Sanctions have significantly impacted Russia, cutting off access to the most technologically advanced sector of the global economy. As a result, plans for future economic development must once again focus on energy commodities. Despite this, Russia’s GDP is projected to fall by just 2.1% in 2022, with IMF projections showing growth in 2023. While the Kremlin uses this to argue that sanctions are ineffective, they have fundamentally changed the way the Russian government operates the economy, leading to capital controls, centralization of payments, and militarization of budget spending.
Following Russia’s invasion of Ukraine in 2022, the US and EU immediately launched new sanctions, freezing Russia’s foreign exchange and gold reserves and limiting the Russian central bank’s ability to use dollars and euros. The government responded by restricting the movement of capital and raising the key interest rate, mitigating the immediate impact on the economy. However, the long-term effects of these measures, including restrictions on capital movement, will continue to be felt.
Russia’s response to sanctions has also resulted in an increase in countries deemed to have taken “hostile” actions against Russia, with trade relations and foreign economic policy driving this designation. As a result, Moscow has strengthened ties with countries such as Iran, Turkey, and Myanmar, while its relationship with China has become one of economic dependence. While Russia has seen record-breaking exports of energy commodities to China, its bargaining position is weakened, and it increasingly relies on Chinese companies for electronics and semiconductors.
The isolation from external shocks has insulated the Russian economy, which has remained relatively unaffected by global financial market fluctuations. However, its increasing reliance on a few remaining foreign partners, coupled with a focus on commodity prices and military spending, mean that Russia’s economic development may remain stagnant for the foreseeable future. In order to avoid repeating past mistakes, Russia must consider diversifying its economy beyond energy commodities.