The United States and its allies imposed unprecedented economic sanctions on Russia in the wake of its full-scale invasion of Ukraine. The swiftness and intensity of the penalties crashed the ruble, forced the Russian stock market to close, and sent Russians to line up at ATMs to withdraw dollars from their bank accounts.
The Russian economy was in free fall. Until it wasn’t, exactly.
The country’s central bank responded by sharply hiking interest rates to 20 percent and imposing strict capital controls. Those interventions, along with Russia’s still-intact ability to sell its oil and gas abroad, helped create a buffer against the economic chaos after the initial sanctions shock. The measures were “straight out of the country’s economic crisis playbook,” said Adam Smith, a partner at Gibson, Dunn & Crutcher, who worked on sanctions during the Obama administration.
The economic crisis playbook did its job, and calmed the immediate crisis. The ruble stabilized. That allowed Russia to declare victory over the sanctions onslaught. “The strategy of the economic blitz has failed,” Russian President Vladimir Putin said in April.
At least, that is what Russia would like to claim. Russia’s efforts to shore up its currency mask the profound economic disruptions and transformations that sanctions are unleashing within Russia right now. The West’s sanctions are isolating Russia, cutting it off from key imports that it needs for commercial goods and its own manufacturing to make its economy work. That means high-tech imports like microchips, to develop advanced weaponry. But it also means buttons for shirts.
Right now, there is “this false sense of stability,” said Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs.
Russia is facing a deep recession, one the Bank of Russia says will be “of a transformational, structural nature.” The Finance Ministry has predicted the Russian GDP will shrink by about 8.8 percent in 2022. Inflation is expected to clock in as high as 23 percent this year. Russia is looking at a looming debt default. All of this will mean hardship for ordinary Russians, who are already seeing their real incomes shrink. Some tens of thousands have tried to flee, especially those in tech, prompting a potential “brain drain.” And these are the things we know; Russia will cease publishing a lot of economic data, a tactic, experts said, Moscow has used before to obscure the effects of sanctions.
These sanctions, said Yakov Feygin, a political economy expert at the Berggruen Institute, are pushing Russia — a modern economy, integrated around the globe — back decades and decades.
“They’ve stabilized it, they’ve taken emergency measures. That was to be expected. But that’s not going to help them in the long run,” Feygin said of Russia. “You’re not going to see people queuing for food for quite a bit. But with the current course of things, it’s still very possible.”
The US and European allies have continued to pile on more penalties, refining and sharpening the sanctions, all in an effort to ratchet up the pressure on Moscow. The EU has proposed a phase-out of Russian oil products, and depending on the final details, that might further erode the Kremlin’s lifeline. And the US could take additional steps, like threatening secondary sanctions that go after countries like China or India, to deter them from buying cheap Russian energy. That comes at a cost, and not just for Russia.
Even without more escalation, the sanctions regime against Russia is one of the most aggressive in history, untested on an economy of Russia’s size and as entangled in the global financial system.
Whether the sanctions are “working,” then, depends on what they are intended to achieve. One thing is clear: Over time, these sanctions will likely make it harder for Russia to rebuild its tanks, manufacture cruise missiles, and finance a war. It will also make it harder to produce food and make cars. And it still may not stop Russia from pursuing its campaign against Ukraine, all with unpredictable consequences for the rest of the world.
What Russia did (and what the West didn’t) to deal with the sanctions shock
The US and allies threatened sanctions against Russia should it invade Ukraine. It was always a question of how far the West might go, largely because of concerns on how some of the pain might rebound, economically and politically, onto the US and its allies. But the West moved swiftly and more forcefully than many expected, a reaction to the brutality of Moscow’s assault, the ferocity of Ukraine’s resistance, and Ukrainian President Volodymyr Zelenskyy’s pointed pleas.
After the US and EU put targeted sanctions on Russia in 2014 after its Crimea annexation and Donbas invasion, the Russian government took measures to sanction-proof-ish its economy — like building up some $640 billion in gold and foreign reserves. Yet the intensity of these latest Ukraine sanctions rattled Russia’s “fortress” economy. And in some cases, the West’s measures directly targeted Russia’s backup plan; sanctions on Russia’s central bank, for example, prevented Russia from accessing about half of those foreign reserves.
Even so, Russia reacted aggressively once those sanctions hit. “They have done textbook defensive policies to retain capital and stabilize the currency and avoid a financial crisis,” said Rachel Ziemba, an economic and political risk expert and adjunct senior fellow at the Center for a New American Security.
