Are sanctions on Russia working?
Russia invaded Ukraine in February 2022. The West responded with sanctions. Three years on, did they make an impact?
I will analyse this question using data from the International Monetary Fund (IMF). I will first give an overview of the sanctions. Then, I will discuss their effects on GDP, the current account (imports and exports), the ruble, and inflation. I will then discuss the reasons why sanctions have not worked as intended.
Sanctions
When Russia decided in February 2022 to invade Ukraine, the West reacted in unity against this. Led by the US and the EU, severe economic sanctions were imposed to weaken the Russian economy.
The most severe sanctions targeted the Russian financial sector. Russian banks were disconnected from the SWIFT interbank transactions system, which basically removed the ability of these banks to conduct transactions with foreign banks. This makes international money transfers extremely hard, making trade harder too.
Other sanctions targeted other industries like aviation or energy. For example, Russian airlines are now banned from using EU or US airspace, among others. Sanctions also include a ban on the purchase of Russian energy products like gas or oil.
Other sanctions target individuals like Russian leaders and oligarchs and their foreign assets.
GDP
We will now examine how the Russian GDP has evolved over the past decade and its development since the start of the war in 2022.
It can be seen that the war has not had a major effect on Russian GDP. There was a small dip in 2022, but after that, GDP has continued to rise at a steady rate.
It was expected, however, that because of the economic sanctions, the Russian economy would collapse, but this has not occurred. The reason for this is the fact that not all world economies have imposed sanctions.
Government spending
One of the major factors affecting GDP is government expenditure. Of course, in a war, government expenditure increases significantly to finance the increase in military spending.
The figure above illustrates how expenditure increased from 2020 due to the COVID-19 pandemic. However, expenditure continued to rise at the same rate, or even higher, from 2022 (invasion) onwards, suggesting that this increase in government expenditure may partly fuel the GDP increase. In other words, the positive growth rate of government expenditure may help to keep GDP growth positive.
Because of sanctions, this spending is primarily occurring within Russia, generating positive effects for domestic firms. When money is transferred to these firms, their revenues increase, which can, in turn, support higher wages and strengthen domestic demand. This dynamic illustrates the Keynesian Multiplier: government spending circulates through the economy, amplifying its impact as each recipient spends a portion of what they receive on another party in the domestic economy.
For example, if the government spends $1, it might pay $0.50 to domestic firm A. Firm A then spends $0.25 purchasing goods or services from domestic firm B. Firm B, in turn, spends $0.13 with domestic firm C, and so on.
However, it is also worth pointing out that this increase in spending is mainly financed through debt, which may also result in other problems in the long term.
See, in the figure above, how the debt/ GDP ratio is rising even though GDP is also growing. Meaning that debt is increasing even faster than GDP, signalling heavy debt financing. Still, the debt-to-GDP ratio is very low, especially compared to other Western countries with an almost 100% debt-to-GDP ratio.
Current account
Sanctions won’t work if not everyone is participating. If the sanctioning countries aim to isolate the target country, but not everyone participates, the target country will get closer to those countries that do not sanction it. This is the concept behind trade deflection.
In this case, Russia has moved away from the EU and the USA and moved towards China and the BRICS countries. However, is this enough to fill in the gap?
See in the figure above how both imports and exports have dropped after the invasion, with exports not even growing since then. Imports have grown significantly recently. This shows how sanctions have had a significant effect on Russia’s current account.
It makes sense that exports have decreased significantly. Much of Russia’s exports involved the energy sector. With the EU sanctioning the import of Russian energy products (like oil and gas).
According to the European Commission, in 2020, the EU was Russia’s largest trading partner. 36.5% of Russian imports came from the EU, and 37.9% of Russian exports were to the EU.
In 2024, the EU became the third biggest trading partner. With 10.3% of imports coming from the EU, and 7.3% of Russian exports going to the EU. This shows the large impact sanctions have had on the Russian current account. This is a large gap that may not be able to be filled by any other nation.
To solve this, Russia may be able to move closer to other countries, but this is not going to be enough to cover the gap left by losing its largest trading partner. Russia was already trading with China and the BRICS, but Russia cannot ask them to buy much more from it. If it were the case that this is possible, Russia might grow too dependent on these countries.
Sanctions have made some progress here, but this performance may be vulnerable to compliance issues, loopholes, trade circumvention and deflection. These will be explained later.
One thing to also point out is that Russia remains very strong in the export of energy products, being the third-largest oil producer in 2023, representing 11% of global production.
