The new US new “strangulation” sanctions on foreign exchange are proving to be increasingly effective, disrupting Russia’s payments to “friendly countries” and leading to sharp falls in export volumes this year.

The US changed its tactics when it released a set of smart sanctions in December, part of which specifically targeted banks amongst Russia’s allies that led to Chinese and Turkish banks cutting off ties with their Russian partners. Trade with these countries was immediately hit.

Office of Foreign Assets Control (OFAC) extended those sanctions to what The Bell has dubbed “strangulation” FX sanctions this month when it sanctioned MOEX, Russia’s main currency exchange, and the supporting depository and clearing house. The Central Bank of Russia (CBR) was immediately forced to stop trading the dollar and euro on the MOEX exchange.

While the parallel over-the-counter (OTC) market continues to function allowing Russian businesses and individuals to buy and sell foreign currency, the spreads have widened and the sanctions have complicated settling Russia’s international trade deals.

The CBR has been preparing for these sanctions since they were first mooted in 2014, but at a meeting this week senior officials were starting to sound more panicky as the regulator hunts for a work around.

“We have to do everything to keep the wheels turning. What seemed to us yesterday, unpopular – there, I don’t know, swaps (including central banks), some clearing systems, the use of crypto – everything needs to be tested, everything needs to be tried as quickly as possible,” First Deputy Chairman of the Central Bank Vladimir Chistyukhin said at the St. Petersburg Economic Forum, as cited by TASS. “Because [if] there are no normal payments for products in foreign economic activity, for our export- and import-dependent country, that’s simply all, it’s ruin.”

The payment situation has worsened since December. Analysis of customs data by The Bell revealed that imports from key trading partners such as Turkey and Kazakhstan fell by one-third in the first quarter of 2024.

The implementation of sanctions has only intensified. Recent measures include the EU banning Financial Communications System (SPFS), Russia’s alternative to SWIFT, and the Russian subsidiary of Bank of China halting payments from Russian banks on the Specially Designated Nationals and Blocked Persons (SDN) list, even in yuan.

"Strangulation has become the main and most effective method of economic warfare against Putin's Russia," Chistyukhin remarked. The SPFS ban particularly affects intermediary countries seeking to maintain trade relations with both Russia and Western nations. Some experts predict a 20-25% reduction in Chinese imports and a 15-20% rise in electronics prices by September due to increased intermediary commissions and shortages.

If imports continue to decline, the ruble, heavily reliant on foreign trade, may strengthen in the short term due to decreased currency demand from importers, reminiscent of the situation in spring-summer 2022.