Russia's economy collapses under sanctions: Putin's conundrum of truth

Russia's economy collapses under sanctions: Putin's conundrum of truth

The Russian economy is currently under enormous pressure, especially since the start of the Ukraine war. While President Vladimir Putin tries to tell the world that the Russian economy is stable and resilient, the actual numbers paint a worrying picture. According to a report by the Stockholm Institute of Transition Economics (SITE), the situation of the Russian economy is much more critical than the government portrays. Since the start of the war, European states have imposed extensive sanctions aimed at weakening Russia's economic base and increasing pressure on the Kremlin. A total of 16 sanctions packages have been adopted by the EU, and a 17th package is already in preparation to ensure that Russia does not continue to make profits from energy exports.

The sanctions particularly target Russia's main sources of income, oil, gas and coal exports. However, these measures do not seem to be as effective as expected, as Russia continues to sell energy resources despite the embargo - mainly to countries such as China and India. A significant portion of Russian oil enters Europe through foreign tankers, indicating a shadow fleet. Last year, Russia also achieved record sales of liquefied natural gas (LNG) to the EU, which brought an additional eight billion euros to the state treasury. However, the planned import bans for LNG are not due to come into force until 2027, which is currently benefiting the Russian economy.

Economic stability or illusion?

Despite short-term economic growth of around three percent, the prosperity of the population in Russia remains stagnant. The increase in gross domestic product does not equate to improved quality of life. Rather, government spending on social areas, education and health is falling, while funding for the military and war spending is increasing. SITE's Torbjørn Becker has found that Russia's actual budget deficits are likely twice the officially reported two percent of gross domestic product (GDP).

Analysts also warn of structural weaknesses in the Russian economy that point to long-term problems. The high inflation rate, which is officially at 9-10 percent, is viewed by experts as unreliable. In January 2025, inflation was already 9.9 percent, raising significant concerns. The financial sanctions have made it more difficult for Russia to borrow on the international financial market, driving up prices further and exacerbating the already tense economic situation.

Effects of international isolation

International isolation and strict financial sanctions mean that the Russian economy is not only losing innovation, but is also having difficulty finding qualified workers. Shortages of electronic components and software are commonplace, while companies are under great pressure due to the war economy. Russia's economic focus is heavily on the Ukraine war and the associated state investments in defense. However, these investments are not sustainable and critically depend on the progress of the war.

The decision in Istanbul, where crucial discussions about possible peace negotiations are taking place, could bring a ray of hope. The EU Commission has also signaled that it wants to further restrict the Kremlin's ability to continue the war in Ukraine. However, Trump's planned negotiations with Putin over a ceasefire could undermine the previous sanctions strategy and jeopardize the international effort to reduce Russia's influence in the region.