With Western countries unwilling to commit their own troops, the war in Ukraine has become one of attrition. To that end, leading policymakers as well as many in Western societies have hoped that economic sanctions would force Russia to abandon its effort to conquer Ukraine. Economic pressure, it has been argued, could bring an end to the war by depriving Russia of critical financial resources.
Sanctions unprecedented in scale and scope were introduced within days of Russia’s unprovoked invasion of Ukraine on February 24, 2022. The initial sanctions included the freezing of Russian assets abroad and a ban on the export of key technologies to Russia. The European Union halted direct purchases of Russian crude oil in June 2022 and cut back on imports of Russian gas (although oil and gas exporters were exempt from the Western financial sanctions). Over 1,200 Western companies began winding down their operations in Russia on their own accord. Some shut down completely, while others just stopped new investment. In the weeks and months following the 2022 invasion, some Western observers insisted that sanctions were crippling the Russian economy.
The sanctions have undeniably had a severe impact on the Russian economy. Certain sectors were particularly hard hit, notably aviation and auto manufacturing, which saw a 60 percent decline in output due to a lack of imported components. Overall, however, Russia got through 2022 having experienced a mere 3 percent contraction in its gross domestic product. Retail sales fell just 9 percent during the year, with local brands—along with some Chinese and Turkish companies—replacing Western companies on the domestic market. In 2023, according to official figures, Russia’s GDP grew by 3.6 percent.
This memo argues that the most dire forecasts for the Russian economy did not transpire for four reasons. First, Russian energy exports are still reaching global markets. Second, Russia is successfully evading Western sanctions on technology imports. Third, Russia’s capitalist economy is more adaptable than many had anticipated. Finally, there is no sign that the sanctions are prompting the Russian business elite or general public to challenge Vladimir Putin’s continuation of the war.
Russia’s Energy Lifeline
In 2022, Russia was spending over $300 million per day to fight the war, but it was earning $800 million per day from energy exports. That revenue stream was sufficient to prevent domestic living standards from collapsing and to replenish Russia’s stock of arms and ammunition.
The war resulted in a spike in oil and gas prices. Global oil prices surged by 50 percent, peaking at $139 per barrel in April 2022, while wholesale gas prices in Europe increased by 500 percent, hitting €300 ($320) per megawatt-hour in August 2022. While the volume of Russian oil and gas exports to Europe fell in 2022, its energy revenues doubled to $168 billion for the year. Russia ended the year with a current account surplus of $227 billion, a record high.
The EU waited until December 2022 to introduce a price cap on Russian crude. (A cap for refined oil was introduced in February 2023; there is also a cap in place for natural gas should it hit €180 per thousand cubic meters). The delay was due to a desire to mitigate the rise in oil prices, which was hurting consumers—and voters—in both Europe and the US (where congressional elections took place in November 2022). Western insurance and shipping companies were barred from handling Russian oil sold above the $60 price cap. Russia responded to this measure by buying a fleet of “shadow tankers”—ships at the end of their life, sailing under dubious insurance from Russian or other sources—and selling to unscrupulous traders, often with hidden transfers at sea. In fact, forty percent of the 535 “dark fleet” tankers are registered in the US Marshall Islands.
Oil that had previously gone to Europe is now being shipped to India and China, which means the average tanker distance has gone from 2,862 miles to 9,271 miles, costing an additional $10 a barrel. All of this comes out of Russia’s profits. Though some insist that the price cap is working, the Financial Times argues otherwise, noting how easy it is for shippers to manipulate the reported price to bring it below $60 so that they can continue to use Western tankers, insurance or financing.
It is much more difficult for Russia to find alternative markets for its natural gas than for oil, given its reliance on gas export pipelines to Europe. In 2023, the European Union imported 43 billion cubic meters (bcm) of gas from Russia—down from 150 bcm in 2021—and Russia’s share of European imports shrank from 40 percent to 8 percent. Europe stepped up imports of tanker-borne liquefied natural gas (LNG) from Qatar and the US. Germany built the Wilhelmshaven LNG import facility in just 10 months, getting it onstream by December 2022. Deprived of its European market, Gazprom lost $7 billion in 2023. China imported a mere 22 bcm of Russian pipeline gas alongside 7 bcm of Russian LNG in 2022. Notably, China has been dragging its feet on the approval of a second gas import pipeline from Russia, presumably holding out for a lower price.
Some Western companies have taken a financial hit from the war, but others continue to do profitable business in Russia. Total write-downs by Western firms who have walked away from assets in Russia exceed $120 billion. However, some firms have delayed their exit from Russia and are continuing to operate. Leading US oil service firms such as Baker Hughes and Halliburton did not immediately cease sales to Russian oil and gas companies, making deliveries worth $200 million in the year following the invasion. Oil service company SLB only cut off supplies in July 2023. In divesting their Russian assets, BP wrote off $24 billion, and Shell and Exxon each wrote off $4 billion. They could afford to do this, as these three companies collectively reported global profits of $104 billion in 2022 due to high oil prices. The tobacco firm BAT made profits of $350 million in Russia in 2022; when it finally announced its withdrawal from Russia in September 2023, it reported a one-off charge of lost assets of $745 million. The Dutch Peet’s Coffee company continues to operate in Russia, where it made $452 million in sales in 2022, although it is renaming its brands sold there. In 2021, Starbucks made $60 million in revenue in Russia, yet restauranteur Anton Pinskiy acquired all of Starbucks’ 130 stores for just $5 million. Half a dozen Western banks have remained in Russia, such as Austria’s Raiffeisen, and they collectively paid €800 million in taxes to the Russian government in 2023.
