The Effectiveness of Russian Sanctions
By Owen Miller
Since Russia’s forceful annexation of Crimea and the advent of the Russo-Ukrainian War in 2014, Western powers have been continuously sanctioning Russian goods and finances. When Russian forces directly invaded Ukraine in a major escalation in 2022, Western governments promised economic sanctions that would cripple the Russian economy. Many government officials called it an economic “nuclear bomb” that would send the entire country into free-fall. Two years later, Ukraine is still fighting for its sovereignty and the Russian economy has not seen the collapse that much of the world has hoped for. Russian President Vladimir Putin has repeatedly said that Russia has had plenty of growth, while Europe is disproportionately suffering from sanctions. With much of their pre-war exports and finances sanctioned, how realistic is Russia’s supposed economic health?
Pre-invasion, energy exports to the European Union and the U.S. were a cornerstone of the Russian economy. Many analysts attributed Russia’s energy export to a form of Dutch disease, where a major part of a country’s economy is dependent on one sector. In 2021, about 20% of Russia’s GDP was attributed to energy exports. At the beginning of Russia’s invasion of Ukraine, global energy prices soared, and Russian companies saw a surge in energy profits as Europe remained dependent on Russian energy. However, these tailwinds were short-lived. Western powers quickly diversified their energy imports away from Russia and sanctioned Russian industries. As a response, Russia turned eastward, shifting its exports to countries such as China, Turkey, and India, who were all ready to take advantage of cheap Russian energy. Despite this strategic realignment to non-Western customers, government revenues from energy exports have still decreased by over 40% since 2022, as the value of the lost European market has not been fully replaced.
In addition to sanctions on energy exports, Russia’s financial system was effectively cut off from the global economy. In 2022, most Russian banks were banned from using the international Society for Worldwide Interbank Financial Telecommunications (SWIFT) payment system, and Russia lost access to US dollars and other key global currencies. As a result, Russia has had to turn to conducting international trade in Russian rubles and Chinese yuan. The ruble has experienced high volatility, which is a weight on the Russian economy as consumers and businesses lose faith in Russian financial institutions. This instability, combined with handling trade in uncommonly used currencies, has made Russian imports and domestic business harder to conduct due to higher premiums and costs.
The war and the compounding effects of sanctions have led the Russian government to adopt increasingly unsustainable fiscal policies. At first glance, Russia’s reported GDP growth of 3% for 2024 seems promising, but the vast majority of this growth is a result of massive government military spending. This spending is not conducive to long-term growth and stability. Military spending is chewing into Russia’s emergency reserves and leaving the country vulnerable to an economic downturn.
Furthermore, military spending is now over a third of all government expenditures, while government revenue from energy and trade is massively down. As a result, the government is running a large deficit and using emergency reserves, such as the National Wealth Fund, to cover for its losses. These are quickly being depleted, and thanks to U.S. and E.U. sanctions, $300 billion in Russian sovereign reserves – nearly half of all Russian reserves pre-war – have been confiscated. Combined, Russian deficit spending and the depletion of their reserves have led to very high inflation rates. Russian consumers will experience a nearly 7% inflation rate this fiscal year, which is about double the pre-war amount. Russia’s ability to finance itself has been cratered by sanctions, which is detrimental to its long term growth and consumer health.
Sanctions against Russia have fallen short of the impact many had anticipated, but they have succeeded in cutting off large portions of the Russian economy from the rest of the world. Additionally, sanctions have made domestic business operations increasingly difficult. The government’s massive expenditures are propping up the short-term economy, but they are unlikely to translate into sustainable long-term growth. Therefore, despite sanctions not having the magnitude of predicted effect, they are still having a noticeable negative impact on the long-term prospects of the Russian economy.
Sources
https://www.wilsoncenter.org/blog-post/sanctions-are-working-just-ask-russias-friends
https://www.brookings.edu/events/sanctions-on-russia-whats-working-whats-not/
https://www.cfr.org/in-brief/two-years-war-ukraine-are-sanctions-against-russia-making-difference
https://wits.worldbank.org/CountryProfile/en/Country/RUS/Year/LTST/TradeFlow/E