Not since the Soviet collapse has Russia faced an economic upheaval on the scale brought on by Western sanctions following the invasion of Ukraine. Half of its $640 billion in foreign exchange reserves are frozen, several of its major banks have been cut off from the international payments system and Urals crude, thanks to sanctions risks, is selling at around $20 a barrel. discount at international prices. About 1,000 Western companies, counting for an estimate for 40 percent of Russian gross domestic product, they have reduced operations.
And yet, six months after Vladimir Putin’s aggression triggered the toughest Western sanctions against Moscow, Russia’s economy is holding up better than many expected. Although the war appears, at least for now, at a stalemate, and Turkey’s President Recep Tayyip Erdogan says Putin is ready for a negotiated settlement, the sanctions have not yet eroded Moscow’s ability to fight.
Swift moves by Moscow’s central bank to impose capital controls and sharply raise interest rates have stabilized the ruble. Rising global oil prices have generally offset the “Russia discount”, with increased sales in China, India and Turkey helping to offset falling exports to the EU. The International Energy Agency estimates that Russian oil production last month was less than 3% below pre-war levels.
Many Western companies that are pulling out also haven’t left entirely or have sold to local buyers, so the assets are still running. Increased trade with major emerging markets, particularly Turkey, has provided another cushion. Russia’s central bank now forecasts a burdensome but not catastrophic 4 to 6 percent GDP contraction this year; IMF projects a 6 percent declinebelow the forecast of 8.5 percent in April.
With European populations facing unprecedented increases in heating bills, less accustomed to hardship than Russians and more likely to take to the streets, Putin may calculate that Russia is better placed to bear the economic pain than many of their western counterparts.
He would be wrong. Sanctions were never likely to lead to an immediate collapse of the Russian economy. Over time, however, Western measures are a tightening noose, and the costs to Russia will pile up.
Western democracies will have to persevere: they still need to do more to cut Russia’s energy revenues, while fine-tuning the design of the upcoming EU oil embargo to ensure it does not hurt the democratic world more than Moscow. They must better prepare their populations, through messaging and direct support, for rising energy prices and step up efforts to dissuade Beijing, Delhi and Ankara from helping Moscow weather sanctions.
The pain of energy decoupling is likely to be shorter for the West than for Russia; the EU, for example, can already see a realistic path to life without Russian gas, while a lack of infrastructure means Moscow will take years to redirect gas exports to China. The biggest impact for Russia may not be the loss of Western energy markets, but of Western technology and components, which Beijing or others cannot fully replace, hampering its manufacturing and natural resource industries, as well as the its military-industrial complex.
There are parallels with the restrictions on high-tech exports to the Soviet Union after the invasion of Afghanistan in 1979. These slowed Soviet growth and deepened its technological backwardness, which combined with the drop in energy prices to cause a deep crisis in the late 1980s. The sanctions may not yet have degraded Putin’s ability to wage his war in Ukraine. But by incurring them, Russia’s president may have degraded his ability to prosecute a long campaign, or to launch a similar large-scale conventional war in the future.