Kyiv Security Forum analyzes Russia’s strategy of sustaining the war despite billions in losses

A recent study examined the impact of economic sanctions on Russia in 2022-2023 and concluded that these restrictions have been somewhat effective in complicating Russian warmongering. Study revealed that in 2023, Russia experienced a 40% decrease in oil and gas revenues, amounting to a loss of $67 billion compared to previous year. This shortfall represents 62% of the estimated $108 billion spent on war during that period.

Despite expectations of a collapse in Russian economy as a result of sanctions, this scenario did not materialize due to various factors outlined in the study. One significant factor is Russia’s long preparation for war, as the country possesses its own partially convertible currency and is not constrained by any restrictions on its issuance. Additionally, Russia does not heavily rely on external financing, has substantial export revenues, and can sustain its domestic spending for an extended period of time.

The study reveals that the Russian economy withstood sanctions on supply of goods and services not primarily due to “parallel imports” or successful import substitution, but rather because sanctions were only imposed on countries that accounted for approximately 50% of Russia’s foreign trade. Moreover, some countries like China and Turkey either did not fully participate or did not participate at all in sanctions measures.

Financial sanctions, such as Russia’s disconnection from the SWIFT international interbank payment system, had significant consequences. This disconnection resulted in a shortage of freely convertible currency, currency devaluation, accelerated production, and consumer price growth. It also made Russia dependent on the Chinese yuan.

The study highlights the freezing of the Central Bank of Russia’s assets as the most effective economic sanction. This action led to a considerable depletion of the National Welfare Fund, with liquid funds decreasing by 44% from March 2022 to January 2024.

As a conclusion, it is recommended to impose secondary sanctions, block tankers of the Russian shadow fleet, include Russia in the FATF blacklist, and penalize banks that aid in circumventing sanctions.

In conclusion, the study suggests that economic sanctions will have a devastating effect on Russia if it becomes unable to continue exporting resources and receiving funds. Only then will the country be more inclined to fulfill the conditions for lifting the sanctions. This research was conducted by the Kyiv Security Forum, which serves as the primary platform for discussing matters of war, peace, national, and global security in Ukraine.