Are Sanctions Hurting Russia?

Many pundits, especially those that support Russia in its fight against Ukraine, have long been telling us that the sanctions placed on Russia have had no effect, and have only served to strengthen that country. Is this really true?

The source for this view comes from Eswar Prasad, an economist at Cornell University, who says that the sanctions have not significantly hindered Russia's economy or military efforts, because Russia has found ways to circumvent many sanctions, particularly through trade with China, which has acted as an "escape valve" for the Russian economy.

For the sake context, as of January 2025, over 21,692 sanctions have been enacted against Russia, adding to an initial 2,695 sanctions that were placed prior to the invasion of Ukraine. The current number of sanctions is thus 24,387. None, we are told, have had any real negative effect on Russia’s economy.

The primary target of these sanctions is the Russian financial system. Approximately 70 percent of the assets held by Russian banks are frozen, and about $350 billion of foreign currency reserves are also frozen. Major Russian banks are excluded from the SWIFT system, which facilitates international financial transactions.

Sanctions have also targeted oil and gas, with bans on Russian oil imports by the US and UK, and restrictions on seaborne crude imports by the EU. Technology that may be used for military purposes has also been sanctioned.

Hundreds of companies and individuals have had their assets frozen and these individuals have also been banned from travel. Sanctions have included asset freezes and travel bans on numerous oligarchs and officials linked to the Kremlin.

The sanctions are international in their application, and include the US, UK, EU, Canada, Australia, and Japan. These nations have collectively implemented measures against Russia's economy and military capabilities. Since February 2022, the EU alone has banned over €48 billion worth of goods that would have been exported to Russia, as well imports from Russia, such as diamonds and gold and other luxury goods.

These same pundits further argue that the sanctions have, in fact, strengthened Russia. They point to various indicators that allow them to come to this conclusion. They say that despite these myriad sanctions, Russian GDP grew to 3.9 percent in 2024, an increase from 3.6 percent in 2023. In the third quarter of 2024, Russia's GDP expanded by 3.1 percent, compared to the same period in the previous year, marking a slowdown from earlier quarters.

These pundits also say that sanctions have led to the formation of “fortress Russia,” by which they mean that the Russian economy has moved towards state control and capital restrictions, thus making Russia immune from global economic shock, which means that the Russian economy, because it has been isolated, has become more self-reliant and no longer needs Western markets.

Sanctions have also led to the rise of a business class in Russia, one that is loyal to President Putin, and one that understands how to navigate the complexities of a war economy, especially those involved in defense-related industries. Regions such as Kurgan, known for armored vehicle production, have seen wages rise significantly, attracting workers and creating new job prospects. Additionally, military personnel participating in the conflict have reported substantial increases in income, contributing to a burgeoning "warrior middle class" that is leveraging their earnings for personal advancement. In this way, Russia economic structure is further strengthened.

Russia, we are told, has also learned to circumvent many of the sanctions through increased trade with other countries like China and India.

And then there is the side-effect of sanctions within Russia, whereby this external economic threat has boosted nationalistic sentiments and support for President Putin.

The figure most often mentioned in this context is Elvira Nabiullina, the Governor of Russia's Central Bank, who has guided the Russian economy through these sanctions by way of inflation control, monetary stability, and banking sector reforms.

Nabiullina focused on curbing inflation, which remains a serious concern for the Russian economy, by way of high interest rates. Thus, in 2022, she raised the key interest rate to an unprecedented 20 percent to make sure that there would be no bank runs and to stabilize the ruble. This prevented a severe economic downturn and the Russian economy shrank only by 1 percent during the initial phases of the sanctions. However, by 2024, the Russian economy has been reduced by half. More on this later.

These are the larger and therefore positive aspects of the Russian economy. And it is this larger picture which is always shown by pundits who want to portray the Russian economy in a certain way. But a closer examination shows a rather different picture.

If sanctions have had no meaningful effect on Russia, then those using them have been utterly foolish to actually believe that they could harm Russia’s economy. And by extension, sanctions should not have harmed Cuba, Venezuela, Syria, Iran, North Korea, Sudan Iraq, Libya, Somalia, Yemen, and many, many others. Obviously, it cannot be true that sanctions do not bring harm, or that sanctions cannot harm Russia.

