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How efficient are the sanctions imposed on Russia?

When Russia originally invaded Ukraine about a year ago, numerous countries decried the assault and levied sanctions in an attempt to strangle its economy and isolate it from global engagement. The expectation during the early days of the conflict was that the economy was likely to decline by as much as 15%. Since then, those projections have been dramatically revised upwards and the latest forecasts by the IMF show a decline of as little as 2%, with moderate growth predicted in 2023. In truth, many agree that the picture is not quite as bright, particularly since data emanating from Russia is no longer accurate.

Nonetheless, the reality remains that Russian finances have not been harmed in a way that would have impeded its activity to wage war. Three explanations explain that.

Russian energy exports continued for the most part unsanctioned. This is because the EU, the major energy importer for Russia, did not punish Russian energy imports as it did not want to risk its ability to meet its energy demands. In most of 2022 thus, only approximately 8% of the export value of Russian energy was under sanctions, all of it by third nations. Given also the enormous rises in energy prices, oil and gas earnings represented for 45% of the Russian national budget.

Second, efficient Russian economic policy kept the economy from freefalling. The government gave support equivalent to 3% of GDP in the form of social benefits, tax reductions, subsidies for loans and by boosting the minimum wage. This is not dissimilar to the support granted in EU countries to deal with the energy issue. There was also an increase in government spending to compensate for the huge decline in investment and private consumption. At the same time, very rapid and large intervention by the Russian Central Bank steadied the exchange rate (albeit at considerably lower trade volumes) and restored liquidity to the banking sector. This averted the economic crisis from evolving into a financial catastrophe that would have placed the economy into a self-fulling downward cycle. All in all, these policies helped to protect per-capita income and prevent poverty rates from increasing.

The third reason is that a huge part of the globe does not condemn Russia for its aggression towards Ukraine. 59 per cent of the world’s overall population is either neutral or encourages Russian aggression. This is of tremendous significance because it suggests that many countries are not necessarily eager to isolate Russia by helping to impose sanctions and stop economic connections with Moscow.

The future will nonetheless be different. Another key shift that will make a difference to Russian earnings is that the EU has now imposed oil sanctions. This means that 40% of the export value of Russian energy will be under sanctions starting this year. The EU still has not sanctioned gas, but the quantities it purchases from Russia have declined dramatically. In the first few weeks of 2023, the EU imported around 20% of what it imported in 2022. Other countries, mainly India, Turkey and China, have stepped in to acquire Russian energy. Yet, they have not able to replace in full the volumes exported to the EU.

While still elevated, costs will also be lower than last year given governmental measures put in place and alternative sources uncovered. Furthermore, third-country importers of Russian energy pay significantly less than what the EU ever paid. Lower volumes sold at cheaper prices mean that this year's Russian revenues will be drastically decreased.

Due to two significant continuing structural shifts, the apparent resilience of the Russian economy is fake and unsustainable. Around 80% of US and EU corporations have either left Russia or discontinued operations there. Without a clear change in the political climate, restarting will be impossible as long as sanctions remain in place. The US and EU will not quickly change their respective sanctions strategies. In exposing the EU's reliance on fossil fuels so openly, Russian aggression has expedited the global energy transition, not just in the EU. This is possibly the most significant impact. The economic paradigm of Russia is entirely reliant on an industry that will become extinct. There are no indications that Russia is considering the future state of its economy.



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