Economy

How Russia’s economy unexpectedly survived a year of war and sanctions

It didn’t take long after Russia invaded Ukraine in February 2022 for Western sanctions to come crashing down on Moscow—volley after punitive volley of economic constraints, all designed to hobble Russia and its citizens from transacting on the world market.

The Russian sanctions were the harshest and most comprehensive in nearly a century. In particular, severing Russia’s links with the international financial system was, in a globalized economy, thought to be something akin to a finishing move in a video game. How could a country so dependent on selling fuel overseas ever recover from that?

“What we’ve done to Russia over the last weeks has blown the top off sanctions,” Julia Friedlander, director of the Economic Statecraft Initiative at the Atlantic Council, told Quartz last March.

A year later, Russian troops are still in Ukraine. That, admittedly, isn’t altogether unusual; the literature shows that sanctions are almost never effective at forcing countries to change their behavior. More surprising, though, is the fact that the Russian economy has withstood wartime sanctions far better than anyone expected. In 2022, its economy shrank 2.1%—much less than the 10-15% some of the forecasts made when sanctions hit last March.

Why did the experts get it wrong? Or, in other words: How did Russia’s economy prove resilient in the face of such heavy sanctions?

Since 2014, when Russia annexed the Crimea and encountered its first round of economic restrictions, Moscow has been “sanctions-proofing its economy,” said Liam Peach, a senior economist at Capital Economics, a London-based research organization. This involved companies and banks shedding external debt, thereby reducing their reliance on Western financing. Russia’s gross external debt shrank from 41% of GDP in 2016 to 27% in 2021.

In parallel, Russia accumulated foreign exchange reserves—more than $600 billion in gold, US dollars, and other currencies, mostly earned through oil and gas exports. In 2014 also, Russia had begun developing an alternative to SWIFT, the messaging network that underpins global financial transactions.

The strategy even came with a catchy name: Fortress Russia. But analysts forecasted last March that all this sanctions-proofing would be insufficient. One asset manager predicted to the Economist: “From Fortress Russia to Rubble Russia in a week.”