“Sanctions enforcement on Russia are “only about a 3” on a scale of 1 to 10 on how painful the economic pressure can be. The US sanctions themselves — such as those targeting Russia’s lucrative energy sector — are nominally twice as high, but there is still room to ratchet them up,” said special envoy Keith Kellogg in an interview with The New York Post.
When Russia launched its full-scale invasion, Ukraine’s allies swiftly implemented so-called “nuclear sanctions,” designed to cripple Russia’s capacity to continue its war effort.
The measures were so severe that economists, both within Russia and abroad, immediately predicted an impending economic collapse. The International Monetary Fund (IMF) forecasted an 8.5% contraction in Russia’s GDP for 2022, with a further 2.3% decline expected in 2023. The Russian Central Bank was even more pessimistic, projecting drops of 10% and 3%, respectively.
As it turns out, those early predictions were wide of the mark. After a modest contraction of 1.2% in 2022, Russia’s GDP grew by 3.6% in 2023 and is expected to expand by 3.9% in 2024. Investment and real wages have reached their highest levels in two decades. The Wall Street Journal even reported that China initiated an intergovernmental group to study Russia’s economic resilience. Meanwhile, on 19 February 2025, the EU approved its 16th sanctions package against Russia, focusing on the aluminium industry and oil tankers.
The reasons behind the miss in forecasts remain a subject of debate, but they generally fall into two main categories: an underestimation of Russia’s economic resilience and a failure to ensure strong enforcement of sanctions.
On one hand, Russia had long been preparing for this scenario, and its efforts turned out to be fairly effective. On the other, the impact of sanctions was blunted, with China, India, and Iran stepping in as alternative suppliers and buyers for Russia. Moreover, Ukraine’s allies struggled to gauge how long the war would last and how sanctions would affect their own economies.
Two main narratives are currently shaping the debate around Russia’s economy. One argues that sanctions have been a complete failure, hurting Western countries more than Russia. This view is pushed by the Kremlin, as well as pro-Russian businessmen and politicians abroad.
The other argues that because Russia routinely manipulates its economic data, the true impact of sanctions is much worse than it appears, meaning they need to be tightened even more. This view is strongly supported by Ukrainians and their allies abroad.
As usual, the truth probably lies somewhere in between. While Russia has hidden parts of its economic data, the available numbers mostly match up with external sources, like reports from Russia’s trade partners, job market data, and firsthand accounts.
That said, it’s clear that Russia’s current economic resilience comes at a cost for the future. The economy is showing signs of overheating and imbalance. Sanctions have also taken on a new role: instead of quickly forcing the Kremlin to stop its aggression, they’ve become a long-term tool of sustained economic pressure.
As the Carnegie Center put it, Russia’s economy has been running like a marathon runner on fiscal steroids—but now, those steroids are wearing off.
How Russia adapts to economic warfare: drivers of growth
Facing the likelihood of a prolonged war and tightening sanctions, Moscow swiftly pivoted to constructing a wartime economy based on several key principles. These included expanding state control over the economy, increasing government-driven demand, strengthening economic ties with allied nations, and pushing for partial industrial autarky alongside intensified import substitution efforts.
In hindsight, Russia’s economic growth shouldn’t have come as a surprise, as similar patterns have emerged in other wartime economies. For example, between 1933 and 1937, Germany’s GDP grew by around 55%, largely driven by state investment in the defence sector. A tenfold surge in military spending also led to a threefold increase in non-military consumption.
Russia’s experience mirrored this trajectory. Initially, the economy appeared to be in freefall—the ruble plunged, the stock market froze, energy exports dropped, imports declined, and foreign companies rushed to exit the country. But what followed wasn’t the collapse many expected.
The ruble quickly stabilised, supported by rising energy prices and a sharp drop in imports. The government adjusted its fiscal policies, ramping up state spending while imposing strict capital controls. After some hesitation, Western countries imposed sanctions on Russian oil at the end of 2022. Initially, this led to a drop in energy revenues in early 2023, but Moscow quickly adapted, tweaking tax laws and redirecting sales to new markets. Exports to India, for instance, surged from 0.1 to 1.9 thousand barrels per day—a nearly 20-fold increase.
Three key factors have driven Russia’s wartime economic growth. First, a sharp rise in domestic investment and consumption, fuelled by state spending. Second, tight restrictions on capital outflows. And third, the seizure of assets from foreign companies that left or scaled back their operations. Around 1,200 foreign companies have either exited Russia or reduced their presence, with 1,028 pulling out completely. The Russian government has set harsh conditions for those looking to sell their businesses—requiring a mandatory 60% discount on market value and a 35% tax on the sale.