The Sanctions Are Not Global
The 49 sanctioning countries account for 60 percent of the world’s economy—but that leaves 40 percent still willing to do business with Moscow. Most countries in the Global South view the Ukraine war through the prism of great power rivalry. They see the United States, based on past and current US behavior, as a more direct threat to their own national interests than Russia. Russia benefits from nostalgia for Soviet support for the Third World during the Cold War, which is supplemented by a pragmatic awareness of economic opportunity in the current crisis.
Many of the goods that had formerly been exported to Russia from Europe are now reaching Russia via third countries. For example, Türkiye’s trade with Russia increased by 45 percent in 2022 ($60 billion in exports and $10 billion in imports in 2022). Istanbul has refused to comply with EU efforts to halt the circumvention of the ban on selling Russia electronics that can be used in weapons. Trade between Russia and the UAE grew by 68 percent to $9 billion in 2022. In the first quarter of 2023, China, India, and Türkiye increased their collective share of Russian exports from 24 percent to 63 percent. In 2023, Russia’s trade with China hit a record $240 billion, up 60% from prewar levels. Despite the sanctions, Russia managed to import $500 million worth of microchips and $390 million worth of iPhones in the first six months of 2023.
Between April 2022 and February 2023, India imported $42 billion from Russia, mainly crude oil, but exported only $3 billion back to Russia. This means that Russia is accumulating $1 billion a month in Indian rupees, which cannot be converted to rubles. It is estimated that over half of the EU exports to Kazakhstan, Kyrgyzstan, and Armenia are forwarded to Russia. Kazakhstan imported $11 billion from the EU in 2022, a 75 percent increase from 2021. While microchips are relatively easy to smuggle in, the main challenge for Russian industry is its heavy dependence on Western machine tools.
In 2022, the average price of Brent crude was $83 per barrel, while Russian crude sold at $70. By the end of 2022, European countries had bought $125 billion of Russian oil and gas, more than the $50 billion bought by China, $20 billion by Turkey, and $18 billion by India. In the first three quarters of 2023, Russia sent 75 million tons of oil to China—a 25 percent increase over the same period from 2022—overtaking Saudi Arabia as its lead supplier. India and China are buying Russian oil at a discount of $10–15 a barrel. India refines the oil, and some of the gasoline and diesel is then exported to Europe. An estimated 25 percent of EU oil imports in 2023 consisted of refined Russian crude.
Saudi Arabia is cooperating with Russia through OPEC+ to reduce the output and boost the price of oil. Cuts announced in July 2023 and extended a few months later in September (300,000 barrels per day by Russia and 1 million barrels per day by Saudi Arabia) contributed to an increase in the Brent crude price from $75 in July 2023 to $87 in October 2023. Each $1 per barrel increase in the price brings Russia $2.7 billion in additional export earnings.
Russia’s Economy is Adaptable
The tumultuous 1990s taught Russian businesses, consumers, and workers how to adapt to random shocks, such as the high inflation that wiped out many people’s savings and the corporate raiders and tax police who stole businesses. Russian people today are resilient in the face of challenges and resigned to lower expectations.
The ruble was trading at 92 to the US dollar in May 2024, down 34 percent from January 2023, a rate of decline outstripped only by the Argentine peso, Venezuelan bolivar, and Turkish lire. In October 2023, the government introduced new rules requiring 43 exporters to deposit 80 percent of their export earnings with the Central Bank of Russia, 90 percent of which it then sells for rubles. (Similar controls had been introduced after the February 2022 invasion before being lifted in July.) In addition, export duties were introduced in October 2023 (not on oil, gas, or grain) and tied to benchmark world prices, which are expected to bring in $8 billion in 2024.
The Central Bank of Russia has been tough in trying to bring down inflation, hiking the interest rate from 7.5 percent in June 2023 to 16 percent in December 2023. The federal deficit in 2023 was held to 1.9 percent of GDP. Federal revenue in 2024 is projected to hit R35 trillion ($380 billion), of which R11.5 trillion is expected to come from oil and gas. Planned expenditure is R37 trillion (representing a 26 percent rise) with a deficit of 0.8 percent of GDP, with oil projected to be $71 per barrel and the ruble projected to be at 90/$. Oil and gas federal income in the first quarter of 2024 was up 79 percent, while non-oil income was up 53 percent over the same period. Defense spending will be R11 trillion ($108 billion) in 2024, three times the amount spent in 2021 and equal to 6 percent of GDP. This figure is burdensome—but manageable.