So, what do we really know about Russia’s economy under 24,387 sanctions?

In 2022, during the invasion of Ukraine, Russia did experience initial surge in government spending, which led to a temporary growth spurt. Therefore, the economy grew by 3.6 percent in 2023. This growth was largely fueled by military expenditures and job creation in defense sectors. This contrasts sharply with previous downturns, such as the 2014 crisis following the annexation of Crimea, where the economy faced immediate recession because of sanctions and falling oil prices.

This is why President Trump called Saudi Arabia and OPEC to lower the price of crude oil, which is happening, and which will severely undermine the Russian economy. The oil and gas sector contributes approximately 20 percent of Russia's GDP. However, this fluctuates based on global oil prices and market conditions. Plus, oil and gas revenues account for 30 percent to 52 percent of the Russian federal budget. This makes them the most crucial source of income for the Russian government, highlighting the sector's importance in financing public services and government operations.

Before leaving office, President Biden imposed sanctions specifically targeting major Russian oil companies, including Gazprom Neft and Surgutneftegas, which are the biggest players in Russia's oil production and exports. Together, these two companies account for approximately 2.5 million barrels per day of output.

As well, some 200 vessels associated with what is termed Russia's "shadow fleet"—ships used to circumvent existing sanctions—have been blacklisted. This move is expected to significantly disrupt Russia's ability to transport oil internationally, especially China and India, two of the biggest buyers of Russian oil.

The sanctions also affect liquefied natural gas (LNG) facilities and include prohibitions on providing oilfield services to Russia. This comprehensive approach aims to cripple not just current operations but also future production capabilities.

Then, there are internal problems within this sector.

Many of Russia's conventional oil fields are aging and becoming depleted, particularly those in the Volga-Ural and West Siberian basins. This depletion leads to declining production levels, as these fields increasingly produce more water than oil, complicating extraction efforts.

Because of sanctions, Russia struggles to get advanced technology and expertise necessary for accessing offshore and unconventional oil resources, and for production and refining. This is why Russai needs India for the refining process.

The existing pipeline infrastructure is designed to transport oil from Western Siberia to European markets, which limits access to newly discovered resources in remote areas like East Siberia and the Arctic. The Eastern Siberia-Pacific Ocean (ESPO) pipeline is operating at full capacity, leaving little room for expansion, despite the need for increased transport options.

The oil and gas sectors are experiencing a significant shortage of skilled workers, estimated at around 40,000 because of mobilization for the war in Ukraine, but largely because of a declining working-age population. This shortage raises questions about the industry's ability to sustain current production levels over the long term. This again brings in the problem of Russia not being able to access the latest technology.

Then, there is the increasing competition in Asia, particularly from Kazakhstan, for the Chinese market. This competition threatens Russia's position as a leading supplier of oil and gas to these markets.

Given that Russia is locked out of the European market, it must find new markets, while adapting to changing global energy trends. This is difficult to do, given the problem of transport.

Turning to the economy itself, there is the ongoing problem of inflation, which officially surged to approximately 9.5 percent as of December 2024, although other estimates suggest that it could be as high as 16 percent based on public perception. In response, the Central Bank has raised the key interest rate to 21% to combat this inflation, which is primarily affecting the civilian sector. while military expenditures remain insulated from these pressures.

The ruble has been experiencing a significant decline, reaching a two-year low against the dollar. This depreciation is a clear indicator of the economic strain Russia is under and complicates its ability to manage fiscal policies effectively.

While the Russian government reported a GDP growth of around 3.8 to 4 percent for 2024 and claimed record budget revenues, many economists are skeptical about these figures. They suspect that the data may be inflated and do not reflect the underlying economic realities, which include stagnation in real production activity since mid-2023.

This brings us to the elephant in the room—social and economic imbalances for ordinary Russians—there are high levels of inequality, poverty, and regional disparities, exacerbated by historical legacies, corruption, and dare we say it, sanctions.

Thus, approximately two-thirds of Russians earn less than $415 per month. The top 1% of earners in Russia now account for 20 to 25 percent of the national income, a figure that surpasses that of many Eastern European countries where the top 1% holds about 10 to 14 percent of income.