Ruble
We will now review how the ruble has performed after the invasion and under sanctions. This is key as it indicates how the market perceives Russia. A weak ruble damages imports, making them more expensive, while benefiting exports. A stronger ruble damages exports, while benefiting imports.
The ruble has suffered some volatility since the start of the war. Since the invasion of Crimea in 2014 (hence the drop around that year), it has trended downwards. This is, of course, expected due to the instability introduced by the wars and sanctions. This brings distrust and capital flight (people taking their money outside of the country).
See how there is a drop right after the invasion, followed by a sharp increase. There was an initial panic reaction due to the sanctions. However, the sanctions and capital controls prevented capital from flowing out of Russia, removing the downward pressure on the ruble’s value. This, together with the positive current account (exports > imports), leads to mostly positive pressure on the value of the ruble. This explains the volatility experienced in 2022.
These capital controls included limits on the amount of foreign currencies to be withdrawn from Russian banks; Russians were also forbidden to take foreign currency abroad, and Russian companies were forced to convert at least 80% of their foreign earnings to rubles (Dallas Fed). These measures helped reduce the demand for foreign currency while also increasing the demand for rubles, resulting in an increase in the value of the Russian currency.
Inflation
Now, let’s see the effect the war and sanctions have had on inflation in Russia. This is important as inflation may lead to a decrease in standards of living, which may also introduce internal pressure from citizens on the Russian government.
In the graph above, we can see that there is a spike in inflation in the year of the invasion. This is expected as right after the start of the invasion, many Western companies ended their operations in Russia, disrupting supply chains. Trade sanctions were also introduced, meaning that Russia was forced to look for other trading partners, maybe partners that were more expensive to import from. This means that prices increase. If Russia was trading with the EU before the war, it was because it offered the best price for what they were trading. Now they had to look for alternative and more expensive partners. This leads to inflation.
After this spike, there was a drop in the inflation rate. It has, however, remained high: between 5% and 10%. This is higher than the pre-war trend, when it moved below 5%.
This trend aligns with the ruble’s behaviour. A weak ruble makes imports more expensive, as the ruble has been losing value against the dollar. This increased cost of imports contributes to rising inflation.
Also, with the rising demand due to government spending and the supply chain disruption due to sanctions, we have the perfect combination for inflation. Too much demand following too little supply.
This reduces citizens’ purchasing power, which leads to dissatisfaction and pressure on the Russian government. It may also lead to an increase in interest rates, which increases the cost of government and private debt.
Are sanctions working?
In short: not as intended. If sanctioning nations expected the Russian economy to crash, so that military financing would also crash, and that the war would be shortened, then the sanctions have not worked. The economy is growing, and the war is still going on.
As previously said, sanctions cannot be expected to work 100% if not everyone is participating to isolate the target country. If the target country can look for other partners, then the sanctions have only achieved a change in trading patterns, but not complete isolation.
It can be said that sanctions fall in the middle between no action at all and full-on military support to Ukraine. Of course, the EU, the USA and other supporting countries have little intention of sending their troops to support Ukraine, as this would imply serious consequences and a significant escalation of the war.
It was also predictable that the EU was not going to introduce the harshest sanctions. After all, the EU relied heavily on Russian energy products at the time. Sanctioning these would’ve introduced significant issues to the EU economy (which it did).
Because of this, there have been many cases of countries which impose sanctions, actually trying to find loopholes to facilitate the trade of Russian gas and oil. For example, according to Stefan Hedlund, a Russian affairs specialist, at the start of the war, Poland experienced an increase in trade with Belarus, products that were then shipped to Russia or Poland. However, these types of loopholes have been identified by EU governments and mostly closed. The private sector has been more reluctant to comply with sanctions. For example, this article also points out how European countries (like Germany) are trading with Russia through countries in Central Asia, such as Kyrgyzstan (trade circumvention).
Another main reason for the failure is that Russia is still earning a lot of money from its oil exports, enabling it to finance its military spending. They were selling a barrel for around $80 in 2024, even though they were sanctioned to sell their barrels at a maximum of $60 per barrel. In 2023, a year into the war, Russia was still in the top 3 of the largest oil producers, representing 11% of the total world consumption (EIA).
In conclusion, more than 3 years later, the war is still going on. So, sanctions have not accomplished their aim. However, they might’ve inflicted some long-term damage on the Russian economy. Apart from the destruction of international relations between Russia and the sanctioning nations, Russia will likely lose access to European products for an extended period, possibly even after the war concludes. With increasing tensions between both sides, Russia may lose access to European technology and investment.