How the Russian economy is faring as new sanctions hit 

The European Union, along with the United Kingdom, imposed a new sanctions package on Tuesday that targets Russia.

The sanctions come after Russia refused to enter a 30-day ceasefire with Ukraine, while also not making enough progress in negotiations following Monday’s phone call between US President Donald Trump and Russian President Vladimir Putin. 

The sanctions mostly target Russia’s covert oil exports and are meant to pressure Putin toward peace talks. Russia’s economy, so far, has withstood Western sanctions, yet it’s not immune from economic pressure.

EU foreign policy chief Kaja Kallas spoke about the new sanctions on Tuesday in Brussels.

“Instead of seeking peace, Russia is still playing games and Russia has escalated its attacks,” she said. “The only option is to put more pressure on Russia to negotiate seriously.” 

In the US, the Trump administration has taken a different approach. On Monday, a reporter asked Trump why he hasn’t increased sanctions on Russia.

“Well, because I think there’s a chance of getting something done, and if you do that, you can also make it much worse. But there could be a time when that’s going to happen,” Trump responded. 

After Trump’s phone call with Putin, many of Ukraine’s supporters criticized the US for being soft on the Kremlin and for losing leverage in negotiations by offering concessions without applying extra pressure.

On Tuesday, during a hearing before the Senate Committee on Foreign Relations, Secretary of State Marco Rubio defended Trump’s negotiating tactics.

“Not one sanction has been lifted on the Russians. Every single sanction that was in place under the previous administration remains in place. So, this idea we’ve given up leverage, we have the same leverage today we had under the previous administration.”

But Russia has been targeted with robust sanctions since 2014. So, what can additional sanctions achieve?

Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security (CNAS), said that one of the keys to answering that question is understanding the state of Russia’s economy.

“Russia’s economy has been stagnating, has been weakening and the fiscal deficits have been growing. The costs of war are racking up. Oil prices are down year on year, so Russia’s revenues have been declining.”

Ziemba said that, for years, Russia has attempted to diversify its economy, however, the war in Ukraine changed the Kremlin’s priorities.

“This has become a war economy. The consolidation of the economy around the government, around the military, continues to grow. And that means that the private sector, sources of revenue for the government, this is all contracting.”

Elina Ribakova, a senior nonresident fellow at the Peterson Institute in Washington, said that Russia’s reliance on the military industrial complex introduces new economic risk. 

“Everybody used to say, Russia is like a gas station, an oil rig, right? So, it’s a gas station and an oil rig that is now producing tanks,” Ribakova said. “So, the only thing that’s showing signs of life is the military industrial complex, and we are expecting the Russian economy to continue to decelerate, the growth to continue to be weaker and weaker, and potentially going into a recession this year.”

Ribakova said that the saving grace for Russia’s economy are its natural resources.

“Russia is endowed with important natural resources that we’re all still willing to consume. That’s oil, gas, fertilizers, metals and mining, rare earth materials, and it takes an outstanding amount of mismanagement and stupidity, to be able not to benefit from these resources.”

So, when it comes to sanctions, Ribakova said, there’s a limit for what they can accomplish.

“The expectation that sanctions will change regimes, bring back unicorns and do many other things, that is absolutely unrealistic and was very unrealistic from the beginning,” she said. “What sanctions can do, they can make some things more costly, and therefore, sort of, throw sand in the wheels of the Russian military industrial complex, the militarized economy.”

But despite the tough talk, Ziemba of CNAS said, the EU has been unwilling to fully cut off Russian oil and gas imports.

“The West decided that the world couldn’t do without Russia’s oil in the near term, and their focus was to pay them less for those resources rather than to choke them off in total, so that means that the sanctions pressure as a result isn’t complete.”

In 2022, G7 countries set a price cap on Russian crude oil at $60 a barrel. The idea was to cut into Russia’s oil revenues while keeping it on the market.

Russia has also built up a “shadow fleet” of oil tankers that continues to export Russian oil across the globe — undermining the price cap.

The most-recent EU sanctions target some of the vessels in Russia’s shadow fleet, but Ribakova said that’s not enough.

“Russia finds new circumvention ways, and then Europeans realize that they need to sanction more companies, go after the shadow fleet. So, to stay in place, you need to keep on running.” 

In recent days, Ukraine has called on the G7 to lower the oil price cap and enforce it. For now, the Trump administration has threatened the use of sanctions, but it’s yet to show a willingness to follow through on those threats.