Sanctions on Russia
How did the Russian economy survive?
March 2, 2025
1991: The Soviet Union broke up, creating fifteen new countries. Russia emerged as the largest of these and as the Soviet Union’s successor state.
As part of the transition from a centrally-planned economy, Russia and some other former Soviet republics went through a process of “shock therapy”, largely under Western economic advice.
The ex-Soviet republics had varying success with their market reforms.
“Shock therapy” in economic policy means introducing extreme market freedoms quickly, to experience an immediate worsening of the crisis in hopes of it quickly turning for the better as reforms take hold.
In Russia, reforms included:
Price liberalisation: prices were no longer set by the state and allowed to change freely
Reduced government spending: the state closed its expensive social support and infrastructure projects
Privatisation of state-owned industries and assets, offered to the people through a voucher privatisation.
Voucher privatisation is a way of selling government-owned industrial infrastructure to the people by distributing paper vouchers, which could then be exchanged for a share in the industries.
Russia is considered one of the most unsuccessful cases of voucher privatisation:
The citizens had little opportunity to make good use of their vouchers, which were instead collected in large numbers by emerging oligarchs.
A small group of individuals accumulated vast fortunes while the quality of life for the majority of the population significantly declined.
Millions fell into poverty as they lost the benefits afforded by the Soviet welfare state, which included guaranteed employment and housing as well as subsidised energy.
A reduction in the size of security services along with a weaker government and rising poverty resulted in the growth of organised crime, violence and drug use.
1998: A financial crisis broke out followed by the Russian government defaulting on its debt.
As a result, the ruble (Russian currency) lost most of its value and the life savings of most Russians were wiped out.
Putin’s first presidency (1999-2008) coincided with a global rise in oil and gas prices, which helped the Russian economy and created favourbale conditions for the government.
After an economic recession following the 2008 global financial crisis, the Russian economy managed to recover and continued to grow.
In addition to commodity exports, Russia also had a growing and regionally competitive IT sector.
Meanwhile, the Russian state managed to rebuild some of its capacity:
collecting more taxes
delivering better government services
lowering crime
Between 2000 and 2021, Russia’s GDP as measured in current US dollars grew from under $260 billion to over $1.84 trillion.
Living standards also improved as the chaos of the 1990s began to decline. Life expectancy rose while alcoholism has continued to decline.
2014: Russia annexes the Crimean Peninsula, a region of Ukraine that had a majority Russian-speaking population and housed one of Russia’s military fleets.
Annexation is an act of one country announcing a forceful takeover of a territory that previously was outside of its borders.
In response, many Western countries, led by the United State, introduced significant economic and political sanctions on Russia.
These sanctions, consisting of economic restrictions on the Russian state, businesses, and individuals, were intended to punish Russia for the annexation while pressuring it to change its foreign policy and to respect international law.
In response, the Russian government pursued a policy of sanction-proofing the economy in order to make it less vulnerable to such actions in the future.
These measures included:
Diversifying trade: relying less on Europe and more on Asia
Alternative institutions: creating financial instruments independent of the West, often in cooperation with China and the rest of the BRICS bloc.
Domestic investment: encouraging Russian money to return and be invested in Russia
Import substitution: Supporting local businesses to produce goods otherwise imported from abroad.
In response to the Russian invasion of Ukraine in February 2022, Western governments coordinated efforts to impose further sanctions on Russia.
The sanctions included cutting Russia off from the international payments system SWIFT and banning imports of Russian energy, targeting many industries and individuals.
This made Russia the most sanctioned country in the world.
In addition to cutting off trade links and imposing sanctions, Western governments also froze Russian Central Bank’s assets.
This meant that over $300 billion worth of the Russian government’s money in Western financial institutions, denominated in dollars and euros, were no longer accessible to Moscow.
This made it harder for the Russian government to service its debts or pay for imports that required Western currencies.
Some Western politicians have proposed confiscating Russian assets and transferring them to Ukraine but legal concerns as well as worries about non-Russian reactions has prevented this from happening.
Despite Russia becoming the world’s most sanctioned country, the overwhelming majority of countries globally did not introduce any sanctions on Russia.
Many individual businesses, especially from the West, chose to stop working in Russia.
The main reasons were:
Concerns about reputational damage by remaining in the Russian market
Not wanting to contribute to the Russian economy or state budget by paying taxes
Difficulties in continuing operations because of sanctions
In order to exit the Russian market, Western companies have often had to sell their assets at below-market prices, which benefited their local competitors.
Many Western goods and businesses remained but under new ownership and branding.
As a result of losing access to Western markets, Russia has reoriented its economy towards Asia.
The European Union announced its goal to completely phase out the import of Russian oil and their desire to weaken the Russian economy.
However, Western sanctions actually led to a rise in oil and gas prices, which helped the Russian state budget.
As a result, even though Russian energy exports to Europe declined in 2022 in terms of volume, the amount of profit generated reached record levels.
In order to motivate other countries to purchase Russian energy exports, its oil and gas companies have offered discounts.
India, the world’s largest country in terms of population and one of the largest economies, significantly ramped up energy imports from Russia.
Russian-Indian trade reached $65.7 billion in the fiscal year 2023-24, which is 5.5 times higher than pre-pandemic levels.
This trade has been very asymmetrical, however, with India exporting $4.26 billion worth of goods and services to Russia while importing $61.44 billion, mostly in the form of energy.
