How the Russian Economy Survived 16,000 Sanctions

There are more than 16,000 sanctions imposed against Russia – 11,000 of them aimed at individuals, 4,600 at entities including financial institutions and the remaining directed at ships and aircraft. European airspace is closed to Russian planes, and hundreds of Western companies have pulled out of Russia completely. Western sanctions against Russia should have crippled the economy, it should have stopped Russia’s military, it should have crashed Russia’s currency, but remarkably none of this happened.

If you go to Russian grocery stores the aisles are full, prices are low, and people are living a normal life. Despite famous Western brands pulling out of Russia completely, their latest products are still on the shelves of new stores, like this store selling the latest iPhones and Macbooks.

Despite Apple pulling out of Russia, plenty of Apple products are still being sold in Russian stores like this one in Moscow

So how did Russia do it? How could any country in today’s day of age survive a record 16,000 sanctions? What’s even more challenging for Western countries to figure out is, how did the Russian economy grow by 3.6% last year, better than any G7 country, and is now projected to grow an additional 2.6% this year. 

Of course it’s no secret by now that Russia has shifted to a wartime economy. For the first time in modern history, Russia is set to spend 6% of its gross domestic product on the military, as defense spending will exceed social spending in 2024. The war in Ukraine is not only the Kremlin’s biggest priority, it is now also the main driver of Russia’s economic growth. At a time when Ukrainian President Zelensky is scrambling to acquire arms, funds, and recruits, Putin seems confident that he will be able to win the war on his conditions. 

Meanwhile some of the most prominent American geopolitical voices are starting to say the hard part out loud. Stephen Walt, a professor of international relations at Harvard University recently advocated in this article for Foreign Policy that NATO should NOT accept Ukraine, for Ukraine’s sake.

I also recently sat down with Colonel Douglas Macgregor, the former advisor to the US Secretary of Defense who shared this insight about Zelensky:

While the future of Zelensky and Ukraine remain uncertain, we know Russia will be led by Putin for the foreseeable future. So how have 16,000 economic sanctions from some of the most powerful countries on earth fail to derail him? The answer might surprise you, but if you’ve been watching the precious metal market over the past few months, you’ll have seen the price of gold continues to shatter all-time highs.

The answer is Putin started using an incredible gold strategy he stole from the United States in order to bypass economic sanctions, which ironically was led by the US. It’s actually a very interesting case study on global economics but one you can also implement in your own investing portfolio, but more on that later. 

In order for Western led sanctions to be successful they needed to be strategic, targeting the environment it works in. The economic sanctions from the West targeted shipping and trade into Russia, but the gold market is a massive market that was completely left untouched from Western sanctions. According to the World Gold Council, Russia is now the second largest producer of gold at 324.7 metric tons in 2023, which only trails China at 374 metric tons. What’s more? Russia is forecasted to increase gold production by 4% a year until 2026! 

Here is something you probably haven’t heard in Western media before but something the Carnegie Endowment for Peace published last month in this article entitled: “Why Russia has been so resilient to Western export controls”. Russia has been preparing for economic sanctions since 2013 and managed to isolate its economy from transactions requiring US dollars. 

Once again when you break down the facts of what happened with these economic sanctions, it’s incredible how ineffective they’ve been in stopping Russia’s economy. Let’s take semiconductor chips for example. Russia’s domestic chip industry is both outdated and undersized. In theory, Western sanctions against Russia acquiring microchip technology should have crippled Russia’s tech industry. Russian factories operate at 65-nanometer chip technology, which is about 15 years behind the US. The US thought they had Russia trapped in a corner.

There is no chance for Russia to develop these chips domestically, by cutting off Russian access to the newest chips and that should have been it. Russia’s tech industry is over, it’s military can’t possibly build more armory and advanced weapons, the West will win, and Russia will be defeated! But none of that came to fruition and within a year Russia’s tech supplies have rebounded to pre-war levels. How did Russia pull this off? They did so by using a 3 point strategy.

First, Russia started importing run-of-the-mill computer chips and components found in consumer products, that often come from US manufacturers, but are rarely subject to export controls.

Second, Russia used a third-party network of traders who have access to components for tanks, missiles, and drones and third Russia took advantage of changing geopolitics.

The shift we’ve seen around the globe moving from a unipolar world controlled by the US to a multipolar world where multiple superpowers gave Russia incredible leverage. Countries like China, India, Turkey, and the United Arab Emirates all choose to ignore Western sanctions and not only sustain trading ties but expand them. No surprise here but the country benefiting the most from this expansion in trade is China.

In 2020, the total trade value between Russia and China was valued at 107 billion dollars but fast forward to 2023 and the total trade value between these two strategic partners is now valued at 240 billion dollars, a 124% increase in just 3 years.

Half of Russia’s oil and petroleum was exported to China in 2023 and according to Chinese customs data Russia is now China’s top oil supplier. 

But if you think imports to Russia are only coming from countries like China and North Korea, think again! Last month The Times, Britain’s top newspaper broke this story on how British luxury cars are still being sold in Russia despite sanctions.

