Russian Sanctions Redux

“There is danger that, if the Court does not temper its doctrinaire logic with a little practical wisdom, it will convert the constitutional Bill of Rights into a suicide pact.” Justice Robert H. Jackson, dissenting in Terminiello v. City of Chicago, 337 U.S. 1 (1949).

Three years ago, we wrote (together with our friend and colleague, Richard Berner) an early analysis of the sanctions applied to Russia immediately following its February invasion of Ukraine. We viewed those sanctions – financial and otherwise – as the most powerful imposed on a major economy at least since the Cold War. Given the widespread revulsion against Russia’s attack, it seemed that even third-party sanctions busters might become targets of further sanctions if they acted to help Russia.

At the same time, we observed that countries targeted by sanctions typically find ways around them. Consequently, ensuring that sanctions remain effective always involves a race between the target’s evasions and efforts at reinforcement. Yet, as we describe below, Russia has successfully evaded reinforced sanctions by developing new delivery mechanisms and finding new buyers for its key revenue-producing export: oil and oil products. These revenues are critical for sustaining Russia’ military aggression. Consequently, now that the Group of Seven (G-7) may wish to pressure Russia to make peace, it is natural to look for ways to plug the leaks that sustain Russian fuel export revenues.

Doing this is not straightforward. As Stiglitz and Kosenko highlight, it is very difficult to enforce sanctions on trade in a liquid commodity – like oil – for which demand is relatively inelastic. Indeed, Russia’s ability to evade the 2022 sanctions (and subsequent enhancements) is perhaps the best evidence for this view.

Without external pressure, we do not see how Russia has any incentive to accept Ukraine as an independent, sovereign nation. In our view, reinforcing sanctions on Russian fuel exports would be critical to countering Russia’s evasions. Yet, the more powerful immediate motivator would be for the G-7 to announce that – unless Russia quickly concedes some of its key objectives – they will soon transfer Russia’s frozen assets abroad (some $300 billion) to Ukraine for its defense.

Opponents of seizing the frozen assets may worry about the impact on the credibility of property rights needed to sustain international finance – a concern that we almost always share. However, Russia’s sustained attack on democratic Ukraine already has severely undermined the system of international rules – including the most basic tenet forbidding one nation from attacking a neighbor to seize its people, land and resources.

To paraphrase the great Justice Robert H. Jackson (see citation above), international rules ought not be a suicide pact for an invaded country. As the lead prosecutor in the Nuremberg trials, Justice Jackson knew something about establishing international rules and standards. And, as Stiglitz and Kosenko note, setting the bar for outright seizure of the frozen assets so high as to be limited to a brutal, widely condemned, recidivist invader like Russia should allay concerns about a precedent that weakens property rights.

In what follows, we start with a brief description of the sanctions regime. We then provide evidence of the extent of leakage. That brings us to the challenge of reinforcing the sanctions—for example, by imposing sanctions on sanction busters (what are known as secondary sanctions). Finally, we turn to what we see as the most powerful option in the current circumstance: seizure and transfer of the frozen Russian state assets.

The sanctions regime. The original 2022 sanctions were largely financial. In addition to freezing assets of Russia’s central and commercial banks (and selected oligarchs) held abroad, they excluded most Russian intermediaries from using the SWIFT messaging system for cross-border payments. The initial impact of these financial actions was powerful, triggering a temporary plunge in the value of the ruble, a run on Russian banks that prompted the central bank to raise interest rates sharply, and a shift to using crypto assets like Bitcoin to transfer assets out of the country. The initial package also limited technology exports to Russia.

Aside from a U.S. ban on oil imports from Russia, however, the initial sanctions regime did not directly restrict Russian fossil fuel exports. Instead, they did so indirectly by complicating cross-border payments, thereby reducing European imports of Russian oil. As a consequence, Russia was compelled to export oil at a large discount relative to the global price (see red dotted line in chart below). In December 2022, to limit Russian income from fossil fuel exports, the G-7 added a “price cap” of $60 per barrel on Russian seaborne crude oil, leading temporarily to a larger Russian oil discount. Russia itself weaponized natural gas against Ukraine supporters, slashing supplies to Europe in June 2022 and compelling Europe to find alternatives (including U.S. liquid natural gas).

Oil prices: Brent versus Russian Export (U.S. Dollars per barrel), 2022-February 2025

Sources: FRED (Brent) and KSE Institute Russia Chartbook (Russian Export price).

During the course of 2023 and 2024, the United States and Europe extended the sanctions, targeting more people and organizations, and banning the import of Russian gold and diamonds (see, for example, here and here). Furthermore, since the start of the war, over 500 western firms, ranging from McDonalds to Mercedes, have exited Russia (for an extensive list, see here).

The Big Hole in the Sanctions Regime. The principal leak in the sanctions regime is Russia’s continuing ability to export fossil fuels to finance its war against Ukraine. This substantial source of revenue, which ranged from nearly one-half to a bit more than 60 percent of Russian exports (measured in U.S. dollars), far exceeds both the nation’s current account surplus ($54 billion in 2024) and its reported defense spending plans ($142 billion in 2025).

The stacked bars in the following chart show the revenues that Russia earned in the year prior to the war (ending February 2022) and in the three subsequent years (through February 2025). Not surprisingly, the totals are sensitive to the price of energy: when global oil prices temporarily surged in the first year of the invasion (the dashed gray line), so did Russian fuel export earnings. Perhaps the most important message of the chart is that oil revenues (blue-shaded bars) in the year ended February 2025 (Year 3) were as high as they were in the year prior to the invasion! To be sure, overall fuel export revenues are down by about 16 percent, but that largely reflected the plunge in natural gas (orange shading) that followed Russia’s punitive 2022 supply cutback.

