What Sanctions Actually Did to the Russian Economy
Based on my thesis "Impact of US and EU Sanctions on the Russian Economy." The full paper, with references, is available on request.
When Russia invaded Ukraine in February 2022, the West responded with the largest coordinated sanctions program ever imposed on a major economy. Eight EU packages, dozens of US executive orders, SWIFT exclusions, a frozen central bank. Two narratives quickly emerged: one that sanctions were crushing Russia, and one that they had failed because the rouble recovered and oil revenues hit records.
Both narratives are wrong, and both are wrong for the same reason: they read a single indicator as a verdict. In my thesis I worked through the sanctions instrument by instrument, compared the outcomes against what economic theory predicts, and tried to separate what sanctions achieved from what they were supposed to achieve. This article summarizes that analysis.
A taxonomy of coercion
Not all sanctions are the same tool, and their historical track records differ sharply.
Financial sanctions restrict access to capital markets and payment infrastructure: asset freezes, transaction bans, exclusion from correspondent banking. Precedents like Iran's Bank Mellat (2012) show they can effectively sever an institution from the dollar system, at real cost to ordinary depositors.
Trade sanctions operate on flows of goods: tariffs, quotas, export controls, embargoes. History is less kind to them. The US-China trade war cut US exports to China by 26.3 percent and Chinese exports to the US by 8.5 percent, while both sides simply redirected roughly 2 to 5 percent more trade to the rest of the world. Trade reroutes; it rarely stops.
Secondary sanctions extend jurisdiction to third parties: a non-US firm dealing with a sanctioned entity risks losing access to the US financial system. They are the enforcement multiplier behind everything else, and their credibility is what keeps China and India cautious.
Targeted sanctions on individuals aim to pressure elites while sparing the population. The empirical record (Biersteker et al., 2016) finds sanctioned countries lose about 1.3 percentage points of GDP growth on average, with the cost falling disproportionately on civilians rather than on the targeted elite.
The literature converges on three findings: multilateral sanctions beat unilateral ones, targeted measures beat broad embargoes, and isolating the effect of sanctions from everything else happening in an economy is genuinely hard. Keep that last point in mind for the rouble discussion below.
Russia prepared for this war
The 2022 sanctions did not hit an unprepared economy. After Crimea in 2014, Russia spent eight years building what analysts called "Fortress Russia":
Foreign reserves grew from roughly $360 billion in 2015 to about $630 billion by early 2022, deliberately rotated away from dollars and euros.
EU share of Russian imports fell from 42 percent in 2014 to 33.5 percent in 2021, while China's share rose from 17.7 to 25 percent.
A fiscal rule and a sovereign wealth fund decoupled the budget from oil price swings.
An inflation-targeting central bank with credibility earned through the 2014 to 2015 crisis.
The fortress had two structural weaknesses that no amount of reserves could fix. First, roughly 70 percent of exports were hydrocarbons, meaning revenue depended on buyers Russia was about to antagonize. Second, Russian industry, especially high-technology manufacturing, remained deeply dependent on Western components. Reserves can substitute for lost financing. They cannot substitute for a missing semiconductor.
What theory predicted, and what happened
Standard trade theory says sanctions raise the relative price of imports, compress import volumes, depress the relative price of exports, and reduce total welfare in the target economy. Financial sanctions amplify this by raising transaction costs on everything. On these dimensions, the 2022 outcome tracked the models closely.
Imports collapsed. Estimates for April 2022 range from 50 percent (Russian officials) to 70 or 80 percent year-on-year (independent estimates), settling at roughly 35 to 40 percent below prior-year levels. WTO model analysis attributes most of the damage not to the tariffs and export controls themselves but to the increase in transaction costs from SWIFT exclusion and banking restrictions. The financial sanctions did the trade sanctions' work.
Manufacturing followed the supply chain. Sectors running just-in-time logistics on Western components stopped almost immediately. In May 2022 Rosstat recorded year-on-year output declines of 66 percent in motor vehicles, 81 percent in fibre optic cable, 77 percent in minibuses, and 50 to 63 percent across locomotives, freight cars, refrigerators, and engines. The car industry is the cleanest natural experiment: new car sales fell 82 percent, and Lada resumed production of the Granta without airbags, ABS, or air conditioning because the certified components could not be imported. By end-April, over 40,000 organizations employing almost 9 million people had reported a "change of employment mode," the Russian statistical euphemism for furlough.