This exodus has opened up new opportunities for Russian firms. Between 2022 and 2024, profits in the finance and insurance sectors doubled, construction profits soared by 41 times, and tourism increased by 52 times. Unlike before 2022, corporate profits and dividends can no longer be moved abroad, compelling companies to reinvest their earnings domestically.
Consumption fueled by the state
The surge in demand for military-industrial production has sparked a rapid increase in labour demand, quickly outstripping supply due to mobilisation and emigration. As a result, wages have risen sharply, propelling both consumption and savings.
In 2024, real wages grew by 9.4%, with the government forecasting a further 7% increase in 2025, though growth is expected to slow to 4% by 2027. Even with this slowdown, the figures are still double the pre-war rate. However, these projections rely on an optimistic outlook for energy revenues.
Capital controls and an investment boom
For decades, Russia’s energy and commodity windfalls were offset by a steady outflow of capital abroad. But with sanctions and domestic restrictions now locking capital within the country, investors have been compelled to find ways to grow their wealth on home soil.
Between 2022 and 2023, the number of Russians with assets exceeding 100 million rubles (around $1 million) surged by 50%, while their collective wealth grew by 62%. This starkly contrasts with early 2022, when the fortunes of Russia’s wealthy shrank by 20% amid a stock market crash and capital flight.
Until then, the Russian government had struggled to convince businesses to invest within the country rather than abroad, or to stop hoarding significant sums in reserves. At that time, companies complained about the unfavourable investment climate, state interference, and unpredictable tax policies.
Now, with foreign options off the table, Russian businesses have turned to domestic investments. In the first half of 2024, capital investments reached their highest level in 12 years.
Indicators of instability
Russian investments are now increasingly funnelling into import substitution and the military-industrial complex. Between 2022 and 2023, sectors such as arms production, military electronics, and optics saw some of the highest growth. Meanwhile, spending on healthcare, education, social welfare, and other civilian priorities has remained stagnant since 2022.
Military production now largely meets the demands of the front, with little exported abroad. In October 2024, Rostec’s CEO admitted that maintaining export volumes had become untenable, partly due to the high cost of loans.
Another driver of growth is consumption, which is rising thanks to wage increases. Companies are being forced to raise compensation in the face of record-low unemployment. In May 2024, the central bank reported a simultaneous shortage of both low- and high-skilled labour. The Ministry of Labour projects that by 2030, the worker shortfall will reach 2.4 million.
The worker shortage in Russia is driven by both increased demand and a reduced supply. Even before 2022, the country’s economically active population was declining due to demographic trends. In 2022, roughly 750,000 people left Russia, many of them highly skilled professionals in IT, finance, and management. Today, between 10,000 and 30,000 people are joining the Russian army each month.
Traditionally, Russia’s depopulation was at least partially mitigated by immigration. However, in 2023, the number of migrants dropped to a five-year low. Following the terrorist attack at Crocus Hall, the government imposed additional restrictions on those seeking to move to Russia.
What happens after the war?
Russia’s current economic structure suggests that the end of hostilities could worsen, rather than improve, the country’s economic prospects. The key issue is Russia’s growing dependence on its defence sector. Whether the war concludes with a lasting peace or a fragile ceasefire, the country will face the need for significant investment to rebuild its armed forces.
At present, the military’s needs are primarily met through Soviet-era stockpiles, not new production. These stockpiles are depleting rapidly and will require replenishment. Expert Dara Massicot estimates that this process could take at least eight years.
Historically, post-war economies tend to face several years of economic contraction and rising unemployment, regardless of whether the country emerged victorious or defeated. For instance, after World War II, Western nations struggled to create jobs for demobilized soldiers and defence workers, while also transitioning to civilian production.
Russia’s post-war path will largely depend on its policy direction. It is highly likely that the Kremlin will begin preparing for another invasion and continue its military spending. However, it’s also possible that Moscow may scale back defence production and seek to reconcile with the West. Nonetheless, sanctions will likely continue to hang over Russia for some time, and tackling the ongoing labour shortage will pose a formidable challenge.
A prolonged drop in energy prices could deal a particularly heavy blow to Russia. When combined with other factors, it could wipe out the current economic growth. As the impact of fiscal stimulus fades—whether due to diminishing returns or the government running out of funds—Russia will struggle to compensate with normal economic activity, such as exports.
In many ways, Russia seems to be repeating the issues that plagued the late Soviet Union. Just as before, Moscow is focusing its resources—both financial and human—on the defence industry, striving to keep pace in the arms race while neglecting the civilian sectors. Government policies, driven by Moscow’s long-standing imperial ambitions, are centralizing the economy, a move that hinders broader development. This is reminiscent of the early 2000s, when Russia glimpsed the possibility of normal, sustained growth—before being pulled back by its own priorities.
