Examining the Short and Long-Term Effects of Western Sanctions on Russia

By BrittAny Macaddino

On February 4, 2022, comprehensive sanctions were placed on an international superpower for the first time since the end of the World War II. The United States, European Union, and others coordinated their efforts against Russia to stifle their economic abilities and hinder their invasion of Ukraine. Nearly a year later, sanctions against Russia are expected to tighten in 2023. But are the sanctions imposed against Russia working the way major powers intended, and is it sustainable for the world economy to continue imposing them?

Despite the scope, speed, and coordination of the economic sanctions, Russia’s economy continues to function, and the invasion of Ukraine has yet to cease.[1] Edward Fishman, a member of the State Department, who spearheaded the sanctions policy when Russia annexed Crimea in 2014, has stated that yes, the sanctions are working; however, it depends on what Western nations were attempting to achieve with the sanctions.[2] The goal was not to “achieve a psychological change in Putin,” Fishman noted, but rather to “create attrition in Russia’s military industrial complex and its economy[.]”[3] Russia has been able to keep its economy afloat partly due to protections put in place for a scenario substantially similar to the one it experienced in 2022.[4]

Elina Ribakova, an economist with the Institute of International Finance, stated that the Central Bank of Russia had spent years preparing policies that defended the country’s financial system in the event of sanctions from the Western world.[5] The strategy has been called “Fortress Russia,” and it was intended to make Russia’s economy sanction proof, although few economists actually thought it would work.[6] As Ribakova has explained, the preparation, along with proficient responses from Central Bank officials, has allowed Russia to control the immediate financial crisis from sanctions and hold on to more than $250 billion in foreign reserves.[7]

The cumulative effect of all these economic hardships, both self-imposed and foreign imposed, will have devastating and long-lasting effects on Russia’s economy.

Despite the short-term success, the International Monetary Fund estimates that Russia’s economy will shrink by 3.4% in 2023.[8] Experts predict that the drop would be bigger if not for Russia’s oil and natural gas sales, which constitute about half of the government’s budget.[9] One main factor contributing to the predicted shrink is corporate flight.[10] Almost immediately after the sanctions were imposed, a series of major Western companies announced that they planned to withdraw from Russia, further amplifying the strain on Russia’s economy.[11] Shipping companies like FedEx, UPS, and DHL halted shipments to Russia, while other retailers like Apple suspended online sales and credit card companies severed ties with Russian financial institutions.[12]

To protect global energy supplies and prices, Western governments provided sanction carve outs for the energy industry, although some energy companies like BP and Royal Dutch Shell still cut ties with state-owned energy companies in Russia.[13] For an energy giant like BP, cutting ties with Russia forced the company to lose upwards of $25 billion.[14] Additionally, as the largest foreign investor in Russia, BP’s early exit forced the issue of withdrawal on other Western companies operating in Russia amid the invasion of Ukraine.[15]

In an attempt to lessen the bleeding caused by corporate flight, Russian Prime Minister Mikhail Mishustin announced a presidential decree that would impose temporary capital controls that restrict the ability of foreign investors to sell Russian assets.[16] He also accused Western companies of giving into political pressures to withdraw from Russia.[17] Russian officials have taken several other measures to try and stabilize the financial system, such as doubling interest rates to twenty percent, banning Russian brokers from selling securities to foreigners, and ordering exporters to exchange eighty percent of their foreign currency revenues for rubles.[18] Russian residents have also been banned from making bank transfers outside of Russia.[19]

In light of protective these protective measures, Russia’s economy is doing better than expected ten months after the initial invasion of Ukraine.[20] However, true economic recovery isn’t expected to begin until 2024, and it will only be possible if external factors do not significantly worsen.[21] While conservative fiscal policies did soften the economic blow, it is those same policies that have prolonged the effects of the sanctions and has caused Russia’s budget to shrink, as much of the budget comes from foreign oil and gas revenues.[22] A recent survey of more than 13,000 businesses by Russia’s central bank revealed that many are experiencing difficulties bringing goods needed for manufacturing purposes into the country.[23] This shortage of raw materials is forcing some businesses to close factories or look elsewhere.[24]

The cumulative effect of all these economic hardships, both self-imposed and foreign imposed, will have devastating and long-lasting effects on Russia’s economy. Russia could face a stagnate decade followed by a decade of regression if Western imposed sanctions do not cease or at a minimum become less strict.[25] While Russian officials maintain that foreign imposed sanctions have largely been a failure, economic indicators paint a more dismal outlook for the struggling world power.

[1] Jackie Northam, Russia’s Economy is still Working but Sanctions are Starting to have an Effect, NPR (Dec. 27, 2022), https://www.npr.org/2022/12/27/1144226139/russia-sanctions-ukraine-war.

[2] Id.

[3] Id.

[4] Are the Sanctions Against Russia Working? WBHM (Dec. 27, 2022), https://wbhm.org/npr_story_post/are-the-sanctions-against-russia-working/.

[5] Id.

[6] Id.

[7] Northam, supra note 1.

[8] Id.

[9] Are the Sanctions Against Russia Working, supra note 4.

[10] Amy Mackinnon, Corporate Flight from Russia Multiplies Putin’s Pain, Foreign Pol’y (Mar. 1, 2022), https://foreignpolicy.com/2022/03/01/corporate-flight-russia-sanctions/.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Ron Bousso & Dmitry Zhdannikov, BP Quits Russia in up to $25 Billion Hit After Ukraine Invasion, Reuters (Feb. 28, 2022), https://www.reuters.com/business/energy/britains-bp-says-exit-stake-russian-oil-giant-rosneft-2022-02-27/.

[16] Mackinnon, supra note 10.

[17] Id.

[18] Mark Thompson and Vasco Cotovio, Russia Tries to Stop Western Companies Fleeting the Country, CNN (Mar. 1, 2022), https://www.cnn.com/2022/03/01/investing/russia-economy-capital-controls/index.html.

[19] Id.

[20] Alexandria Prokopenka, The Cost of War: Russia Economy Faces a Decade of Regress, Carnegie Endowment (Dec. 19, 2022), https://carnegieendowment.org/politika/88664.

[21] Id.

[22] Id.

[23] Lora Jones, Ukraine Sanctions: What Pain Lies Ahead for Russia’s Economy? BBC (May 11, 2022), https://www.bbc.com/news/business-61381241.

[24] Id.

[25] Prokopenka, supra note 20.