In the aftermath of Russia’s invasion of Ukraine in 2022, Western nations imposed severe sanctions on the country, prompting a shift toward a wartime economy. Despite these changes, Russia continues to face challenges such as frozen foreign reserves and significant technological limitations. Many experts argue that, regardless of the war’s outcome, Russia is likely to emerge as the principal loser.
Anders Aslund, a Swedish economist and former advisor to Russia, recently shared insights with Project Syndicate, suggesting that while President Vladimir Putin and his inner circle claim the sanctions have strengthened Russia, they paradoxically continue to push for their removal. This contradiction highlights a larger debate over the effectiveness of Western sanctions; some observers insist they’re having little impact, while others contend they aren’t stringent enough.
Aslund posits that the current sanctions will shrink Russia’s GDP by 2% to 3% annually, steering the economy toward stagnation. He believes that conditions will deteriorate for Putin, potentially curbing his aggressive stance toward Ukraine.
On September 14, Kyrylo Budanov, head of Ukraine’s Defense Intelligence Agency, reported at the Yalta European Strategy summit in Kyiv that intercepted Russian documents hint at the Kremlin’s intention to seek peace for economic reasons by the end of 2025. Regardless of the authenticity of these claims, they resonate with the prevailing challenges facing Russia’s economy, which are more serious than many external observers understand. Historically, Putin’s war is increasingly being viewed as both brutal and ill-advised.
Aslund emphasizes that no matter the outcome of the Russo-Ukrainian conflict, Russia will wind up the biggest loser, owing to the exorbitant costs of the war. Since the annexation of Crimea in 2014, the country has seen an average GDP growth of only 1% per year, with its GDP declining from $2.3 trillion in 2013 to approximately $1.9 trillion today.
Moreover, Russia’s reliability as an energy supplier has diminished. The only sector really thriving is the military and related industries, where state-owned enterprises sell products to the government at reportedly inflated prices, while other sectors remain stagnant. This situation echoes the economic climate of the Soviet era, with hidden inflation indicating that Western financial sanctions are proving more effective than many are willing to acknowledge.
Looking at the numbers, Russia’s foreign debt has dropped markedly from $729 billion at the end of 2013 to $303 billion as of March this year, with public debt constituting only 14% of GDP. However, this decreased foreign debt is largely irrelevant, as Moscow struggles to secure international loans. Since the full-scale invasion of Ukraine, about half of Russia’s foreign reserves have been frozen, and as of March, the liquid reserves of the country’s sovereign wealth fund plummeted from $183 billion in 2021 to just $55 billion—amounting to only 2.8% of GDP, with most of these funds tied up in illiquid investments.
Under these conditions, Russia has been compelled to limit its annual budget deficit to 2% of GDP since the invasion. With its GDP at roughly $1.9 trillion, this equates to an annual shortfall of approximately $40 billion, indicating that its foreign reserves might be depleted by next year. In an attempt to tackle these fiscal issues, the Russian government is raising personal and corporate income taxes, but this has minimal impact on an already stagnant economy, as it cannot issue substantial domestic debt.
Compounding matters, Western technological sanctions are taking their toll. Russia is not only isolated but also experiencing a brain drain, as educated young people flee the country, all against a backdrop of Soviet-style oppression and rampant corruption under Putin, which further exacerbates its technological lag.
Even as the Kremlin tries to mitigate these challenges by sourcing Western-sanctioned technology from countries like China and Turkey, Western nations are increasingly tightening the noose through secondary sanctions. Meanwhile, Russia’s arms exports have collapsed due to weaponry being deployed to the battlefield, and the country is now forced to import artillery shells from North Korea, which is known for its outdated military technology.
The situation regarding military personnel is also dire. The U.S. estimates that 120,000 Russian troops have been killed and another 180,000 wounded. Despite Putin’s recent directive to boost troop levels by 180,000, Russia’s unemployment rate sits at just 2.4%, indicating a constrained labor market.
When considering all hidden costs, Russia’s military expenses related to the Ukraine war might reach as high as $190 billion this year, accounting for about 10% of GDP. Given Western financial sanctions, this figure could represent a maximum threshold. Confronted with a budget deficit that it can no longer finance, Russia will have to cut public spending, even as non-military expenditures are already at a bare minimum.
In contrast, Ukraine, deeply enmeshed in this conflict, spends around $100 billion annually to combat Russia, with its budget and foreign military assistance each contributing half of that amount.
In conclusion, Aslund points out that Western countries could utilize the interest from Russia’s frozen $300 billion sovereign assets to continue providing military support to Ukraine, assisting the nation’s efforts to resist aggression and restore its territorial integrity.