Take the ruble, which President Joe Biden declared reduced to “rubble.” In the aftermath of sanctions, its value crashed. It suddenly took a lot more rubles to buy, say, one US dollar. You really wouldn’t want rubles, then, because you wouldn’t have as much purchasing power. So the Russian central bank sought to create demand for rubles.
The central bank did so through a series of measures. That included raising interest rates, an incentive for Russians to save their money. The bank implemented a series of capital controls that targeted Russian businesses and individuals. For example, companies that export things or do business abroad had to convert 80 percent of their foreign exchange revenues to rubles. It also limited the amount of money Russians could transfer abroad or remove from foreign bank accounts — currently no more than $10,000 over the next six months.
Those are policies the Russian central bank engineered, but Russia has also benefited from the fact that it is still exporting a lot of oil and gas, including to places like Europe, which gets more than one-third of its natural gas imports from Russia. That money — hundreds of millions per day from the European Union alone — is coming into the Kremlin’s coffers, and their ability to replenish funds gives the economy a cushion.
This is partly why Putin started demanding “unfriendly countries” pay for natural gas in rubles, as it would help prop up Russia’s currency. But it’s also why, until his shutoff to Poland and Bulgaria (who are far from the biggest consumers of Russian gas), Putin wasn’t enforcing it because it might require contract renegotiations, and that might incentivize EU countries to start the process of weaning themselves off Russian hydrocarbons altogether.
Neither sophisticated Russian central bankers nor energy can fully save the Russian economy in the long run. As Smith said, this is the economic crisis playbook. “The problem with that playbook, of course, is that it runs a course,” Smith said.
These measures are painful, which makes them harder to sustain. Russia has slightly eased some of its interventions, inching down interest rates to a (still high) 14 percent. It also loosened some capital controls, but that also knocked the value of the ruble.
Oil and gas revenues help, but if sanctions against energy tighten, as with with the EU’s proposal for a gradual oil ban, or Russia is forced to sell its gas on the cheap — or if the threat of running afoul of sanctions deters even the bargain hunters — the safety net frays over time. Russia has already said oil output is expected to decline as sanctions hinder investments and trade.
“There was an initial shock,” Feygin said. “It’s over, but it’s not better.”
The toll of Russian sanctions, so far
Russia wants everyone to want rubles. But there isn’t much Russia can do with all those rubles because sanctions block those transactions or make them way too expensive. “The money itself matters, but also how you can use it — both in terms of who your counterparts are, and physically, how you can move it around — matters much more,” said Edoardo Saravalle, a sanctions researcher.
Moscow can’t buy some foreign goods because of controls on critical items like microchips. Those restrictions will directly undermine Russia’s technology and defense sectors, making it difficult to continue developing weaponry or tools like artificial intelligence, or even repair damaged tanks.
Even if items are not explicitly banned, the web of financial sanctions can make it difficult to do transactions, and often it’s easier for Western companies to self-sanction to avoid running afoul of any possible penalties.
And sanctions have revealed how reliant Russia is on imported goods and products, not just for the things the country’s populace buys, but for the things it needs for the products it makes and sells at home.
All of that means Russia’s economy will become more isolated over time. Data from other countries has shown that it is already beginning to happen, as imports to Russia are crashing. For example, Finland’s exports to Russia are down 60 percent; South Korea’s are down about 62 percent.
Russian planes are now mostly limited to domestic flights because of sanctions, but because a lot of the jets in Russia are made by Western companies like Boeing, Russia can’t get spare parts or maintenance, leaving it to recycle parts from grounded planes or cut back the flights it still has. Car companies can’t get parts, either.
Companies can’t get bleaching reagents for paper or packaging for baby food. One report from a Russian business outlet said that 90 percent of Russian bread makers rely on parts from Europe; their current replacements will only last months. Russia’s garment industry got a lot of buttons from the European Union. As Elvira Nabiullina, the governor of Russia’s central bank, said, finding new buttons is possible, it just takes time.
All of this cascades across the economy. If a car company can’t get parts, it may have to temporarily shutter and its employees will lose income. If the bakers can’t fix their mixers, it may mean bread shortages. If Russia can’t get semiconductors or chips for computers or communications systems, it will have to make equipment that is less technologically and economically efficient. A report from the Bank of Russia called what Russia is facing “reverse industrialization.”
The US and its allies also keep adding more sanctions. So far, they are not as sweeping as what happened in the early days of the war, but instead are more incremental, building on what was already in place. For example, after the discoveries of the Bucha massacre, the US closed a loophole on Russia’s sovereign debt payment that might now force Russia to default on its foreign debt for the first time in more than a century. Europe is reportedly ready to move on a gradual oil embargo. It’s a cumulative tightening that gives Russia fewer and fewer options out of the catastrophe.
