administration proposed a stricter ban on exports to Russia from G7 nations, with an exemption for food and medical supplies. Officials from the EU and Japan have balked at the plan, however, since both rely much more heavily on trade with Russia than does the U.S.

The disagreement over the proposal highlighted some emerging divisions in the international coalition backing Ukraine. Biden and other leaders have had to balance their commitment to Kyiv with the political costs at home of high inflation and slow economic growth.

It remains to be seen how much appetite G7 leaders have for expanding sanctions while also sending billions in military aid to Ukraine and juggling a plethora of other security challenges. Leaders at the summit will also discuss threats posed by China and climate change, major agenda items that will compete for attention with the war in Ukraine.

Even if the summit produces a breakthrough on new sanctions against Russia, it likely won't be enough to change Putin's calculus about continuing the war, said Kluge, of the German Institute for International and Security Affairs.

Russia can sustain its war effort "for a long period of time so long as other significant economic powers are willing to trade" with Moscow, Kluge said.

"It's clear the sanctions are having an effect," he said. "But in this war, it's not a game-changer for Russia."