Not since the Soviet collapse has Russia faced an economic upheaval of the scale provoked by western sanctions after its invasion of Ukraine. Half its $640bn foreign exchange reserves are frozen, several of its top banks have been cut off from the international payments system and Urals crude, thanks to sanctions risks, is selling at about a $20 a barrel discount to international prices. About 1,000 western companies, accounting by one estimate for 40 per cent of Russian gross domestic product, have curtailed 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 had expected. Though the war seems, at least for now, at stalemate, and Turkey’s president Recep Tayyip Erdoğan claims Putin is ready for a negotiated solution, sanctions have not yet eroded Moscow’s ability to fight on.
Swift moves by Moscow’s central bank to impose capital controls and sharply raise interest rates have stabilised the rouble. Higher global oil prices overall have offset the “Russia discount”, and rising sales to China, India and Turkey helped to counteract declining exports to the EU. The International Energy Agency estimates Russian oil production last month was less than 3 per cent below prewar levels.
Many withdrawing western companies, moreover, have not left completely or have sold to local buyers, so assets are still operating. Increased trade with big emerging markets, notably Turkey, has provided another cushion. Russia’s central bank now foresees GDP shrinking by an onerous but not catastrophic 4 to 6 per cent this year; the IMF projects a 6 per cent decline, down from a forecast 8.5 per cent in April.
With European populations facing unprecedented heating bill increases, less used to hardship than Russians, and more prone to taking to the streets, Putin may calculate Russia is better placed to withstand the economic pain than many of its western counterparts.
He would be wrong. Sanctions were never likely to lead to an immediate collapse of the Russian economy. Over time, though, the western measures are a tightening noose, and the costs for Russia will accumulate.
Western democracies will have to persevere: they still need to do more to shrink Russia’s energy revenues, while tweaking the design of a coming 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 energy price rises, and step up efforts to dissuade Beijing, Delhi and Ankara from helping Moscow to weather sanctions.
The pain of energy decoupling is likely to be shorter for the west than for Russia; the EU can, for example, already see a realistic path to life without Russian gas, while lack of infrastructure means it will take years for Moscow 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 entirely replace — hampering manufacturing and its natural resources industries, as well as its military-industrial complex.
There are parallels with the restrictions on high-tech exports to the Soviet Union after its 1979 invasion of Afghanistan. These curbed Soviet growth and deepened its technological backwardness, which combined with falling energy prices to provoke a deep crisis by the late 1980s. 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.