Whilst the UK government stood in alliance with the US by imposing economic sanctions, once again profits and the chance to cash in amongst Russia’s elite wealth was just too much of an opportunity to pass. Rolls Royce and Bentley shifted their focus to neighboring countries and started imports their luxury vehicles to Belarus, Armenia, Azerbaijan, and Kazakhstan.

Now look at the trade numbers and it will shock you. The number of Jaguar Land Rovers shipped to Kazakhstan has increased by 5,190% since before the Russian Invasion.

Meanwhile UK car exports to Azerbaijan have increased 795% vs pre-invasion.

There was certainly a time in history where economic sanctions carried much more weight and consequences but in today’s global economy, it seems sanctions are effectively useless. 

But now let’s break down the economic strategy Putin stole from the United States and how he used it to stabilize his currency and economy. In 2022, Putin decided to peg Russia’s currency the Ruble to gold. 5,000 rubles was the standard and could be used to purchase 1oz of gold. Of course, the United States was the last major economy to use the gold standard. The US dollar used to be one of the most stable and valuable currencies in the world, but the purchasing power of the dollar is decreasing every year and has only accelerated even more in recent years with US rising inflation.

Usually, the rationale for holding on to gold reserves is to use them to settle foreign transactions at both home and abroad. Gold can be swapped for currencies to settle transactions and then swapped back into bullion. Because the world is filled with so much uncertainty and instability, central banks around the globe are stockpiling the asset. Over 1,073 metric tons of gold were purchased in 2022 alone. 2023 was just slightly lower, meaning that in the past 2 years alone, Central Banks around the globe have spent over 220 billion dollars acquiring gold!

Now due to Western sanctions against Russia, the UK, United States, and Canada will not touch Russian gold, but don’t forget 85% of the globe is NOT sanctioning Russia. One of the biggest customers that have emerged is the United Arab Emirates who imported 96.4 metric tons of gold (that’s worth over $6 billion dollars alone) in 2022. That figure represents a 15x increase from pre-war imports. Another big client of Russian gold is Switzerland. In 2022, Switzerland imported 75 metric tons of Russian gold (worth 4.87 billion dollars) and in 2023 Switzerland followed the business model of Britain’s luxury auto exports, importing an incredible 8.22 billion dollars of gold from the UAE and an another 3.92 billion from Uzbekistan.

Of course, all the gold from both the UAE and Uzbekistan come directly from Russia. The result is Russian gold worth hundreds of billions of dollars are being freely traded at top dollar while avoiding every one of the 16,000 sanctions. Now for Putin’s plan for economic resilience through gold to work, gold needs to increase in value over the long term. The last few months have been great news for gold investors, just last month a CNBC article showed how gold hit record highs, propelled by US interest rate cut expectations and strong safe-haven demand.

But gold is not the only strategy Russia has for the future. Last month, Russia announced a new BRICS currency that will incorporate digital assets and cryptocurrencies on the blockchain. Russia is of a founding member of the BRICS alliance along with China and India and here are the words of Russian diplomat Yuri Ushakov who states:

“We believe that creating an independent BRICS payment system is an important goal for the future, which would be based on state-of-the-art tools such as digital technologies and blockchain. The main thing is to make sure it is convenient for governments, common people and businesses, as well as cost-effective and free of politics,”

Boasting the largest economy in Latin America, Brazil’s President Lula de Silva has been a vocal supporter of developing countries finding a way to avoid the US dollar in foreign trade. Last year when visiting Shanghai he stated: 

“Every night I ask myself why all countries have to base their trade on the dollar, why can’t we do trade based on our own currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”

BRICS founding member China is making the most aggressive moves, stockpiling gold for the past 16 months while simultaneously reducing its US dollar reserves. But it’s not just China, like I mentioned earlier, the World Gold Council reported that central banks bought over 1,000 tons of gold in 2023. This even prompted Thomas Hill, a former State Department employee to speak out on why the world moving away from the US Dollar should alarm our lawmakers

“The BRICS-led dedollarization effort should alarm US policymakers. It is clear that traditional US allies, such as Egypt, Saudi Arabia, and the UAE are all exploring ways to dedollarize, and that Beijing is helping that process move forward”

Everyone, the multipolar world is here and there has never been more uncertainty for the future of our world. The Russia/Ukraine conflict continues to provide uncertainty and instability in Europe, Israel’s war in Gaza threatens to escalate into a larger regional war throughout the Middle East, potentially even bringing in Turkey which is the gateway to Europe and once tensions in the Taiwan Strait and South China Sea could see the two largest superpowers in the world in the US and China escalate into a conflict that would do nothing but harm for the future of humanity. With a potential new US President coming in 2024 who knows what the future will bring, but as always you can count on this newsletter for bringing you the best insights into global geopolitics.

What’s the Best Way to Invest in Precious Metals?

As you can see from today’s newsletter. Russia pegging it currency to gold and using it for stability in fearful times is an investing strategy that you can steal as well. In my opinion, precious metals should absolutely be part of a balanced investing portfolio. I’ve been an active gold investor for years and have partnered with Lear Capital to be my precious metals expert and sponsor of my show because Lear has been helping investors like me purchase gold and silver for almost 30 years. They have over 3 billion in trusted transactions, 1,000‘s of 5-star reviews, and are the only gold company with a 24 hour-risk free purchase guarantee. 

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