Since the initial imposition of Western sanctions following Russia’s first invasion of Ukraine in 2014, and their significant expansion after the full-scale invasion in 2022, the Russian economy has faced increasing pressure. These sanctions have targeted key sectors, including finance, energy, and technology, and have sought to curtail Russia’s ability to sustain its war effort. While the Kremlin has attempted to mitigate the effects of these sanctions through economic adaptation and alliances with non-Western countries, the long-term consequences have become increasingly evident. Here we explore the state of the Russian economy under sanctions, focusing on currency devaluation, the withdrawal of foreign businesses, financial restrictions, military expenditure, and the impact on the population.
Currency Devaluation and the Decline of the Ruble
One of the most immediate effects of Western sanctions on Russia has been the depreciation of the Russian ruble. Following the 2014 annexation of Crimea, the ruble lost nearly half of its value against the US dollar. While the Russian government managed to stabilise the ruble temporarily through interventions, the 2022 invasion of Ukraine triggered another steep decline. With the imposition of tighter sanctions, including a freeze on Russian foreign reserves held in Western banks, the ruble faced extreme volatility.
In early 2022, the Russian Central Bank took emergency measures, including raising interest rates to 20% and imposing capital export controls to stabilise the ruble. However, as sanctions have persisted, the ruble has continued to slide, reflecting deep structural weaknesses. By 2024, the currency had depreciated significantly against the dollar, leading to higher inflation, particularly for imported goods, and diminishing purchasing power for ordinary Russians.
Withdrawal of Foreign Businesses and Economic Isolation
The mass exodus of Western businesses from Russia has had a profound effect on the country’s economy. Major multinational corporations, including McDonald’s, Apple, and BP, ceased operations in Russia, either selling their assets at a loss or completely exiting the market. This withdrawal has disrupted supply chains, led to widespread job losses, and deprived Russia of investment and technological advancements.
The Russian government has attempted to fill the gaps left by Western businesses with domestic substitutes and imports from China, India, and other non-aligned states. However, this transition has been far from smooth. Many Russian-made products are of inferior quality compared to their Western counterparts, and dependency on China has created new vulnerabilities, including over-reliance on Chinese payment systems and industrial goods.
Ejection from SWIFT and Financial Constraints
One of the most crippling financial sanctions imposed on Russia was its partial removal from the SWIFT international payment system, which significantly hampered its ability to conduct cross-border transactions. This measure has forced Russia to develop alternative payment networks, including the domestic SPFS system and China’s CIPS, but these remain inadequate substitutes for the global banking network.
Without access to SWIFT, Russian banks have struggled to process transactions with Western countries, making it difficult to receive payments for energy exports or pay for imported goods. While some workarounds have been established through intermediaries in Turkey, the UAE, and China, these solutions remain costly and inefficient. This financial isolation has restricted Russia’s access to global capital markets, exacerbating liquidity problems and increasing borrowing costs.
Macroeconomic Indicators: GDP, National Debt, and Inflation
Russia’s GDP saw a sharp contraction in 2022, with estimates indicating a decline of between 3.5% and 5%. While the economy showed signs of stabilising in 2023 due to increased military production and redirected trade flows, the long-term outlook remains bleak. Western sanctions on Russian oil and gas exports, particularly the price cap on crude oil contained in Western sanctions packages, have reduced state revenues significantly.
Inflation remains high, eroding real wages and consumer purchasing power. The Russian government has increased social spending to mitigate public discontent, but this has come at the cost of rising budget deficits. National debt, though relatively low compared to Western economies, has been growing as the government struggles to finance military and social expenditures.
Military Spending and its Impact on Civilian Life
A growing proportion of Russia’s budget is being allocated to military spending, further straining public finances. The defence sector has become one of the few areas experiencing growth, with increased production of weapons, ammunition, and military vehicles. However, this comes at the expense of civilian sectors, leading to shortages of consumer goods, higher taxation, and declining investment in infrastructure and public services.
Ordinary Russians, particularly those outside major cities like Moscow and St. Petersburg, are feeling the impact of economic decline most acutely. Many rural and industrial regions, already economically fragile, have seen job losses and declining living standards. Reports indicate that military conscription and mobilisation efforts have disproportionately affected these regions, further exacerbating economic hardships.
Sustainability of War Efforts and the Future of the Russian Economy
Despite these economic challenges, the Kremlin has managed to sustain its war effort by increasing domestic production, enforcing strict capital controls, and maintaining support from non-Western allies such as China, India, and Iran. However, this strategy has significant limitations. The continued depletion of financial reserves, a shrinking labour force due to wartime casualties and emigration, and the technological backwardness resulting from sanctions, all threaten Russia’s long-term economic stability.
Furthermore, access to objective information within Russia is severely restricted due to state-controlled media and censorship laws. The Kremlin has portrayed economic hardships as a necessary sacrifice for national security, but as economic conditions worsen, public dissatisfaction could rise. The sustainability of Russia’s war economy depends on whether the government can continue to suppress dissent while maintaining financial stability in the face of growing economic pressures.
How long can Russia continue?
The Russian economy has suffered significant setbacks due to Western sanctions, with the ruble’s devaluation, financial isolation, withdrawal of foreign investment, and growing military expenditure all contributing to long-term instability. While the Kremlin has taken measures to mitigate these effects, the underlying structural weaknesses in the Russian economy are becoming increasingly apparent. The longer the war continues, the more difficult it will be for Russia to sustain both its military campaign and its domestic economy.
Whether the country can endure prolonged economic hardship remains uncertain, but its growing dependency on military spending and authoritarian controls suggests a precarious future. With or without a peace agreement with Ukraine, the next few years will be critical in determining whether Russia can withstand its deepening economic challenges or if internal and external pressures will force a shift in its policies or even government.