Ordinary Russians, too, have fewer options. They are the ones who will feel the real crush of sanctions. Overall, experts said, Russians are likely worse off than they were two months ago. “People are seeing a squeeze on their real incomes, that’s the main effect that ordinary Russians are feeling,” said Jacob Nell, former chief Russia economist and head of European economics at Morgan Stanley.
Ziemba said, at the outset, relatively well-off Muscovites might have felt the shock of sanctions most sharply — like those who worked in tech or who had a nice chunk of change in a foreign bank account. This is partly what prompted tens of thousands of people to flee, a “brain drain” depleting Russia of those who might be best able to help Russia recover, whenever that might be. Still, the sanctions have now made it even harder for those people to leave. There are few planes to take you anywhere, and Russians can’t take out more than $10,000 in foreign money from their accounts, making it hard to start a new life, wherever you might go.
Yet many of those middle- and upper-class Russians — with resources at the start of this crisis — are the people best able to withstand sustained sanctions pressure in the longer term. Russia’s most vulnerable will feel the sanctions’ pain most acutely, watching their incomes shrink, struggling to pay for goods, and seeing services fall away.
As Shagina said, those on Russia’s periphery were always an afterthought, and they will be the ones who suffer the most. “If you look at the people who were sent to fight the war in Ukraine, and they’re from the Far East. And because they were poor, I think their situation will be even worse,” she said. That is, the Russians who have the least power may be punished the most.
So are Russian sanctions working? Well, it depends on the goal.
The longer sanctions stay in place, the worse it will be. “We’re ultimately looking at an economy that is shrinking, is turning more inward,” Ziemba said.
Russia may figure out how to navigate as a permanently state-sanctioned economy — like an Iran or a North Korea. “These economies, they don’t just stop, they kind of slow down and stumble,” Saravalle said. “But often, I think in the popular perception, there was this point where the economy just collapses — and there isn’t necessarily. Past sanctions programs haven’t had these types of collapses.”
Russia will find workarounds where it can. It will substitute for supply chains, many of which will be murky, and help fuel a dark economy. Living standards may erode to levels not seen in decades, and the things Russians buy may be more poorly made and harder to get. “Cuba refurbishes old cars for a reason,” Feygin said. In early April, after the Biden administration tightened sanctions, a senior Biden administration official told reporters that, at this rate, Russia “will go back to Soviet-style standards from the 1980s.”
That will not likely happen in the immediate future, but it is the course Russia is on, for as long as the West keeps it there. But the question is: What does the West actually want to achieve by doing this? Before the invasion, the Biden administration framed the threat of sanctions as a way to deter Russia from invading Ukraine. It did not.
In the wake of the invasion, the goal was framed as “inflicting pain on Russia and supporting the people of Ukraine,” which is how Biden put it in his State of the Union. He also talked about depleting Russia’s military, making it harder to wage war in the future.
The Biden administration has also indicated that certain sanctions are trying to squeeze Russia, eroding its ability to finance its war in Ukraine. This month, Defense Secretary Lloyd Austin said that the US “wants to see Russia weakened to the degree that it can’t do the kinds of things that it has done in invading Ukraine.” The administration hopes to accomplish that through a combination of sanctions on Russia and aid for Ukraine.
But it’s less clear what a “weakened” Russia means, and what the United States and allies would do with it. Are they using the pressure to get Russia to the negotiating table? Are they trying to stop the war by getting Russia to withdraw or surrender? Or to defeat it? And what are the consequences of that?
If this is an indefinite effort to weaken Russia, it may get harder to keep up the intensity. The US and its allies acted in cohesion and got enormous buy-in from other partners, including in Asia. But as the war drags on and sanctions continue, that coalition may fracture, especially if the economic costs mount beyond Russia’s borders.
Poorer countries will experience the shock of these economic sanctions, without having much say at all in whether or not they will support these policies. Farmers in Brazil need fertilizer from Russia, countries that depend on Russian arms exports all of a sudden won’t have parts or equipment for themselves, either.
As experts said, the United States and its allies may also need to mitigate the pain for these countries, promising to help replace arms at a discount or offer food aid. The US’s latest request to Congress for $33 billion in supplemental aid to Ukraine partially acknowledged this, including funding for global food assistance.
The sanctions on Russia are unraveling its economy. But this act of extreme economic pressure will have consequences beyond Russia. “It’s a form of economic war,” Saravalle said. “But it’s also very much like we’re reshaping the global economy.”