What will 2023 Hold for Sanctions on Russia?

2022 was a year defined and shaped by sanctions on an unprecedented scale. Following Russia’s invasion of Ukraine on February 24, the most comprehensive sanctions were imposed against a major power since the end of the Second World War, with the US, European Union (EU), and others coordinating their actions in new ways. While western sanctions against Russia are likely to remain and tighten further in 2023, their loosening will play an important role in ending the war if Putin decides he cannot achieve his goals militarily. Against this backdrop, it’s evident why Russia topped our chart of geopolitical hotspots compliance teams are concerned about in our 2023 State of Financial Crime survey.

Before the invasion in February, western countries had varied sanctions in place against Russia in response to a range of issues, including its abuse of human rights, regime corruption, and cyber-attacks. But the invasion changed this situation dramatically. Although the most substantial sanctions were imposed in the first few months after the invasion, new packages were introduced across the year as the invasion continued. 

The effectiveness of western sanctions on Russia

In light of global sanctions packages, the Russian economy underwent a severe contraction that will likely continue through 2023. The performance of the Russian military has also been undermined by sanctions, which have limited its ability to resupply. 

But despite these effects, sanctions still need to succeed in their primary aim: convincing President Putin to withdraw from Ukraine. While this is yet to be achieved, Putin’s past behavior suggests he has a high threshold for economic pain and is willing to accept difficulties as long as they do not cause levels of political unrest that might imperil his position. 

How Russia sanctions might evolve in 2023

The development of sanctions against Russia in 2023 is likely to hinge on results on the battlefield in Ukraine itself. If Russia is unlikely to win or quit, the conflict will continue into 2023. A ‘steady state’ will likely emerge, with Ukraine making incremental territorial gains, as in Kharkiv in September and Kherson in November. At some point, serious talks about ending the war will come, but it is unlikely that either side will be willing to make significant concessions at this stage. 

Western sanctions programs

It seems improbable that there will be any further EU moves on natural gas supplies or an attempt to remove all Russian financial institutions from the international financial architecture unless prompted by a significant escalation in Russian violence. 

However, new sectoral categories may be added in successive packages. More generally, we are likely to see new sanctions focus on the following:

• Extending lists of designations for pre-existing types of targets
• Shortened timetables for the implementation of some existing bans
• A strong focus on tackling sanctions evasion efforts through new designations, law enforcement, judicial action, and the practical implementation of ‘freeze to seize’ measures

At the same time, we are likely to see a limited scaling back of western sanctions in some areas, even as the number of designations overall will continue to rise. Any successful legal action by an oligarch to have their name removed from sanction lists will set a precedent to cause major problems for the western approach. Russia is also likely to seek concessions on sanctions as rewards for good behavior if talks develop. 

Key sanctions considerations 

The effectiveness of sanctions will be further scrutinized in 2023 in light of ever-growing sophisticated sanctions evasion techniques, the rejection of western sanctions by many non-western states, and unintended humanitarian consequences. 

Other considerations for the coming year include the following:

• The US will remain at the forefront of applying a national autonomous sanctions regime, as underpinned by its strategic review in October 2021
• European, Anglophone, and Asian countries that have their own sanctions regimes will use them more widely and will seek to coordinate and consolidate their approaches where there are key shared issues 

The importance of real-time AML risk data

Firms should prepare for further changes to the lists of Russian sanctions designations and have appropriately comprehensive and agile screening tools in place. According to our 2022 global compliance survey, 96 percent of firms believe real-time AML risk data would improve their response to sudden sanctions regime changes, like in Russia’s case. 

Having identified this need, compliance teams should ensure they work with vendors that can deliver for them. Firms must ensure they do not take a minimalistic approach to detect potential Russian sanctions exposure, especially since western government agencies will increasingly focus on improving private sector implementation and reducing evasion.