Exports fell in volume but not in value. This is the part the "sanctions failed" narrative gets half right. Export volumes dropped roughly 17 to 31 percent depending on the estimate (IMF versus World Bank), and pipeline gas flows to the EU fell more than 40 percent. But prices rose enough that fossil fuel revenues in the first six months of the war reached EUR 158 billion, the highest in Russian history, with the EU itself buying about 54 percent. The sanctions coalition was, for most of 2022, simultaneously Russia's adversary and its best customer. That tradeoff was a deliberate design choice: the EU phased in the oil embargo and price cap precisely to avoid an energy price spiral, accepting that Russia's war chest would stay funded in the interim.
The financial system was hit hardest. Freezing roughly $300 billion of the central bank's reserves halved Russia's primary defensive asset in a single move. Twelve banks and counting were removed from SWIFT. The US barred its citizens from holding Russian securities, collapsing an entire emerging-market asset class. In June 2022 Russia defaulted on foreign debt for the first time since 1918, notably from an inability to transact rather than a lack of liquidity, which is itself the purest possible demonstration of what financial sanctions do.
The rouble round trip, and why it fooled people
The rouble lost nearly half its value in two weeks, then recovered to pre-war levels by May. Commentators read the recovery as proof that sanctions had failed. The exchange rate literature (Itskhoki and Mukhin, 2022) explains why that inference is invalid.
A floating exchange rate aggregates supply and demand for foreign currency. But by April 2022 the rouble was no longer floating in any meaningful sense. Three forces drove the appreciation, and none of them signals economic health:
An artificial current account surplus. Sanctions hit Russia's imports harder than its exports. Fewer imports means less demand for foreign currency, while record energy revenues kept supplying it. The surplus was a symptom of the import collapse, not a sign of strength.
Financial repression. Capital controls, strict limits on foreign currency withdrawals, and a 12 percent tax on converting roubles to dollars or euros suppressed domestic demand for foreign currency by decree.
Fiscal surplus from commodity prices. High energy revenues meant the government did not need to monetize its obligations, avoiding a monetary source of depreciation.
The much-discussed rate hike to 20 percent mattered mainly for stopping bank runs, not for the exchange rate. The correct reading of the strong rouble is that it priced a closed economy that could sell abroad but barely buy. A strong currency you are not allowed to sell is not strong.
Did the sanctions work?
The honest answer requires splitting the question into three objectives, because the sanctions scored differently on each.
Degrading economic capacity: largely achieved. GDP forecast at minus 9 percent for 2022, inflation above 22 percent, unemployment projected to double, investment access severed, more than 750 foreign companies gone, and the technological base of entire industries hollowed out. The full damage is back-loaded: firms with deep inventories were still burning through pre-war stock when I wrote the thesis, meaning the output figures understated the eventual hit.
Sparing the population while punishing elites: failed. Despite the careful carve-outs for food, agriculture, and pharmaceuticals, the incidence of the sanctions falls overwhelmingly on ordinary Russians through prices, jobs, and product availability. This replicates the standard finding in the targeted sanctions literature. The distributional aim of "smart sanctions" remains mostly aspirational.
Changing behavior: failed. The war continued and escalated. This too is consistent with history: sanctions reliably impose costs and reliably struggle to convert those costs into policy reversal, particularly against a state that spent eight years preparing to absorb them.
The forward-looking question is a race between two adjustment processes. Russia is trying to rebuild supply chains through Asia faster than its inventories, technology stock, and energy leverage deplete. My conclusion in the thesis was that the substitution is not working at the required scale: China and India lack either the production capacity or the technology to replace Western suppliers in the sectors that matter, and secondary sanctions risk keeps third countries cautious. Russia's economic survival is contingent on energy prices staying high, on rerouting supply chains faster than Western enforcement tightens, and on the coalition not extending secondary sanctions to its remaining partners. None of those three variables is under Moscow's control.
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