The Russian auto industry is struggling, with production down 50 percent in 2022. Auto manufacturers must now import spare parts that were previously produced by factories in Russia owned by Western, Korean, and Japanese manufacturers who pulled out after the invasion. Other sectors are faring better, with some continuing to export to Western markets. There was a bumper grain harvest in 2022 (158 million tons), leading to record exports of 60 million tons. Total food exports amount to $40 billion per year. The atomic-energy company Rosatom posted $10 billion in export earnings in 2023 from sales of enriched uranium and construction contracts, up 15 percent from 2021. France bought $370 million worth of enriched uranium from Russia in 2022, while the US bought $700 million in the first half of 2023. Russia supplies 6 percent of the world’s aluminum, 5 percent of its nickel, and 4 percent of its copper, earning some $20 billion per year from metals exports. The US barred imports of Russian diamonds, but the G7 has been unable to agree on a global ban, so Russia earned $4 billion in 2023 from diamond exports.
Oligarchs and Bureaucrats Remained Loyal
One of the key political assumptions driving the initial sanctioning strategy was flawed. The theory was that sanctioned oligarchs stood to lose hundreds of millions of dollars alongside their access to Western luxuries and that, as a result, they would persuade Putin to change course to save their fortunes. The problem is that Russia is a dictatorship, not a kleptocracy (i.e., a country run for the benefit of a corrupt elite). Putin values the power and prestige of the Russian state over the wealth of the Russian business elite. Only a handful of oligarchs have publicly criticized the war; they know that challenging Putin would mean, at the very least, losing their businesses in Russia.
Around 500,000 people have emigrated from Russia since the war began, especially following the partial mobilization in September 2022. Those who left include many IT workers, a dynamic that will undoubtedly crimp Russia’s economic growth. At the same time, allowing potential oppositionists to exit the country made it easier to enforce political conformity at home.
The seizure of foreign assets was a golden opportunity for Putin to reward loyal oligarchs. Since February 2022, Russian businesspeople have acquired an estimated $40 billion worth of Western assets at bargain prices. Vladimir Potanin, the wealthiest Russian on the global Bloomberg Billionaires Index at number 51, added $6 billion to his $31 billion portfolio after buying Rosbank from Société Générale in April 2022. There are 26 Russians on the Bloomberg list of the world’s top 500 billionaires. On the Forbes list, the number of Russian billionaires fell from 121 in 2021 to 88 in 2022 before rising to 110 in 2023 and 125 in 2024 (46 of those 125 are under sanctions). The war also gave the Kremlin an opportunity to nationalize the assets of some Russians whose businesses are coveted by Kremlin insiders. It is estimated that 180 firms were seized over the past two years, including some large operations such as the Chelyabinsk Electrometallurgical Combine.
Meanwhile, the “liberal” Russian economists running the central bank and finance ministry—who were pivotal in helping Russia withstand the sanctions—stayed loyal. As the Financial Times put it, “Putin’s technocrats saved the economy to fight a war they opposed.” In a striking signal of Putin’s faith in the economic elite, on 12 May he appointed Andrei Belousov, his economic advisor and deputy prime minister, as defense minister.
What Next?
After the war began the Russian government stopped publishing many aggregate economic statistics, so all the data must be treated with caution. It is possible that the reality is worse than the available data suggests. The government projects 2.3 percent growth in 2024, exceeding the IMF projection of 1.1 percent. Russia’s federal budget is under pressure. In 2022, the country had a $47 billion deficit that was covered by the National Welfare Fund, which has shrunk from $177 billion in 2021 to $136 billion as of April 2024. However, with a $50 billion current account surplus in 2023 and a debt/GDP ratio below 20 percent, Russia is not facing a balance of payments crisis.
The sanctions have not forced Russia to abandon its war of aggression against Ukraine. David O’Sullivan, EU Special Envoy for the Implementation of Sanctions, and James O’Brien, US Assistant Secretary for European and Eurasian Affairs, said on an October 2023 panel that the sanctions will last five to 10 years, and that Russia’s GDP will be 20 percent smaller in a few years than it would have otherwise been due to the sanctions. Assuming this to be true, what difference do the sanctions make to Putin’s determination and capacity to destroy Ukraine?
While assessing the costs to the Russian economy, we should also factor in the costs to the European economies. The 2022 energy price shock forced European governments to spend over €800 billion on subsidies for households and businesses facing unsustainable energy bills—more than five times the total amount of Western aid provided to Ukraine. This energy shock pushed the European economy into recession. The EU GDP grew by an anemic 0.4 percent in 2023, with German GDP shrinking by 0.3 percent. Vladimir Inozemtsev concludes that “many policies promoted by Western authorities appeared to be more painful to their own economies than to Russia’s—while not benefiting Ukraine.”
As an energy exporter, the US has been insulated from the economic impact of the war. Even so, Republicans in Congress held up passage of a $60 billion aid package for Ukraine for six months before it was ultimately approved in April 2024. It is not at all clear that Western politicians and publics will be prepared or willing to sustain economic support for Ukraine at the current level of seven to eight billion USD per month for the next five to 10 years.
Peter Rutland is a Professor of Government at Wesleyan University. He is an expert in
contemporary Russian nationalism, politics, and the economy, with over three decades of
experience studying Russia and the former Soviet Union.
