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Russia’s War on Ukraine: The Economic Impact of Sanctions
Impact on Russia’s Economy
late March (Figure 2). The central bank subsequently
Across a range of metrics, Russia’s economy is worse off
lowered interest rates slightly and somewhat relaxed capital
than it was before Russia expanded its invasion of Ukraine
controls.
in February 2022. The International Monetary Fund (IMF)
Russia’s financial stability is precarious. The ruble would
projects that in 2022 Russia’s economy will contract by
almost certainly depreciate further if interest rates and
8.5%, inflation will reach 24%, and unemployment will
capital controls were further relaxed, and Russia has
double to 9.6% (Figure 1). The new sanctions imposed by
defaulted on some of its debt for the first time since the
the United States, the European Union (EU), the United
1917 Bolshevik Revolution. The Russian government is
Kingdom (UK), Canada, Australia, Japan, and others are
trying to boost demand for its currency by demanding
unprecedented in terms of scope, coordination, and speed,
payment for natural gas exports in rubles (with unclear
and appear to be the overarching source of economic
exemptions), and Russia suspended gas supplies to Poland
pressure on Russia. Other factors—including economic
and Bulgaria after they refused.
disruptions from the war and the pandemic—also are
creating challenges. The Russian government has
Figure 2. Fluctuations in the Value of the Ruble
implemented a number of policies to mitigate the impact of
sanctions, and Russia’s energy exports—so far largely
exempt from international sanctions—remain a major
source of revenue.
Figure 1. IMF Forecasts for Russia
Source: Created by CRS using data from the Wall Street Journal.
Real Economy
Sanctions have disrupted Russia’s real economy—the
production, purchase, and flow of goods. The volume of
Russia’s trade has contracted sharply (Russia’s imports by
volume are forecast to fall by nearly 25% in 2022), and
more than 750 international companies have curtailed
operations in or with Russia. Many international companies
have limited business with Russia beyond what is required
legally by sanctions, most likely due to concerns about the
prospect for future sanctions, threats of asset seizure by
Russia, and reputational costs of continuing business in
Source: Created by CRS from IMF World Economic Outlook Data.
Russia.
Financial Sector
Several Russian factories reportedly have suspended
Some of the most significant sanctions—those targeting the
central bank and Russia’s participation in
production because they cannot access the necessary
the Society for
foreign parts and supplies. Russian companies cannot
Worldwide Interbank Financial Telecommunications
access essential goods and services (such as computer
(SWIFT) financial messaging system—created an
software or audits by major western accounting firms), and
immediate crisis in Russia’s financial sector. The sanctions
Russian consumers cannot access popular international
triggered runs on Russian banks, capital flight, and a 60%
products (including many western luxury items). Some
depreciation of the ruble in less than two weeks (Figure 2).
foreign firms are major employers in Russia, and their exit
The Russian central bank responded quickly by imposing
is a shock to Russia’s labor market. Moscow’s mayor
capital controls, doubling interest rates, and providing
estimates that 200,000 people in the city are at risk of losing
emergency liquidity support to banks. The government
their jobs as international companies exit.
closed the stock market for a month and announced no new
The Russian government has enacted a number of policies
government borrowing through the end of the year. These
to support domestic economic activity, as well as retaliate
policy actions stemmed capital flight and restored some
against sanctions. It has banned the export of more than 200
stability. The ruble rebounded, reaching pre-war levels by
types of goods through the end of the year, established
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Russia’s War on Ukraine: The Economic Impact of Sanctions
financial support mechanisms for some affected workers,
this year by 0.5% to 2.5%, according to most estimates. (By
and instituted price controls. Reportedly, the government is
comparison, Ukraine’s finance minister predicts that its
considering nationalizing the assets of foreign companies
GDP will contract by 40% in 2022.) Efforts to diversify
exiting Russia.
energy sources are underway, but will take time.
Russia’s Main Defense: Energy Exports
In addition to energy exemptions, the sanctions also include
Russia’s main economic lifeline continues to be its energy
exemptions to minimize humanitarian costs. For example,
exports, particularly to Europe. High energy prices and
the sanctions exempt agricultural trade, because the war has
sharp contraction in imports have created historically high
disrupted global grain and fertilizer markets, increasing
current account surpluses in Russia. The Institute of
concerns about global food insecurity.
