No, time is not on Russia's side.

Josep Borrell, High Representative of the European Union for Foreign Affairs and Security Policy / Vice-President of the European Commission

HR/VP Blog – Russian authorities regularly claim that the Russian economy is not really suffering from Western sanctions and that time is on Russia’s side in its war of aggression against Ukraine. However, these claims do not stand up to scrutiny. Our sanctions have already significantly weakened the Russian economy, and the country’s future becomes bleaker with each passing day that Russia continues its war of aggression against Ukraine.

In response to Russia’s war of aggression against Ukraine, the European Union has so far unanimously agreed on 13 sanctions packages – the largest sanctions effort it has ever undertaken. These sanctions were also closely coordinated with many like-minded partners. However, in recent months there has been widespread talk that these unprecedented sanctions may not be effective. These voices became particularly loud after Russian authorities announced a GDP growth of 3.6% in 2023.

Beware of official figures in Putin's Russia

First, in an autocracy like Russia, where there is no freedom of information and no checks and balances, you always have to be very careful with official figures. Economic figures are as suspect as the election results of the last presidential election. Second, it was a priori impossible for the Russian economy to collapse after the invasion of Ukraine. Over the past two years, we have repeatedly emphasized that our sanctions will not have an immediate effect and that they are aimed at weakening Russia's ability to sustain its war effort in the medium term. And that is exactly what is starting to happen now.

The economic growth that Russia recorded in 2023 was the classic result of a policy of “war Keynesianism” as already seen in Germany in the 1930s. With defense spending increasing by 70% in 2024 compared to the previous year, about 30% of Russia’s budget and 6% of GDP are now officially earmarked for national defense, with the main additional funds marked as secret spending. Military and security spending has returned to Soviet-era levels.

The Russian economy is being fueled by an explosion in defense spending.

The Russian economy was boosted by this explosion in defense spending, including large payments to soldiers and families of those killed in action in Ukraine, especially to ethnic minorities in poorer regions. This dynamic is also reflected in regional economic disparities, with regions with a strong military industry or bordering Ukraine showing better economic performance due to war-related activities.

It is relatively easy for an authoritarian regime like Putin’s Russia to reorient the economy towards military production, albeit with massive negative consequences for other sectors. The transition to a war economy inevitably means much less investment in education, health, social security, roads, civil infrastructure, energy systems, etc. This reorganization has already had a negative impact on the lives of many ordinary Russian citizens, as we saw, for example, with the numerous defects in collective heating systems in several Russian cities last winter. If the war continues, things will only get worse.

Our sanctions are already having an impact on Russia’s portfolio. The Russian economy’s revenues from fossil fuel exports have been halved since spring 2022 due to the European embargo on coal and oil and the price cap on oil exports imposed by the G7. Our goal was never to prevent Russia from exporting fossil fuels, which would have caused a major crisis in global energy markets. The goal was to significantly reduce Russia’s profits from these exports, and we achieved this goal. The trade figures bear this out: As a major exporter of fossil fuels, Russia traditionally has a large foreign trade surplus. However, in the last two years this surplus has shrunk to almost zero.

Inflation is high in Russia

In 2022, the Russian economy also experienced a sharp increase in inflation, largely due to Western sanctions. Inflation eased significantly in the first half of 2023, only to rise again from mid-2023. Currently, annual inflation rates in Russia are above 8%, compared to 2.6% in the Eurozone. This is especially true for food prices. For example, prices for eggs, a staple food for many Russians, increased by 40% in 2023. Food expenses in the home of an average Russian family have increased to more than 30% of the total.

The ruble has also been steadily falling since spring 2022. This depreciation makes imports more expensive. To stop the Russian currency from collapsing and inflation from resurging, the Russian central bank has been forced to sharply raise its short-term interest rates, which are now 16% per year, 3.5 times the European Central Bank’s rate. Massive war-related spending, higher import costs and a tight labor market mean that inflation in Russia will remain high, forcing the central bank to keep interest rates high.

At the same time, investor confidence in the future of the Russian economy is so low that the Russian government has to borrow at a 10-year interest rate of almost 14% per year, compared with an average of 2.9% in the eurozone. Russia has already experienced a significant capital flight, and even what Russia calls “friendly” countries are unwilling to put their money towards Russia’s future. Given the high interest rates, private investment in Russia has been severely affected, and the Russian state itself can hardly afford to borrow. The continued lack of investment will further damage Russia’s economic future.

To curb sanctions evasion

It is a well-known fact that our sanctions have been partially circumvented, particularly through the export of products to Russia’s neighboring countries, which are then re-exported to Russia. In response, we are working continuously with our G7 partners to limit such circumvention and to hold all actors in the supply chain accountable, especially banks that contribute to such transactions. These efforts are becoming increasingly effective. But despite the partial evasion, it has become much more difficult for Russia to obtain the products it needs to wage war, especially high-tech products. Russia can only buy a fraction of what it will need, and at significantly higher prices than before February 2022.

These difficulties are already reflected in official Russian statistics. In Russian national accounts, investment spending has increased by more than 20% since the start of the war of aggression against Ukraine. However, this is not a sign that the Russian economy is modernizing at a rapid pace. On the contrary, the volume of actual investment has likely decreased significantly. The sharp increase in investment spending is mainly due to the sharp increase in prices for capital goods that Russia can still import.

Although the authoritarian Russian regime is able to massively redirect the country’s economic output towards arms and ammunition production, its dependence on countries such as Iran or North Korea to supply enough drones, ammunition or missiles to support its war effort also reflects a persistent industrial weakness, exacerbated by Western sanctions. Car production in Russia has fallen to half its pre-war levels. The space industry, once the pride of the country, is in deep trouble. Air transport has become quite dangerous due to a lack of maintenance, software updates and spare parts.

A major labor market crisis in Russia

In a rapidly aging country where the population has already been shrinking since 2000, the exodus of hundreds of thousands of young, skilled workers after February 2022, in addition to hundreds of thousands of people mobilized, dead or disabled as a result of the Russian war, has caused a deep labor market crisis in Russia. In an attempt to alleviate this crisis, the Russian government had opened the floodgates to emigration from Central Asia. However, after the tragic terrorist attack in Crocus City Hall, for which Daesh claimed responsibility, many of these emigrants are returning to their homeland, deepening the labor crisis in Russia.

Because of the war in Ukraine, the Russian economy is more focused than ever on trading basic materials, often at a reduced price, for medium- and high-tech goods. China is using this weak period to buy cheap oil from Russia and export more goods to Russia, which is becoming increasingly dependent on its large neighbor. Currently, about 50% of Russian imports come from China.

Russia's economy has been significantly weakened by our sanctions

In short, the assumption that the Russian economy would withstand Western sanctions and that time favors Russia in its war of aggression does not stand up to scrutiny. If we do what is necessary to continue to support Ukraine economically and militarily, especially with ammunition, it can prevail. Russia, although three times more populous, has in reality already been significantly weakened by our sanctions. Over time, they will become increasingly apparent as human capital is depleted, the scale and quality of investment deteriorates, and Russia is deprived of the advanced technologies it needs for its future./eeas.europa.eu/