Following Russia’s invasion of Ukraine in 2022, the country found itself facing significant sanctions from the West. Despite efforts to transition towards a wartime economy, Russia is struggling with the ramifications of frozen foreign reserves and limited access to technology. Economists argue that irrespective of the war’s outcome, Russia is poised to be the biggest loser.
Anders Aslund, a Swedish economist and former advisor to Russia, recently penned an article for Project Syndicate, where he noted the contradictory stance of President Vladimir Putin and his allies. While they claim that sanctions have fortified Russia, they simultaneously advocate for their removal.
The effectiveness of Western sanctions against Russia has been a topic of debate. Some observers assert that the sanctions have had little effect, while others argue they fall short of what is needed.
Aslund posits that the current sanctions may cut Russia’s GDP by 2% to 3% annually, pushing the economy toward stagnation, which could ultimately complicate Putin’s military ambitions in Ukraine.
Kyrylo Budanov, head of Ukraine’s military intelligence, revealed on September 14 during the Yalta European Strategy summit in Kyiv that intercepted documents suggest the Kremlin might aim for peace by the end of 2025 for economic reasons.
Regardless of the veracity of this claim, it’s plausible. Russia’s economy is battling deeper financial, technological, and demographic issues than many are aware of. The war initiated by Putin is likely to be remembered not only for its brutality but also for its strategic errors.
Aslund highlights that, no matter the war’s outcome, Russia will emerge as the largest victim. Since the annexation of Crimea in 2014, Russia’s economy has expanded at a meager average of 1% per year, with its GDP declining from $2.3 trillion in 2013 to approximately $1.9 trillion today.
Additionally, Russia’s reputation as a reliable energy supplier has suffered, and the only industry showing growth is the military sector. Here, state-owned companies sell products to the government, often at inflated prices, while other sectors stagnate.
Aslund draws parallels to conditions during the Soviet era, suggesting that this hidden inflation indicates that Western financial sanctions are proving to be more effective than many commentators have recognized.
Although Russia’s external debt has dropped significantly, from $729 billion at the end of 2013 to $303 billion by March of this year, with public debt comprising only 14% of GDP, this reduction holds little benefit as Moscow is unable to borrow internationally.
Currently, Russia depends on tax revenues and foreign reserves. However, after the full-scale invasion of Ukraine in February 2022, Western nations froze half of its foreign reserves.
As of March, the liquid reserves of Russia’s sovereign wealth fund had suffered a steep decline from a peak of $183 billion in 2021 to just $55 billion, which represents only 2.8% of GDP, with much of it locked in illiquid investments.
Due to these constraints, Russia has been compelled to keep its annual budget deficit within 2% of GDP post-invasion. Budanov noted that translates to an annual deficit of about $40 billion, suggesting Russia’s foreign reserves could be depleted by next year.
In response, Russia is raising personal and corporate taxes, yet with the economy stagnating, this action is unlikely to yield significant results. Furthermore, the government is unable to issue substantial domestic debt.
Western technology sanctions are also taking a toll. Russia is becoming increasingly isolated as educated young people leave the country. This, coupled with a mix of Soviet-style repression and corruption within Putin’s regime, is exacerbating its technological challenges.
Despite attempts by the Kremlin to procure sanctioned technology from countries like China, Turkey, and those in Central Asia, the West is progressively closing these avenues through secondary sanctions.
Compounding these issues, Russia’s arms exports have significantly dropped, as virtually all military supplies are needed for the ongoing conflict. Additionally, Russia has resorted to importing shells from North Korea, which has even less advanced weapon technology.
Furthermore, Russia’s manpower is dwindling. The U.S. estimates that 120,000 Russian soldiers have been killed, with another 180,000 wounded. Although Putin has recently ordered the recruitment of an additional 180,000 soldiers, the country currently has an unemployment rate of only 2.4%, indicating a tight labor market.
Considering all hidden costs, Russia’s military expenditures related to the war could rise as high as $190 billion this year, accounting for about 10% of GDP. Given Western financial sanctions, this figure likely represents the upper limit. If Russia cannot sustain its budget deficit, it will be forced to cut public spending further, which has already been minimized.
By comparison, Ukraine’s annual military expenditure in its war against Russia stands at around $100 billion, with half of that amount coming from its national budget and the other half from foreign military support.
Aslund concludes by emphasizing that Western nations have an opportunity to utilize the interest accrued from the $300 billion of frozen Russian sovereign assets to ensure ongoing military assistance for Ukraine, enabling the Ukrainian government to resist aggression and restore its territorial integrity.