Russian Revenues from Export of Fossil Fuels (Annual, Billions of Dollars), March 2021-February 2025

Sources: Center for Research on Energy and Clean Air (interpolation of chart in billions of euros on page 5), FRED, and authors’ conversion from euros to U.S. dollars.

Three developments account for these persistently high oil revenues, despite the decline of oil prices after 2022. First, Russia found new buyers. According to Bruegel’s Russian foreign trade tracker, China, India and Turkey accounted for a whopping 82% of Russian mineral fuel exports in 2024, up sharply from 27% prior to the invasion of Ukraine. Second, these new buyers facilitated trade with Russia despite it being shut off from the standard international means of payment (e.g. SWIFT), a largely U.S.-dollar based system. Indeed, a list of 213 foreign enterprises that defy “demands for exit or reduction of activity” in Russia includes more than 40 Chinese firms. Third, in an effort to evade the sanction-regime oil price caps, Russia purchased a fleet of shadow tankers. The combined effect of these developments is as anyone would expect: Russia’s export oil price relative to the world price rebounded during 2023 and continued on that improved course in 2024 (see the first chart).

Reinforcing the sanctions. As the target adapts, every sanctions regime requires reinforcement to remain effective. The Russian case is no different. How can western governments reduce Russia’s export revenues?

There are several alternatives. One set of tools addresses producers directly by lowering the price cap on Russia’s oil exports or by expanding the scope of the sanctions to include things like “refined” energy products. More broadly, Becker and Gorodnichenko argue that Ukraine’s partners should impose a “full embargo on all business … including trade, investments, and finance.” An embargo would mirror the treatment of Russia’s ally, North Korea. It also would simplify enforcement and allow foreign companies continuing to operate in Russia to invoke force majeure clauses in cancelling contracts without legal risk at home.

Other approaches aim at altering the behavior of “intermediaries.” In January 2025, for example, the United States intensified sanctions against “more than 180 vessels and dozens of oil traders, oilfield service providers, and Russian energy officials.” The point is that going after the shadow fleet involves sanctioning not only the ships themselves but also the firms that insure, maintain, and service them, or allow them to dock. Recent evidence on the Russian oil price discount suggests that the U.S. 2025 move had some effect (see here).

In theory, it should also be possible to go after the largest importers of Russia fossil fuels: China, India and Turkey. Supporters of Ukraine could impose penalties severe enough to materially reduce these countries’ demand for Russian oil. Such secondary sanctions could include punitive tariffs, limits on investment (in both directions), and restrictions on access to the international financial system. Yet, as far as we are aware, no major jurisdiction has taken this route.

Finally, there is the world price of oil itself. We have already shown that Russian fuel exports are sensitive to this price. A sustained decline in the price of oil – say, because of a massive expansion of U.S. supply that is not accompanied by a cut elsewhere – would very likely diminish Russia’s ability to sustain the war against Ukraine.

Seizing Russian Assets. This brings us to what may be the most powerful sanction currently available to Ukraine’s supporters: seizing Russia’s frozen assets and transferring them to Ukraine. The following table provides estimates by jurisdiction of the location of these assets. Notably, more than one-half of the assets are held by jurisdictions in the EU (namely Belgium and France).

Frozen Russian Assets by Jurisdiction, 2024 (Billions of U.S. Dollars)

Note: The “Other possible” row includes assets that may be held by United States ($20.8 billion) and Australia ($6.2 billion). The TOTAL includes “Other possible” funds. Source: Ziskina, Moiseienko, and Firestone, “Resolving Accountability over Russian State Assets: New Understandings of Jurisdiction and Policy Opportunities,” New Lines Institute, January 2025.

Should Ukraine gain immediate access to these funds, it could go a long way to sustaining their ability to pay for weapons. To see why, consider that the IfW Kiel Ukraine Support Tracker estimates that U.S. support for Ukraine from the February 2022 invasion to the end of 2024 totaled nearly $125 billion, of which about $70 billion was military. Consequently, even if the United States were to cease providing aid to Ukraine, the EU portion of the frozen Russian assets (combined with ongoing EU support) could finance Ukraine’s military imports for several years (see here). Moreover, with the new consensus for rearming Europe, use of the frozen Russian assets would buy crucial time for developing Europe’s own weapons systems – for use both by the EU and in Ukraine.

Importantly, this would not be the first time Europe tapped the frozen assets: they have previously used the income from these assets to support Ukraine (see here). Given the existential threat should Russia continue to attack an under-resourced Ukraine, how could any property-rights logic compellingly distinguish between distributing these revenues and distributing the assets themselves?

Our conclusion is simple. Ukraine’s supporters should aim to deter Russian aggression by helping Ukraine continue to defend itself. Yet, Russia’s sustained attack, combined with the new U.S. Administration’s vacillating support, means that the rules of the post-World War II world are changing rapidly. There is no reason to think that the international financial architecture of the past 80 years will be immune to the forces driving these changes.

Critically, that architecture was never designed to ensure that invaders can compel the helplessness of their victims. If Ukraine’s supporters are not ready to establish a full embargo on Russia, or to impose severe penalties on sanctions busters like China, India, and Turkey, then they should transfer Russia’s frozen assets abroad to Ukraine as soon as practically possible. This asset transfer would strengthen, rather than weaken, the rules of the game that aim to secure world peace.