Russia-China trade has grown significantly with China having been able to replace the imports of many manufactured goods into Russia, such as machinery, cars and semiconductor chips, while remaining a reliable energy consumer.
Former Soviet republics in Central Asia as well as the Caucasus experienced strong GDP growth in 2022 and 2023, in part because they were used by Russia to circumvent Western sanctions.
US allies in the Middle East, like Turkey and the United Arab Emirates, became popular destinations for Russian businesses to operate as they also refused to apply sanctions.
Concerns about secondary sanctions (being targeted for doing business with sanctioned entities), did limit the willingness of some non-Western businesses to work with Russian companies.
This raised operating costs for Russian businesses abroad as middlemen were able to charge higher prices or require greater discounts.
Continued demand for oil and gas in Europe resulted in some countries, such as Azerbaijan and India, purchasing at a discounted price and then reselling Russian energy at a higher rate.
Russia’s major role in the global energy market has meant many other energy exporters have been wary of isolating the country.
Russia and Saudi Arabia, for example, have coordinated oil production as part of the OPEC+ partnership, in order to influence energy prices.
Western governments tried to introduce a price cap on Russian energy exports.
This was done by refusing to insure ships carrying Russian oil trading above $60 per barrel.
Russian companies have managed to circumvent these restrictions by relying on a “shadow fleet” consisting of vessels without clear ownership or that are not registered publicly.
The Russian government’s spending on its military has also boosted economic growth.
This comes both in the form of pay to contracted soldier and compensations for their deaths, as well as the production and purchase of military equipment.
In order to avoid a general mobilisation – which could provoke public opposition to the government – as well as a large number of casualties on the battlefield, the pay to soldiers and compensation to families have been raised.
These payments have effectively acted as a cash transfer from the state to individuals.
Many of the soldiers recruited come from poorer regions, which means those regions have benefited disproportionately from increased government spending.
Large-scale recruitment has also resulted in declining unemployment, which in turn has led to wages for private sector workers rising.
Reduced access to foreign markets has also spurred domestic production.
Despite an initial contraction in 2022, the Russian economy recovered by early 2023 and continued its growth.
Measured by purchasing power, the Russian economy is now the fourth largest in the world. Since 2022, it has overtaken both the German and Japanese economies.
Despite having largely been able to manage challenges caused by sanctions, the economy still faces many difficulties.
Restricted access to foreign goods and declining unemployment has led to a rise in prices of consumer goods.
In order to combat rising inflation, the Russian Central Bank raised interest rates to a record level of 21%, which in turn has made it more difficult for businesses to borrow money and invest.
Because of its exclusion from Western economic institutions and financial instruments, it has become harder for the Russian government, businesses and individuals to convert rubles into dollars and euros for international trade.
As a result, Russia has shifted towards trading in currencies of its partners, such as with Indian rupees.
While this has helped prevent additional financial assets being frozen by the US or the European Union, it has made it harder to convert currencies and move assets internationally.
For example, because of its massive trade surplus with India and the difficulty in converting Indian rupees, Russian profits have largely been sitting in India instead of being used to purchase goods in a third country.
Because they have fewer potential economic partners, Russian businesses have weaker negotiating positions when trading abroad, receiving less favourable terms.
With Russian-issued Visas and Mastercards not functioning abroad, Russians travelling internationally have been forced to rely more on cash, cryptocurrencies, or opening bank accounts when they are in a foreign country.
Western countries and Russia have also prevented each other from using their airspaces, which has made travel between the two more expensive as travellers are forced to fly via another country, such as Serbia, Turkey or UAE.
On the one hand, Russia’s unemployment rate is at a historical low, which has led to greater consumption. On the other hand, it has made it more expensive for businesses to hire workers to meet demand.
The country’s labour shortage has three main causes:
Hundreds of thousands of would-be workers being recruited into the military
Emigration by people worried that they would be mobilised and sent to fight
Growing demand from the business sector as the economy continues to grow
For most of the past twenty-five years, Russia’s chronic labour shortage and ageing population has partially been offset by immigration, especially from post-Soviet republics in Central Asia.
Economic turbulence caused by sanctions has led to the Russian ruble fluctuating significantly since 2022.
After an initial fall in value, the Russian Central Bank managed to stabilise the currency through its monetary policy and limiting the ability to withdraw cash.
The demand by Russian energy companies to be paid in rubles instead of euros or dollars also helped increase the value of the national currency.
A weak ruble is generally beneficial for exporters (including the state-owned energy sector) but harmful for importers and consumers of foreign goods.
Rising demand by the government has led to businesses shifting their production from being consumer-oriented to becoming state-oriented.
Consequently, this has had a negative effect on certain sectors already hit by sanctions, such as car manufacturing.
This also applies to weapons exports. Rising domestic demands has led to a difficulty in meeting some armament export targets because of their diversion to the war effort.
Sanctions have put some restraints on the Russian economy. Nevertheless, it has proven to be very resilient and able to overcome many of the challenges that sanctions create.
Russia’s ability to survive the sanctions and to some degree even thrive under them have revealed the limits to the power of Western economic institutions and coercion.
Even if Western sanctions on Russia are lifted, continued mutual distrust along with the reorientation of the Russian economy towards the Global South – the source of most projected future economic growth – will likely prevent a full return to pre-2022 economic relations.
Author Naman Habtom
Editor Anton Kutuzov
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