How Russia's Economy Has Survived Putin’s War

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We've witnessed a historic shift that has changed the world order. This was the first time a U.S. president had spoken with Vladimir Putin since the invasion of 2022. That phone call between U.S. President Donald Trump and Russian leader Vladimir Putin shifted global alliances.

From the very beginning of the war:

"You're not in a good position. You don't have the cards right now. With us, you start having cards."

"I'm not playing cards."

"Right now, you don't—you're playing cards. You're gambling with the lives of millions of people."

"You're gambling with World War III."

Relations between Trump and Ukrainian President Volodymyr Zelensky have deteriorated since then. Many believe that Cold War-style military spending is inevitable, leading to competition for resources. Even with a ceasefire on the table, U.S. military support for Ukraine and Europe is no longer assured. This uncertainty makes Europe's ability to contain Russia far less certain.

However, what is clear is that over a decade of sanctions has not worked. Russia’s economy has weathered the war and sanctions far better than many Western analysts predicted. Despite the G7 imposing some of the harshest measures, they have failed to deter Russia. From the Kremlin’s point of view, the economy is not the primary concern. Putin remains focused on achieving his goals in Ukraine and confronting the West.

How Has Russia’s Economy Survived the War?

Russia’s economy relies on two major factors. The first is the export of energy products such as oil and natural gas. The second is the military-industrial complex, which has become the most dynamic sector of the Russian economy. The Russian government has injected massive sums into the economy, both to support defense production and to aid businesses affected by international sanctions.

The military is now competing with the civilian sector for labor, with industries having to raise salaries to retain workers. This has driven demand to a level the economy cannot easily meet, leading to overheating. Overheating, in turn, causes inflation, which spiked in 2022. Although capital controls and interest rates temporarily managed it, inflation has been rising again since mid-2023. As a result, the Russian Central Bank has had to maintain a tight monetary policy, with interest rates now close to 21%.

Such high interest rates make it difficult for private, non-defense-affiliated corporations to conduct business. Despite these challenges, Russia still has significant fiscal space. Government spending has not led to substantial debt, as federal revenue has remained relatively stable. The deficit is currently under 3%.

The Role of Energy in Russia’s Economy

Oil and gas remain vital to Russia’s economy. The country produces approximately 10.4 million barrels of oil per day, making it the third-largest producer behind the U.S. and Saudi Arabia. The Russian government profits from taxing oil sales and revenues and receives dividends as a major stakeholder in key energy corporations.

While the global stability of oil prices and supply is a priority, it is also a vulnerability for Russia. Sanctions have restricted Russian oil sales above a price cap of $60 per barrel. When the war began, sanctions targeted both Russian oil producers and financial institutions. However, they were designed to allow Russia to continue producing oil to prevent a global energy price shock.

There were concerns that stricter sanctions on Russian oil would cause gas prices in the U.S. to rise. The global oil market remains tight, meaning no immediate supply can replace Russia’s exports. Another limitation of sanctions is that oil, as the world’s most traded commodity, is highly fungible. It can be resold and traded through various channels, allowing Russia to bypass restrictions.

Just days before leaving office, President Joe Biden imposed sweeping sanctions on Russia’s shadow fleet of tankers, which transport oil outside Western restrictions. He also sanctioned major Russian oil producers such as Surgutneftegas and Gazprom Neft. Critics, however, argued that these measures were too little, too late.

Russia’s Shift to Asian Markets

Along with oil, Russia has the world’s largest natural gas reserves. In 2021, the European Union imported nearly half of its gas from Russia, with Norway supplying about a quarter and the U.S. just 6%. By 2023, Russia’s share had dropped to 15%, as Norway and the U.S. filled the gap. While Russia lost its primary gas market in Europe, it continued earning billions from oil sales to other regions.

China, already a major importer of Russian energy and minerals before 2022, has significantly increased its imports. India, which previously sourced just 1% of its oil from Russia, now imports between 35% and 40%. The Chinese yuan has become the dominant currency for Russian trade, with Russian businesses and citizens even using it for household savings.

China has also been a crucial supplier of semiconductors and microelectronics, essential for Russia’s precision-guided weaponry used against Ukraine. If India and China had followed Western sanctions, Russia would have struggled far more to sustain its war effort. However, Russia’s reliance on these Asian trading partners creates vulnerabilities.

Economic Pressures and the Path Ahead

Russia’s tight monetary policy, coupled with new U.S. sanctions imposed at the start of 2024, has created conditions that could lead to a Russian recession. Inflation, labor shortages, and rising prices for basic goods like butter and potatoes have started to affect ordinary Russians.

Western officials estimate that Russian casualties have reached approximately 800,000 killed or wounded since 2022—an enormous loss for any country. Historically, dominant military nations tend to retreat when domestic public pressure builds against prolonged conflict. However, measuring Russian public opinion is difficult due to the state’s control over information.

As an authoritarian state, Russia restricts political freedoms, with hundreds of political prisoners and severe penalties for dissent. This level of control allows Putin to sustain the war effort despite economic difficulties. Currently, Russia holds the military advantage on the battlefield, giving it little reason to retreat.

A Crossroads for Europe and Ukraine

While Russia faces economic pressures, it is Europe that stands at a crossroads. The outlook for Ukraine remains dire. The cost of rebuilding Ukraine is estimated to exceed $1 trillion. For decades, the U.S. has been the guarantor of peace and stability in Europe, making the stakes incredibly high.

No one wants to increase military spending, but this is the new reality. The war in Ukraine is the largest conflict in Europe since World War II. Russia is actively redrawing the borders of a neighboring state—a country that once gave up its nuclear weapons in exchange for security guarantees from Britain, the U.S., and Russia, promises that have since proved empty.

This moment will define the global order in the 21st century. The question is whether the world will be governed by international laws and rules or by raw power and the willingness to use force.