Western sanctions hamper Russia's economy, but Ukraine war still rages at year's end

Russia has been feeling the sting of Western sanctions that aim to stifle its economy, but the war in Ukraine that sparked those repercussions still rages at year's end.

Missiles are falling on Ukrainian cities, soldiers are fighting and the death toll continues to mount.

Critics may point to the continuing conflict as proof sanctions have failed. But experts say these measures serve to maintain pressure on Moscow, and they still serve a purpose even though Russia hasn't withdrawn its forces.

"I don't think that sanctions are going to necessarily force Russia to negotiate," said Alexander Lanoszka, an assistant professor of international relations at the University of Waterloo in southwestern Ontario.

However, Lanoszka said the sanctions put stress on the Russian state and make it harder for Moscow to fund its war.

"[They can] raise the opportunity costs that the Kremlin faces when deciding its budget," said Lanoszka, who believes Western financial and military support for Ukraine will provide more tangible effects on the war-fighting front.

Less decline than forecast

The International Monetary Fund (IMF) estimates Russia's economy will shrink 3.4 per cent this year — a fraction of the 35 per cent it projects Ukraine's war-ravaged economy will contract.

The drop in Russia's GDP is sharply lower than predicted, though Sergei Guriev, an economics professor and provost at Sciences Po in Paris, said the measure "overestimates the performance" of the country's wartime economy.

Increased production of artillery shells in Russia makes it appear that the GDP is increasing, but Guriev noted that "has no positive impact on the quality of life of Russian households."

A marked drop in household spending is a true indication of how the war — and sanctions — have affected people's lives there, he said.

Joy Neumeyer, a historian and journalist, said Russian state media are promoting a view that sanctions have been a costly failure for the West, while domestic consumers are doing well.

"The state media also claims, contrary to most economists, that Western brands are being seamlessly replaced by domestic equivalents," Neumeyer, who has previously worked as a reporter in Russia, said via email.

The sanctions levied against Russia have been wide-ranging: Key banks were removed from the SWIFT bank messaging system; Russia's central bank has been limited in accessing $600 billion US in reserves held by foreign banks; Russia has been cut off from access to Western technology and supplies.

Making adjustments

Top Russian officials have publicly acknowledged the challenges sanctions pose. 

In July, Russian President Vladimir Putin slammed the "economic blitzkrieg" the country has faced. Yet he suggested it wasn't causing the damage the West had counted on.

More recently, Elvira Nabiullina, the head of Russia's central bank, had a similar message, telling lawmakers the country's economy and banking sector had withstood Western pressures — though she notes their effects have been widely felt.

"Sanctions are very powerful and their influence on the Russian and global economy should not be downplayed," said Nabiullina, who faces sanctions herself.  

Russia made moves in response to the sanctions, including hiking its benchmark interest rate to its highest level this century, according to Reuters.

Janis Kluge, senior associate at the German Institute for International and Security Affairs, said Russia's introduction of capital controls at the onset of the war was the most important adjustment it made.

"This helped to stabilize the ruble exchange rate in the first weeks after sanctions were imposed, and the stronger ruble took some pressure off inflation," Kluge said via email.

Higher energy prices

Energy prices have soared amid the war's chaos, with European gas prices up "more than four-fold since 2021," according to the IMF in October.

Higher gas prices benefit Russia, which is why Western governments — after months of discussions — enacted a price cap on Russian oil in a bid to limit the income Moscow can generate from its exports. 

Russian authorities have rejected the price cap and threatened to cut shipments to countries that endorse it.

In response to sanctions, Kluge said Russia "conquered new markets for its oil exports," selling more oil to China and India.

However, Guriev said the average price that Russia gets for its oil is decreasing, and this has already had implications for its war effort — such as when Moscow turned to a mobilization effort to bring more soldiers to Ukraine.

"It felt that it no longer has an unlimited amount of cash to spend on hiring soldiers," said Guriev. "And that's the major impact of the sanctions so far."

Western exodus

The Russian economy has also been harmed by the exit of many Western companies — more than 1,000 of which have, to varying degrees, curtailed business activities there.

This pullback has involved businesses as varied as fast-food chains, fashion brands, convenience-store retailers, mining companies and automakers.

Experts say major industries in Russia — including some key to its war effort — have been compromised by this exodus and by sanctions that have cut access to Western technology and finances.

"Russia did not fully understand how dependent its military-defence complex is on Western components, so now we see that Russia cannot reproduce the stock of modern tanks, modern jets, modern rockets," said Guriev.

Reports suggest Russia may be running low on long-range precision weapons and that Moscow has been importing North Korean-made artillery shells and Iranian-made drones.

The future

The war in Ukraine has upended markets, driven up global food prices and created uncertainty about Europe's security.

It has also prompted Western countries to act. 

The University of Waterloo's Lanoszka said the countries involved in the sanctions efforts have stuck together more closely than expected. 

Ten months into the war, he judges the differences among them to be "more tactical than strategic."

For Russia, the longer it's isolated from interacting more widely with the world, the more damaging the sanctions are predicted to be.

"While sanctions are a slow tool, time works in their favour," Kluge and a co-author wrote in a fall brief for the European Union Institute for Security Studies.

Guriev said the sanctions' ongoing strength will depend on how tightly the West enforces them.

If the goal is to hamper Russian industry and its military industry in particular, he said the West must continue to "play this difficult and tiring, whack-a-mole game" of crimping other countries' efforts to help Russia circumvent sanctions.