Russia’s full-scale invasion of Ukraine in February 2022 ignited international outrage and triggered a wave of sanctions aimed at crippling the Kremlin’s war efforts. Russia’s assets abroad were frozen, its economy isolated from the global financial system, and its energy exports targeted.
Initially, Western officials and commentators described these sanctions as “crippling,” “debilitating,” and “unprecedented.” With such strong language, it seemed inevitable that Russia’s economy would collapse, forcing the Kremlin to withdraw its troops.
However, twenty-seven months later, the war continues, and Russia’s economy is growing. The International Monetary Fund predicts a 3.2% economic growth for Russia this year, surpassing that of many advanced economies. Despite the sanctions, there are no shortages in Russian shops, though prices are rising, and some Western products have disappeared due to companies exiting the Russian market. Nonetheless, many of these products still enter Russia through alternative routes, with American cola still available in some stores.
While European and American CEOs no longer attend Russia’s annual St Petersburg International Economic Forum, delegates from over 130 countries and territories are participating. Russia has shifted its economic focus to new markets in the East and the Global South, allowing officials to claim that attempts to isolate Russia have failed.
“It looks like the Russian economy managed to adjust to very unfavourable external conditions,” says Yevgeny Nadorshin, senior economist at PF Capital. ”Without any doubt sanctions broke a lot in the mechanism of operation inside the economy. But a lot has been restored. Adaptation is happening.”
So, have the sanctions failed? Elina Ribakova, senior fellow at the Peterson Institute for International Economics, explains, “The big issue was our understanding of what sanctions can and cannot do. It’s not like flipping a switch and Russia disappears. What sanctions can do is to throw a country off balance temporarily until it finds the way to work around the sanctions, until it finds alternative ways to get shipments, or sell its oil. We’re exactly in that space where Russia has found a workaround.”
Russia has redirected its oil exports from Europe to China and India. In December 2022, G7 and EU leaders introduced a price cap plan to limit Russia’s oil revenue, aiming to keep prices below $60 a barrel. However, Russia has circumvented this easily. This situation highlights a dilemma for the US and its partners. To avoid hiking global energy prices, they have kept Russian oil flowing, inadvertently allowing Moscow to continue earning revenue.
“In a way, we refused to properly sanction Russian oil,” Ribakova concludes. “This price cap is an attempt to have our cake and eat it. The priorities are to allow Russian oil on the market and to reduce Russia’s revenue. And when these two priorities conflict, unfortunately, the first one wins. That allows Russia to raise a lot of revenues and continue with the war.”
Russia has become China’s biggest oil supplier, and trade between the two countries reached a record $240 billion (£188 billion) last year. In Russian cities like St Petersburg and Moscow, Chinese electronics and cars dominate the market. Even the Russian automobile industry relies heavily on Chinese components, as illustrated by the new Volga car, which is based on a Chinese model.
Ultimately, Russia’s economic growth is driven by military spending. Since the invasion, armaments factories have been operating nonstop, employing more Russians in the defense sector and driving up wages. However, this focus on military expenditure diverts funds from other areas.
“Longer term, you are destroying the economy,” says Chris Weafer, founding partner of Eurasian consultancy firm Macro-Advisory. He notes that money initially intended for the National Project program, aimed at improving infrastructure and communication, has been redirected to support the military-industrial complex.
After more than two years of war, Russia’s economy has adapted to sanctions. However, the US is now threatening secondary sanctions on foreign banks aiding transactions with Moscow, creating new challenges for Russia. “Products have slowed down coming into Russia,” says Weafer. “Spare parts are more difficult to access. Every day there are stories of banks in China, Turkey, and the Emirates refusing to deal with Russian transactions. Unless this is resolved, Russia will have a financial crisis by the autumn.”
Thus, it would be premature to conclude that Russia has beaten the sanctions. Although it has managed to adapt and circumvent them so far, the pressure on the Russian economy persists.
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