Four years after Russia’s full-scale invasion of Ukraine, the devastation wrought by the Kremlin’s drones, infantry, missiles and armour continues to be matched by economic destruction. This is a cost borne mostly by Ukraine: The World Bank now estimates the cost of reconstruction, were the war to end today, is now $588bn, nearly three times the country’s GDP.
Simultaneous to the fighting in Ukraine itself, the economic war between Russia and the West rages on. But that battlefield has shifted far more sharply than the one in southern and eastern Ukraine has over the past year. With a war of attrition being waged on the ground, how the geo-economic battleground plays out from here may well prove more important in determining how the conflict is ultimately settled.
The nature of the changes in both sides’ economic fighting conditions, however, is obscured by a dense fog of war. This is compounded by the fact that most participants in this economic conflict are increasingly happy to obscure the state of the geo-economics at play, and to let narratives play out that are more rooted in propaganda and politics than fact. To understand where the war is headed, it could help to bust three myths about Russia’s current state of economic affairs and Western capabilities.
The first is that the economic cost Russia has borne is manageable. The Kremlin may appear willing to wage the war no matter the cost to its coffers and people, but that does not mean that doing so is not devastating its economy.
As a result of the 2022 invasion, the Kremlin has lost what was its largest gas export market: Europe. Before the war, Russia sold roughly 150 billion cubic metres (bcm) of gas to the EU annually; that number is down to 38 bcm. Based on the recent prices for European gas futures, every billion cubic metres is worth more than 300 million euros ($353m), meaning Russia is losing out on as much as 34 billion euros ($40bn) annually. That sum will increase next year when EU countries will phase out completely Russian gas imports.
Approximately $335bn in Russian sovereign assets remain frozen worldwide as well. Although the Kremlin has launched repeated legal challenges to the underpinning sanctions to scare off Ukraine’s backers from harnessing these in its defence, reading between the lines of recent Russian offers in negotiations indicates the Kremlin acknowledges a large portion thereof will never be recovered.
The Kremlin has also acknowledged that its remaining domestic piggy bank, the National Wealth Fund, is running dry, and with withdrawals at a record pace at the beginning of the year could even be spent by year’s end, barring a sustained uptick in oil prices.
The sole area of the economy that is performing well is that connected to the military and defence production, but sustained high borrowing costs and the decline in employable Russians due to war losses and recruitment mean that the Russian economy continues to bleed, too.
The second myth that must be dispelled is that the US has lost interest in fighting the economic war against Russia.
President Donald Trump may be making offers for Russian-American cooperation if a ceasefire and potential settlement to the conflict are reached, but it is still maintaining the sanctions.
In fact, his administration’s punitive economic measures are bringing real additional pain to the Kremlin in its sole remaining other major export market: oil.
Since Washington imposed sweeping sanctions on Russia’s two largest oil companies, Rosneft and Lukoil, in October, early signs suggest the measures are beginning to disrupt the Kremlin’s ability to place barrels on global markets.
The restrictions blacklisted firms responsible for a large share of Russian crude exports and deterred banks, traders and refiners from participating in deals, particularly in Asia. The Trump administration may lag well behind Europe in imposing sanctions on Russia’s shadow fleet, but it has outpaced Europe in targeting Iran’s, meaning there are more “black” barrels in the market than before.
The result has been a growing pool of oil in search of buyers. Cargoes have accumulated, with tens of millions of barrels stranded in storage or on tankers without firm destinations as refiners hesitate to risk sanctions exposure. The emerging pattern suggests sanctions are not stopping exports outright, but forcing a slower and less certain trade in which Russian crude must hunt for buyers – and offer increasingly sharp discounts.
Therefore, even as the geopolitical risk premium driven by Trump’s threat to strike Iran has seen the benchmark Brent oil price reach more than $70 per barrel, Russia has had to offer discounts of as much as $30 per barrel to secure buyers.
This is not only a US story. Even in India, where Washington has openly negotiated on tariffs in exchange for decreasing Russian oil purchases, European sanctions have helped heap on the pressure. Brussels significantly sharpened its “anti-circumvention measures” over the past year, going as far as to target refineries in both China and India.
In the latter case, the country’s second-largest refinery, Vadinar, which is part-owned by Rosneft, has been blacklisted since the middle of last year.
Europe is currently preparing its 20th sanctions package and has proposed going further still, including with an outright ban on providing any support for the trading of Russian crude. That process, however, as well as the crucial 90-billion-euro ($106bn) loan that Brussels agreed to provide Kyiv in December, has been delayed by the latest round of intra-EU squabbling, after Hungary extended its veto on the eve of the invasion’s anniversary.
And therein lies the third myth due for dispelling in relation to the ongoing economic war: Europe must be prepared to pay for assistance to Kyiv from its own coffers. The EU does have a viable alternative: Russia’s frozen assets.
In fact, the 90-billion-euro loan plan was itself thrown together at the last minute in December, after the bloc failed to unite on a plan to harness these assets, the lion’s share of which is firmly under EU jurisdiction. Negotiations failed last year, but that does not mean they cannot be revisited.
With Russia-US-Ukraine diplomatic negotiations making no discernible progress, and both sides girding for fighting to continue unabated into a fifth year, the economic war is set to trundle on, as well.
To threaten a real collapse of the Russian economy and force Moscow to make concessions on ending the war, the West must take steps it has been unable to so far. The alternative is far worse: striking a deal on the Kremlin’s terms that may encourage future aggression.
Huw Evans Picture Agency