The richest 10 percent of Russians own an overwhelming 83 to 89 percent of the country’s wealth, making Russia one of the most unequal major economies in the world. This means that there is a long-term decline in living standards for many ordinary Russians, particularly in the lower-income brackets.

Inflation rates outpace wage growth, creating a cost-of-living crisis that disproportionately affects low-income individuals. As basic goods become more expensive, families with limited financial resources struggle to meet their needs, leading to increased hardship among these groups.

Then, there are high levels of corruption. Transparency International ranks Russia as 146 out of 180 countries on its Corruption Perception Index, indicating a high level of perceived corruption.

This systemic corruption is often described as a "normal part of everyday life," where bribery is commonplace across multiple sectors, including law enforcement, education, and healthcare. It is estimated that 60 percent of Russians have admitted to paying bribes, highlighting the extent to which this practice permeates society.

Reports suggest that corrupt practices add approximately 6.6 trillion rubles (around $89 billion) to state contracts annually, which constitutes more than a third of Russia's state budget and about 6 percent of its GDP. This environment discourages innovation and competition, as businesses often find it more profitable to engage in corrupt practices rather than pursue legitimate avenues for growth.

Research indicates that corrupt governments tend to allocate fewer resources to essential services like healthcare and education, which are critical for improving living standards among the poor. This misallocation results in inadequate support for those in need, perpetuating a cycle of poverty. For example, despite government goals to halve poverty levels by 2024, rampant corruption has negated these efforts by diverting funds intended for social programs into private hands.

In 2023, the poverty rate in Russia saw a significant decline, with estimates suggesting that less than 9 percent of the population lived below the poverty line. Specifically, Rosstat reported a poverty level of 8.5 percent, down from previous estimates of 9.3 percent. This translates to approximately 10 million Russians living in poverty during the fourth quarter of 2023, a notable decrease from earlier figures. The methodology for calculating poverty in Russia has evolved over the years. The poverty line is now defined based on the cost of a minimum market basket adjusted for inflation, which has raised concerns about the accuracy of these statistics. Critics argue that this approach may understate the true extent of poverty by setting the poverty line lower than actual living costs. For instance, while official statistics indicate a poverty rate below 10%, alternative analyses suggest that if the living wage were used as a benchmark, the number of people living in poverty could be significantly higher, potentially exceeding 20 million.

The poverty line is calculated based on the living wage, which differs from region to region. In many areas, the poverty line is set below the current living wage, leading to discrepancies in the number of people classified as poor versus those who may actually be struggling financially.

For example, in the Irkutsk Region, the monthly living wage for a family of three was approximately $550. Around 22 percent of the population earned below this threshold, indicating a poverty rate of about 15 percent.

Ingushetia has the highest poverty rate at 30.5 percent, highlighting severe economic challenges compared to other areas.
As for Moscow and St. Petersburg, these urban centers have significantly lower poverty rates, reported at around 5 percent and 4.5 percent, respectively, reflecting better economic conditions and higher median incomes.

These regional disparities highlight significant differences in economic well-being across Russia. Areas like Ingushetia face extreme poverty levels, whereas major cities enjoy much lower rates, underscoring the need for targeted economic policies to address these inequalities.

So, what about that 3.8 to 4 percent GDP growth? Here is the reality of how this figure has been arrived at.

Following the invasion of Ukraine, the Russian government significantly increased its budgetary outlays and state-subsidized loan programs. This fiscal stimulus accounted for over 10 percent of GDP from 2022 to 2024, which has been instrumental in driving economic growth.

Military spending has surged, transforming the military-industrial complex into a major engine of economic expansion. This focus on defense-related expenditures has allowed Russia to report a 3.6 percent GDP growth in 2023, with projections of around 4 percent for 2024.

Where is the money coming from that the government is spending in the military-industrial complex? From the Russian National Wealth Fund (NWF).

The NWF s a sovereign wealth fund established to support the country's pension system and provide financial stability. It was created on January 30, 2008, following the division of the Stabilization Fund of the Russian Federation into two separate entities: the National Wealth Fund and the Reserve Fund. The NWF is primarily funded by oil and gas revenues, as well as investment income, and serves as a buffer for the federal budget during economic downturns.