International Finance (IIF) estimates that (absent significant
The sanctions on Russia are multilateral but not global, and
new sanctions on Russian energy) Russia’s current account
Russia may seek deeper economic relationships with
surplus could exceed $250 billion this year, allowing the
countries outside the sanctions coalition, including Brazil,
government to replenish frozen central bank assets (around
China, Mexico, Saudi Arabia, and the United Arab
$300 billion).
Emirates, among others. It is unclear that Russia will be
Economic Impact Outside of Russia
able to circumvent obstacles to cross-border payments
created by the sanctions, or whether countries outside the
Although sanctions are a foreign policy tool deployed in
sanctions coalition are willing to risk potential fallout with
several contexts, the coordinated sanctions on Russia are
the United States, the EU, and others by increasing
particularly significant due to the size of Russia’s
economic engagement with Russia.
economy—before the war, the 11th largest in the world—
and Russia’s integration in the global economy. In addition
Impact on the Structure of the Global Economy?
to oil and natural gas, Russia has been a key global supplier
The new sanctions responding to Russia’s aggression could
of several metals (titanium, aluminum, and nickel),
have lasting effects on the structure of the global economy.
chemical gases used in semiconductor production, wheat,
The sanctions could create (or deepen) fractures in the
and fertilizers, among other commodities. Many
global economy, resulting in disparate economic blocs and
international firms had also established factories, joint
schisms that could undermine the international rules-based
ventures, and retail operations in Russia, and face losses as
economic order that the United States has prioritized since
they exit the Russian market.
World War II. On the other hand, a coalition of like-minded
economies, led by the United States and Europe, could
U.S. Economy
create opportunities for significant new economic
The United States has never had a substantial economic
agreements that have largely stalled in the World Trade
relationship with Russia. For example, Russia (and the
Organization (WTO) over the past quarter of a century.
USSR prior to 1992) has accounted for less than 2.25% of
annual U.S. exports and imports since World War II.
Sanctions could also accelerate efforts by various countries,
However, sanctions may have significant effects on specific
particularly China, to reduce their reliance on the U.S.
U.S. companies and sectors engaged with Russia. For
dollar in international transactions, and Western cross-
example, there may be concerns about the exposure of
border payments infrastructure more generally. The freeze
particular U.S. financial institutions to Russia, the
of Russia’s central bank assets, in particular, could make
availability of raw materials from markets outside of
countries reconsider their holdings of and use of the dollar.
Russia, and the competitiveness of U.S. firms. The main
There is some evidence that central banks are shifting out of
impact on the U.S. economy to date has been higher gas
U.S. dollar-denominated assets. If de-dollarization efforts
prices, exacerbating inflation concerns in the United States.
gain traction on a broader scale, there would likely be
implications for the U.S. economy and foreign policy.
Global Economy
Policy Questions for Congress
Sanctions that isolate Russia are a shock to the global
economy, which was still struggling to recover from the
Does international economic pressure influence
COVID-19 pandemic. The sanctions have likely
decisionmaking in Russia?
contributed to disruptions in global supply chains, higher
Under what conditions should sanctions be tightened,
global commodity prices, and a slowdown in global
maintained (status quo), eased, or lifted?
economic growth. The IMF forecasts that global economic
Should the United States seek to restrict Russia’s access
growth will slow from 6.1% in 2021 to 3.6% in 2022, but it
to proceeds of energy exports, such as through escrow
is difficult to assess the effect of sanctions separate from
accounts held outside of Russia?
other contemporaneous factors, including the war or
Should the U.S. government support U.S. firms and
COVID-19 related supply disruptions in China.
allies adversely affected by sanctions?
Within the coalition imposing sanctions, the EU has been
How should the United States respond if countries
Russia’s strongest economic partner and faces the greatest
outside the sanctions coalition increase economic
potential economic disruption. Europe remains heavily
engagement with Russia?
dependent on energy imports from Russia, especially
Can the United States credibly assure other countries
natural gas, and current EU sanctions on Russia include
that their U.S.-based central bank assets will remain
certain energy-related exemptions. The EU is considering
accessible during foreign policy disagreements?
new sanctions on Russian oil imports, but Germany, in
particular, is reluctant to implement a full energy embargo,
Rebecca M. Nelson, Specialist in International Trade and
including on natural gas, which could reduce German GDP
Finance
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Russia’s War on Ukraine: The Economic Impact of Sanctions
IF12092
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