How Sanctions Impacted Russia? Diamond Ban and Oil Price Controls
Russia’s economy is facing severe challenges due to sanctions imposed by the European Union, the United States, and other nations in response to its ongoing conflict in Ukraine. Two key areas targeted by these sanctions are the diamond trade and the oil sector. Let’s explore the effectiveness of these sanctions and their broader implications.
The Diamond Ban
On December 19, 2023, the EU agreed on a 12th package of sanctions against Russia, which crucially included a ban on Russian diamond imports. This ban, set to take effect from January 1, 2024, aims to cut off a significant revenue stream for the Russian government. Russia, through the state-owned company Alrosa, is a major player in global diamond production, holding about a quarter of the market. In 2022, Russia exported approximately $3.5 billion worth of rough diamonds, primarily to Europe and India. This ban poses a direct challenge to the Antwerp diamond trade, a long-standing hub for Russian diamonds.
The United States had previously imposed a similar ban in March 2023, targeting not only natural but also synthetic diamonds from Russia. Synthetic diamonds, being more affordable and environmentally friendly, represent a growing segment of the market. The challenge lies in verifying and certifying these diamonds to ensure compliance with the sanctions.
The Oil Price Cap
Another significant measure is the tightening of the price cap on Russian oil by the EU. This initiative, agreed upon by the G7+ countries, aims to limit Russia’s revenue from crude oil, a critical source of export earnings. The price cap mechanism is set at $60 per barrel and applies to the Urals blend, a benchmark for Russian oil. It requires detailed attestation, including ancillary costs like insurance and freight, to prevent any extra fees being used to acquire Russian oil.
The price cap has successfully reduced the value of Russian oil exports by about 30% in 2023 compared to 2022, translating to a loss of approximately $175 million per day for Moscow. However, this has led to the emergence of a black market, with countries like China and India increasing their purchases of discounted Russian oil. Russia has also been exploring ways to bypass these sanctions, including barter deals and using local currencies.
Impact and Outlook
The sanctions have led to a noticeable contraction in the Russian economy, with a 4.5% decrease in 2023 and a projected modest growth of 0.5% in 2024. This economic downturn is accompanied by a depreciation of the Russian ruble and a significant inflation spike. These economic pressures are impacting the living standards in Russia, leading to increased poverty and a decline in President Vladimir Putin’s approval ratings.
Despite these challenges, Russia shows no signs of altering its course in Ukraine, maintaining its military posture and violating ceasefire agreements. The international community, particularly the EU and its allies, remains committed to supporting Ukraine and upholding its sovereignty, while also seeking a peaceful resolution to the conflict.
The future of these sanctions and their overall effectiveness remains uncertain. While they have undoubtedly impacted the Russian economy and signaled international disapproval of its actions, they have not yet achieved a change in Russia’s behavior or strategy in the region. The international community faces the challenge of balancing pressure with dialogue, striving to prevent further escalation and a humanitarian crisis in Ukraine.