Initially endowed with $32 billion at its inception, the NWF has evolved significantly over time. The Reserve Fund, which was meant for low-risk investments abroad, was depleted by 2017, leaving the NWF as Russia's primary reserve fund.

The NWF aims to ensure long-term sustainability of the Russian pension system by co-financing voluntary pension savings and balancing the budget of the Pension Fund of the Russian Federation. It also supports federal budget expenditures, especially during periods of low oil prices or economic instability.

Unlike many sovereign wealth funds that primarily invest overseas, the NWF focuses on domestic investments to stimulate modernization and infrastructure development within Russia. This approach is intended to enhance economic resilience and reduce dependency on foreign investments.

As of late 2024, the NWF's assets were valued at approximately $133 billion, comprising liquid assets and long-term investments. The fund has shifted its asset allocation in response to geopolitical tensions, notably increasing its holdings in Chinese yuan while reducing exposure to Western currencies.

The fund is managed by the Russian Ministry of Finance, which oversees its investment strategy and allocation. The NWF's expenses are capped at 8 trillion rubles ($114 billion) for 2023-2025.

As in 2017 with the Reserve Fund, the NWF now is also facing a critical depletion of its liquid assets, which will severely impact the country's financial stability and military capabilities in 2025.

As of late 2024, the NWF's total reserves were reported at approximately $121.6 billion, with only $31 billion in liquid assets available for immediate use. This represents a significant decline from $117 billion in 2021, highlighting a troubling trend in Russia's economic management amidst ongoing Western sanctions and the financial strains imposed by the war in Ukraine.

In other words, sanctions are beginning to cripple Russia.

Russia's defense spending for 2025 is projected to reach a record $126 billion, raising concerns about the sustainability of funding amidst dwindling reserves, since it is the NWF which funds the military.

In other words, sanctions are beginning to cripple Russia, because they have severely restricted Russia's ability to access international financing, leading to a sharp reduction in foreign borrowing from $729 billion in 2023 to approximately $293 billion by September 2024.

As well, a significant portion of the NWF is composed of illiquid assets, which cannot be quickly converted into cash. This situation leaves Russia vulnerable in times of economic crisis, as these assets provide limited immediate support.

Experts predict that if current trends continue, Russia could exhaust its liquid reserves by the fall of 2025. Anders Åslund, an economist, warns that this depletion would necessitate budget cuts and could lead to price controls and rationing. The Russian government has attempted to stabilize its finances by targeting an accumulation of liquid assets; however, these plans hinge on favorable economic conditions, including stable oil prices above $70 per barrel.

Again, this is why Donald Trump called Saudi Arabia and OPEC to lower the price of oil, which they have done. This bad news economically for Russia.

The depletion of the NWF not only threatens military funding but also poses broader risks to Russia's economy, which is already grappling with high inflation and stagnant growth. Predictions indicate that GDP growth may slow down to just 1% by 2025, further complicating the fiscal landscape for Russia.

Without significant changes or improvements in economic conditions, Russia faces a bleak financial future.

In other words, President Putin needs to end the war in Ukraine as soon as possible. Russia will run out of money, if this does not happen by the end of this year.

Sberbank is Russia’s biggest institution. It’s CEO, German Gref has issued a stark warning regarding the state of the Russian economy, highlighting significant signs of slowdown in various sectors.

Gref emphasized that the Russian economy is experiencing a "significant" slowdown, particularly in housing construction and investment sectors. He noted that inflation is currently more than double the government's target of 4 percent, largely driven by increased military spending related to the conflict in Ukraine.

As noted, the Central Bank of Russia has raised interest rates to a two-decade high of 21 percent in an attempt to combat inflation. Gref has cautioned against further increases, suggesting that overly aggressive rate hikes could hinder economic recovery efforts.

Earlier in June 2024, Gref described the economy as "definitely and strongly overheated," attributing this condition to wartime activities and government subsidies. He noted that production capacity is at a historical high of 84%, indicating limitations on further economic expansion. The combination of sustained sanctions and military expenditures is a recipe for economic disaster.

So, next time you hear pundits tell you that sanctions are not hurting Russia and its economy is booming, just mention the NWF. Which also means that Russia will need to tread with great care, because the United States still wants regime change—the prime and only purpose of sanctions, and Trump will prove to be no friend of Russia.