Four years after Russia’s full-scale invasion of Ukraine, the economic devastation continues to match the devastation wrought by the Kremlin’s drones, infantry, missiles, and armored weapons. This is a cost mainly borne by Ukraine. The World Bank currently estimates that reconstruction costs if the war ended today would be $588 billion, nearly three times the country’s GDP.
At the same time as the fighting inside Ukraine, the economic war between Russia and the West is escalating. But that battlefield has changed much more rapidly than those in southern and eastern Ukraine over the past year. A war of attrition is being waged on the ground, and how the geoeconomic battlefield unfolds in the future may prove more important in determining how the conflict is ultimately resolved.
However, the nature of the changes in the economic combat situation of both sides has been obscured by the thick fog of war. The situation is further exacerbated by the fact that most participants in this economic conflict are happy to see a narrative developed that increasingly obfuscates the ongoing state of geoeconomics and is rooted more in propaganda and politics than in fact. To understand how the war will play out, it will be helpful to bust three myths about Russia’s economic situation and the West’s capabilities.
First, the economic costs incurred by Russia are manageable. The Kremlin may appear ready to wage war at any cost to the state treasury and the people, but that does not mean it is not devastating to the economy.
As a result of the 2022 invasion, the Kremlin lost Europe, its largest gas export market. Before the war, Russia sold around 150 billion cubic meters (bcm) of gas to the EU annually. That number drops to 38 bcm. Based on recent prices for European gas futures, each billion cubic meters is worth more than 300 million euros ($353 million), meaning Russia is losing as much as 34 billion euros ($40 billion) a year. That amount will rise further next year, when EU countries phase out gas imports from Russia completely.
Approximately $335 billion in Russian state assets also remain frozen around the world. The Kremlin has repeatedly launched legal challenges to the underlying sanctions for fear that Ukraine’s backers will use them to defend itself, but reading between the lines of recent Russian proposals in negotiations shows the Kremlin admits that much of it will never be recovered.
The Kremlin also acknowledged that the country’s remaining savings bank, the National Wealth Fund, is running dry and, after a record pace of withdrawals at the start of the year, could even run out by the end of the year absent a sustained rise in oil prices.
The only sectors where the economy is doing well are those related to the military and defense production, but still high borrowing costs and fewer employable Russians due to war losses and conscription mean that the Russian economy also continues to bleed.
The second myth that must be dispelled is that the United States has lost interest in fighting an economic war with Russia.
President Donald Trump may offer cooperation between Russia and the United States if a ceasefire is reached and the conflict potentially resolved, but sanctions remain in place.
Indeed, the regime’s punitive economic measures are causing further pain for the Kremlin’s only remaining major export market: oil.
Since the US government 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 supply barrels to global markets.
The regulation blacklisted companies responsible for the bulk of Russia’s crude oil exports and prevented banks, traders and refiners from participating in trade, particularly in Asia. The Trump administration may be far behind Europe in imposing sanctions on Russia’s shadow fleet, but it has outpaced Europe in targeting Iran, meaning there are more “black” barrels on the market than before.
As a result, oil reserves are growing in search of buyers. Cargo is piling up, with tens of millions of barrels stranded in storage and tankers without a clear destination as refiners avoid risking sanctions. The new pattern suggests sanctions are not completely halting exports, but are forcing Russian crude into slower, less certain deals where they must offer increasingly deep discounts as they search for buyers.
So Russia had to offer discounts of as much as $30 per barrel to secure buyers, even though the benchmark Brent crude oil price has reached more than $70 per barrel due to the geopolitical risk premium caused by President Trump’s threat to attack Iran.
This is not just a US story. Even in India, where Washington is openly negotiating tariffs in exchange for cutting Russian oil purchases, European sanctions are adding to the pressure. Brussels has significantly stepped up its anti-circumvention measures over the past year, going so far as to target refineries in both China and India.
In the latter case, the country’s second-largest refinery Badinar, which is partly owned by Rosneft, has been on the blacklist since mid-last year.
Europe is currently preparing its 20th sanctions package, proposing even more drastic measures, including a complete ban on any support for trade in Russian oil. But the process has been delayed by recent intra-EU disputes, as well as a crucial 90 billion euro ($106 billion) loan that Brussels agreed to provide Kiev in December, after Hungary extended its veto on the eve of the invasion anniversary.
And therein lies a third myth that needs to be dispelled related to the ongoing economic war. That is, Europe must be prepared to pay aid to Kiev from its own coffers. The EU has a viable alternative: freezing Russian assets.
Indeed, the €90 billion loan plan itself was put together at the last minute in December after the EU was unable to come together on a plan to leverage these assets, most of which fall under EU jurisdiction. Negotiations broke down last year, but that doesn’t mean they can’t be restarted.
With no visible progress in diplomatic negotiations between Russia, the United States, and Ukraine, and both countries poised to continue unabated into their fifth year of fighting, the economic war is likely to drag on as well.
To threaten a real collapse of the Russian economy and force Russia to make concessions to end the war, the West will have to do things it has not been able to do before. The alternative is far worse, striking a deal on Kremlin terms that could encourage future invasions.
The views expressed in this article are the author’s own and do not necessarily reflect the editorial stance of Al Jazeera.
