06 May 2024

Russia’s war on Ukraine has had serious economic impacts with global consequences. International sanctions following the invasion of Ukraine initially led to a sharp decline in Russian export earnings which, in turn, precipitated a fall in the value of the Ruble. A surge in global oil prices in the second half of 2023, coupled with Russia’s successful effort to tap into new energy markets, subsequently brought energy revenues to near-2021 levels. A weaker than expected Ruble helped Russia maintain export despite sanctions. 

The Kremlin has constructed a war economy, driven by increased defence spending and financed by energy earnings. Government spending soared to a record high in 2023, primarily financed by Russian reserves and energy income. Defence expenditure consumed the largest share of Russia’s budget for the year. This expansionary fiscal policy, however, has generated substantial economic imbalances including inflation and a very tight labour market exacerbated by military conscription and the exodus of hundreds of thousands of young people. These challenges raise questions about the longer-term sustainability of current economic policies.

In response to Putin’s invasion of Ukraine, over 30 Allies and partners imposed sanctions aimed at reducing Russia’s commodity export revenues and undermining its military capabilities. Russia currently faces an array of energy, commercial and financial sanctions, including an oil price cap and technology access restrictions. Moscow has actively sought to circumvent these by exporting oil through so-called “ghost ship” tankers sailing without Western insurance, importing sanctioned goods via intermediary countries or smugglers, and denominating trade in non-Western currencies like the Chinese Renminbi. The United States, the EU and the G7 are now challenged to ratchet up sanctions, close loopholes, and enhance enforcement.  

Despite international efforts to isolate Russia, Putin’s regime has managed to strengthen trade ties with certain countries in Asia, Africa, the Middle East, and South America. Indeed, Russia has put trade at the very centre of its global diplomacy. The Kremlin has also used so-called private militia groups like Wagner to maintain access to essential raw materials in Africa and the Middle East while constructing a coalition of like-minded pariah states including Iran, North Korea and Belarus, united by a shared interest in circumventing Western sanctions. At the same time, Moscow has tightened its diplomatic and commercial ties with China. Russia is selling energy to China at discount prices and China is moving a range of high-technology components and machine tools to Russia that are sustaining the defence industries that now drive its domestic economy. Russia is also using Chinese Renminbi to settle trade not only with China, but also with third-party countries including India, Japan, and several Southeast Asian countries. Russia and China are working to build an anti-Western international order more amenable to their authoritarian vision of interstate relations.