Since Russia’s unprovoked invasion of Ukraine, the United States and Europe have deployed tools of economic warfare with the explicit goal of crippling the Russian economy and rendering the Kremlin unable to wage its war of aggression. The alacrity and scale of the Western response—which has included freezing Russia’s foreign-currency reserves, cutting off many Russian banks from the SWIFT payment system, and coordinating export controls—shook the foundations of the Russian economy.
But Russia has absorbed similar economic shocks before, and the last twenty-five years have shown that its economy can endure serious pain without destabilizing its political foundations. To put the stress in perspective, the estimated 4.5 percent contraction of Russia’s gross domestic product (GDP) in the three months since the invasion is similar to the early losses during the 2008 global financial crisis and the country’s 1998 financial crisis. And it pales in comparison to the shock from the COVID-19 pandemic in 2020.
While no two economic shocks are the same, Russia’s dependence on resource revenues has made fuel prices a key determinant of economic fate. Each of the four previous crises was aggravated by plummeting oil prices, which created budget deficits and deprived the central bank of the foreign currency reserves necessary to stabilize the ruble.
But this time, the economy’s landing has been softened by skyrocketing oil prices. Russia’s export revenues brought in nearly $100 billion during the first 100 days of the war, resulting in a record-high trade surplus of $38 billion in April. This has allowed Moscow to increase pensions and the minimum wage by 10 percent in an effort to appease Russian citizens.
The question is what comes next. The recession will worsen and inflation will aggravate the economic pain. Russians have not yet felt the full bite of sanctions, central bank chief Elvira Nabiullina said recently, while export controls will technologically isolate Russia. Just this week, the government released fresh statistics showing a massive drop-off in sales of everything from cars (96.7 percent) to refrigerators (58.1 percent).
Meanwhile, hundreds of Western companies have fled and are unlikely to return. Recovery will also be slower, if and when it comes: There will be no International Monetary Fund bailout (nor are Special Drawing Rights an option, as they were during the COVID-19 shock) and no Western economies will help the Kremlin as they did in 1998. With its foreign assets frozen, central bank interventions will need to be more measured than during the global financial crisis.
All this might fuel hope among supporters of Ukraine that, eventually, this Western economic punishment will cripple the Russian economy enough to bring the Kremlin’s war machine to a halt. Yet when a crisis emerges every half decade, the shock ceases to awe, and with each recession, Russian institutions and the population itself have become increasingly inured to economic trauma. But how exactly did Russia get here?
A recession reflex
To hedge against economic attacks from the West, Moscow built a “Fortress Russia” by shoring up official reserves (though it didn’t expect those would be sanctioned), initiating the System for Transfer of Financial Messages (SPFS) as an alternative to SWIFT, and trying to dedollarize trade. Wary of its fate being tied too closely to oil revenues, the Kremlin has over the last decade adopted a self-adjusting tax system so that its budgets remain sustainable even in a low oil-price environment. Rapid-response measures now seem less staggering because those levers have been pushed before (though to a lesser extent): dramatic key rate hikes overnight, the delicate use of foreign-currency refinancing instruments, the temporary easing of prudential regulations for banks, and measures for their additional capitalization. In other words, the Russian central bank had the playbook ready.
Consumers and companies have also learned through experience. Firms have already begun finding ways to evade sanctions, just as they did during the previous round of sanctions in 2014. Banks have experienced (and survived) runs several times before, so most of the risk-averse population now facing the possibility of unemployment will be hesitant to take their money out. After 2014, owing to a lack of consumer confidence, the savings rate grew rapidly over the following years, even as high inflation slashed the value of people’s savings. Given high interest rates, Russians will likely start saving again—and their expectations will be better calibrated through earlier experience.
The battle for hearts and minds is also a key component here—and the Kremlin is rolling out the big guns there, too. Using its vast propaganda machine to cast the war in Ukraine as an epic battle between Russia and the West, it has hardened public resolve. This is also why the idea of repurposing Russia’s frozen assets to rebuild Ukraine could play right into Putin’s claim that this is all a power grab by the United States.
None of this means that sanctions have been ineffective; indeed, they’ve wreaked havoc on the economy and arguably affected Moscow’s long-term ability to continue financing the invasion. A forecasted 10 percent GDP contraction for the year is on par with the first year of the Great Depression in the United States. Those hundreds of multinational firms exiting Russia are taking their jobs, products, and services with them, while the automotive and airline industries are already in distress. Purchasing power is deteriorating swiftly with the highest inflation rate in two decades. Last week, the government defaulted on its external debt for the first time since the Bolshevik Revolution—meaning that Moscow will have serious problems accessing international lending for years to come, no matter how or when the war in Ukraine ends.
But some of the mechanisms through which sanctions are meant to apply pressure on the regime—internal civilian and elite mobilization or institutional collapse—may not be as potent as the West is hoping. There are degrees of economic pain Russia’s leadership knows its citizens will tolerate and its institutions can handle. To change that calculus, the West will need to do more to truly shock the Russian economy.
Group of Seven (G7) leaders recognize the reality. That’s why the idea of price caps on Russian oil is being seriously considered both in the United States and Europe. If the West can cut off Putin’s most potent economic lifeline, it may strike fear both in the Kremlin and the central bank that this crisis really is different. Meanwhile, as our colleagues have pointed out, there’s more to be done through tariffs, restricting the conversion of currency, and targeting more banks and individuals.