“I’ve been absolutely clear with President Putin…he has no misunderstanding: Any, any assembled Russian units move across the Ukrainian border, that is an invasion [and would be met with] severe and coordinated economic response.”
—U.S. President Joseph Biden, January 20, 2022.[1]

In the lead-up to the February 24, 2022 invasion of Ukraine, Western nations threatened Russia with severe economic sanctions, export controls, and other punitive economic measures if it proceeded with an invasion. These threats were ignored. Over a year into the invasion, Russia’s economy and war-fighting capabilities are hurting. Punitive economic measures by the West have shut Russia out of the global economy and challenged its ability to profit from oil sales, import critical technology, and finance its war effort.

Russia has also been embarrassed on the battlefield and diplomatically shunned by most of the world’s leading nations. These frayed commercial partnerships and political outcasting have altered Russia’s future and likely relegated it to a third-rate power posturing behind the shadow of its once powerful empire. This is certainly not the outcome President Vladimir Putin envisioned on the eve of invasion.[2] How did he get it so wrong?

Below I explore Russia’s three logical—but incorrect—assessments about the war that led it to disregard the economic threats against it. I also explore what Russia’s aggression in the face of economic threats means about the effectiveness and utility of economic deterrence as a foreign policy tool.[3]

Russia’s Incorrect Assessments

Among the many incorrect assessments Russia made about the war was underestimating the resistance it would face from Ukrainian armed forces, underestimating the impact of the West’s punitive economic measures on the Russian economy, and overestimating its own leverage in preventing the West from interfering in its attempted conquest of Ukraine.

Length of War

Russian military strategists believed Ukraine was militarily weak and Russian armed forces would quickly overrun them, much as they had done in their 2014 invasion of Crimea.[4] Putin counted on a quick takeover that would avoid prolonged war expenses and minimize the possibility of a collective military counteraction from the West.

In the year after its invasion of Ukraine, Russia’s assessment proved wholly wrong. Ukrainian and Russian forces are now at a virtual standstill with many observers expecting a sustained and lengthy war.[5] Its military has made minimal territorial gains against capable Ukrainian forces bolstered by Western security assistance and funding.[6]

The apparent culmination of conflict, which is ongoing as of this writing, has incentivized the West to continue punitive economic measures against Russia. These measures targeted Russia’s defense-related industries, including the electronics, automotive, and aerospace industries, cutting them off from essential imports used in conventional and advanced Russian weapons.[7] The Kremlin turned to inferior replacements from Iran, North Korea, and China.[8] By forcing the use of low-grade components, these attacks on Russia’s military supply chains have compounded the apparent downward spiral in Russia’s combat performance.[9]  These measures have also created a significant strain on Russia’s fiscal circumstances, as they must now pay for an expensive war of attrition with declining revenues.

Scope and Impact of Economic Measures

Russia’s second incorrect assessment was underestimating the scope and impact of Western punitive economic measures on its economy and war effort.

Russia was on the receiving end of Western economic sanctions after its 2014 invasion of Crimea. However, these sanctions were generally limited to non-critical industries because Russian oil was sufficiently important to the West as a stabilizer of global crude oil prices and European markets.[10]

Eight years later, Russia—still convinced of its irreplaceable centrality at the center of European oil markets—expected a similar global response in the leadup to its invasion of Ukraine. It further hedged its bets by seeking closer trading partnerships with China, Turkey, and India, and by creating a Russian-led alternative to SWIFT—the global payment communication system used in international trade.[11]

However, these efforts to shield its economy were insufficient to protect against the unified efforts of the Western powers given the prolonged and indefinite nature of the war.[12] 

States in the Western coalition imposed a series of cascading punitive economic measures against Russia less than 24 hours into the invasion. These measures included sanctioning almost 80 percent of Russian industries and their third-party facilitators, freezing Russian foreign assets and price capping Russian oil.[13]

Sanctions and price caps on Russia’s oil industry have been particularly painful for Russia.[14] The oil and gas sector makes up about 20 percent of Russia’s GDP and revenue from these accounts for almost 45 percent of its federal budget.[15] Over half of Russian oil is exported, with Europe responsible for over 60 percent of these purchases.[16] A year into the invasion, Russian energy sales are down almost 45 percent from the same period a year earlier, despite sharp increases in global oil prices.[17] Many other export-reliant Russian industries have likewise suffered, and the Russian economy contracted by over three percent in 2022.[18]

