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Russia faces the slow burn of economic sanctions

Sanctions are contributing to the slow strangulation of the Russian economy and depriving the country of critical financial assets and technological capabilities.


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Russia’s economy appears to have performed reasonably well in 2022, according to major macroeconomic indicators. GDP decreased by 2.2%, but this was a far cry from the predictions of a 15% contraction made by many analysts in the early months of the war. Unemployment and inflation remained low and under control, the rouble rebounded from a sharp decline early in the crisis and the financial system remained stable. Sanctions had a smaller effect on these metrics than some expected, for two main reasons: Russia’s economic technocrats managed the situation reasonably well and Western energy sanctions were not applied in force until December 2022. In addition, the hallmark of economic sanctions is that they are slow burning. Macroeconomic indicators – increasingly obscured or classified by the Russian authorities – do not reveal the true picture, which is that the sanctions are constraining the Kremlin’s fiscal-policy options and the country’s economic growth, particularly in areas outside Moscow and St Petersburg.

Russian policymakers have been developing an economic playbook for countering Western sanctions since the country’s invasion of Ukraine in 2014. The Central Bank of the Russian Federation acted quickly in 2022 to tame outflows from the economy with aggressive capital and currency controls and interest-rate hikes. While Western policies have immobilised around US$300 billion of the central bank’s assets, the country has succeeded in rebuilding the ‘fortress economy’ it created in 2014, with its current account surplus reaching more than US$220bn. And while Canada, the United Kingdom and the United States banned imports of Russian fossil fuels in March, European Union member states continued to purchase Russian hydrocarbons until December – a total of more than €139bn (US$148bn) in oil, gas and coal.

With an EU embargo on Russian crude oil and refined products now in place, alongside a price cap on oil, Russia will not receive windfall energy revenue in 2023 at the level it did in 2022. Russia has succeeded in replacing some lost European exports with sales to China, India and Turkey, but at discount prices. Since December, Russia’s crude-oil revenue has dropped by 32%, costing the Kremlin around €160 million (US$171m) per day. In January 2023, Russia’s Ministry of Finance reported a single-month deficit of US$25bn, the largest on record since 1998. The price cap on refined products will further strain the Russian budget. Compared with crude oil, China and India have fewer economic incentives to purchase Russian oil products because they have their own refining facilities.

The West’s attempt to prevent Russia from importing critical technology is arguably one of the most effective trade instruments that has been used against Moscow. The country’s military-industrial base has been significantly degraded by export controls on chips and semiconductors, and Russian arms manufacturers have experienced major supply shortages affecting the production of tanks and hypersonic weapons. The Russian aviation industry has been forced to cannibalise planes for spare parts, while at one point the automotive sector almost came to a halt.

In 2023, as energy revenues dwindle and the economic pie remains roughly the same size or shrinks, the Kremlin must pay for simultaneous increases in military and social expenditures. The price of the Urals oil blend has remained below US$70 per barrel since November 2022, which means the government will face a budget deficit of 4.5–6.5% of GDP in 2023–24. The entire economy is being mobilised for the war effort; defence companies are working three shifts per day, seven days a week; and the government has been forced to reduce non-war spending on infrastructure, education and healthcare while increasing taxes on state-owned companies. Concurrently, it has begun to deplete its macro buffers, tapping into the National Welfare Fund and remaining foreign reserves (the not-so-liquid gold and yuan accounts). Despite these budget strains, Russia will continue to prioritise defence, with spending in this area expected to grow by one-third in 2023.

Sanctions are forcing Russia to adapt by doubling down on its domestic capacities and pivoting to third countries for assistance. Many Russian businesses have been forced to establish new supply chains through parallel imports in the wake of global corporates choosing to withdraw from the country. The military is procuring drones and missiles from Iran and North Korea. The Russian oil majors are resorting to a shadow fleet of vessels to ship their crude oil to the Global South. China, Turkey and the United Arab Emirates have become key suppliers of goods, including the sanctioned ones. These readjustments in response to sanctions are costly and will take time to implement successfully.

This means that despite the resilience of the Russian economy in 2022, the long-term picture is bleak: the country is becoming more inward-looking, is falling behind technologically, and will face an extended period of stagnation as a result of invading and waging war against its neighbour. Moscow’s attempt to weaponise energy failed in Europe and its best bet now is to find new buyers elsewhere for its commodities. Most notably, it will become increasingly dependent on China as a buyer of its fossil fuels. The regime may attempt a difficult transition to a new economic model to escape some of these problems and increase its chances of survival. The cases of Iran and North Korea show it is possible to survive under strong sanctions with help from third countries, albeit with crushing costs for society.


Maria Shagina

Senior Fellow, Diamond-Brown Economic Sanctions, Standards and Strategy


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