Summary

It would appear that US and Western assumptions regarding the geopolitical utility of economic coercion have been disproven by the Ukraine war. Not only did the threat of economic punishment fail to avoid the outright invasion of Ukraine in 2022, but the Russian economy has also proven remarkably resilient in the face of Western sanctions, due to a combination of sanction avoidance, a structural shift toward a wartime command economy, and the ongoing viability of Russian oil exports, albeit at reduced prices. The view from early 2023 was one of abject disaster for Western sanction policy: inflation was down, the rouble had stabilized, and interest rates had settled back to pre-war levels.

But of course, the war is not over, neither for Ukraine nor for the Russian economy. In fact, with the recent invasion of the Kursk region by Ukrainian forces and the negative turn in former president Trump’s polling numbers, the war may be going on for longer than the Kremlin had been planning on. This will have consequences for the wider Russian economy, especially because the reprieve of 2023 appears to be over, with economic indicators now turning negative across the board. This article will explore some of these trends and provide insight into risk factors for the Russian economy going forward.

Impact

The Russian economy tanked in the direct aftermath of the invasion, with inflation spiking and the rouble shedding value against the USD. However, the situation swiftly reversed and then stabilized once capital controls were introduced by the central government. Wartime industrial production was also fired up, which helped to make up for the loss of Western export markets; it has only grown since then, with output increasing an estimated 60% between autumn 2022 and spring 2024. The scale of this wartime production is significant, and it continues to resonate in the Ukraine war. For example, according to NATO intelligence estimates, Russia was producing approximately 250,000 artillery shells per month in March 2024 – over three times the amount of the United States and Europe combined. Disparate production levels translates into capacity gaps on the battlefield, with Russia able to fire an estimated 10,000 shells a day to the Ukraine’s 2,000.