Russia has struggled to avoid the West’s punitive economic measures. Economic sanctions limit Russia’s ability to do business internationally, take out loans, and attract global investment. International firms do not want to run afoul of Western sanctions or accept payment in a restricted and unstable Russian currency.[19] 

Furthermore, the loss of the European market presents a severe economic challenge: While Russia’s partnerships with friendly non-Western countries have helped buoy its economy in the short-term, Europe is too large and important a commercial market to be replaced for any meaningful period of time.[20] China, India, and Turkey—the largest friendly markets now available—have their own established sources of energy imports and are unlikely to decouple these entirely.[21] Moreover, as Russia’s global business partners dwindle, so too does its leverage to negotiate prices. It has already had to offer significant concessions and discounts for its oil, often doing so at unprofitable amounts.[22] The Russian economy will remain dependent on selling its oil to a global market that is now smaller and less competitive.

Europe’s Reliance on Russian Gas

Russia’s third incorrect assessment was believing that Europe would hesitate to oppose it because of Europe’s reliance on Russian gas, much as it had after Russia’s annexation of Crimea in 2014. Gas is used for heating homes and buildings and is particularly important during the winter months. With Russia providing almost half of Europe’s gas imports prior to the invasion, Europe could ill afford to lose this critical supply—or so the reasoning went.[23]

But European states have been able to wean themselves off Russian gas by gradually substituting it with liquified natural gas brought in by sea from the U.S. and Qatar.[24] While liquified natural gas is generally more expensive than pipeline-based natural gas owing to its higher production and transportation costs, it presented Europe with a viable supply alternative. 

Europe also benefited from 2022’s warm winter, reducing the demand for gas and minimizing the physical suffering of European residents who might have otherwise pressured their leaders into caving to Russian demands.[25]

Freedom from Russian supply chain dependency allowed Europe to participate fully in the global backlash to Russia’s aggression. The closure of its vast market to Russian oil stripped Russia of a significant revenue stream that is not easily replaced and removed a source of funding for its war effort.

Punitive Economic Measures Are Working

Despite the severe economic measures taken against it, Russia’s economy has not collapsed. In fact, it is forecasted to grow in 2023, driven by favorable revenue from high global oil prices. Above all, Russia’s ability and willingness to wage war rages on.

Some critics point to this as evidence that punitive economic measures are not effective at causing real harm.[26] However, these accusations are incomplete as they fail to recognize that the effects of punitive economic measures on a country’s economy take time to materialize.[27] Regardless of its short-term durability, the Russian economy is projected to lose approximately $190 billion in GDP—or an 8 percent decline—by 2026 relative to its pre-war projections.[28] The loss of high-end technology imports, foreign capital investment, leading multinational corporations, and talented professionals will likely limit Russia’s ability to keep pace in the global economy in the present decade and likely longer.

While the acquisition of territory in Ukraine would serve as a physical buffer for Russia against supposed NATO encroachment, its economic benefits will hardly improve Russia’s financial position. The estimated economic loss for Russia within the initial three years post-invasion alone exceeds the value of the entire Ukrainian economy.[29]

Russia’s actions have rendered it politically and economically isolated, with few friends, limited commercial and financial markets, substandard supply chains, and an economy overleveraged on a single industry.[30] Russia is a nation that is, at best, economically handicapped and, at worst, in steady economic and power decline.[31]

U.S. Senator John McCain once called Russia “a gas station masquerading as a country.”[32] Today, it is worse than that. The gas station is losing money and selling to fewer customers.

So Does Economic Deterrence Work? It Depends.

Putin and Russia’s disregard for the global economic threats challenge previously held assumptions about the utility of economic deterrence as a practical foreign policy tool. Economic threats failed to dissuade Russia from using aggression, and the result is a world that is now less interconnected, less safe, and less prosperous.

But deterrence is only effective if an adversary correctly assesses the severity and credibility of those who threaten it. An adversary must believe that the actor is willing to follow through on its threats and that the resultant harm would exceed the expected benefits of non-compliance. Putin—guided by logical but incorrect assessments—neither believed those who threatened Russia were willing to act or that they could cause any real harm. These proved costly miscalculations.

However, miscalculations of this magnitude on the global stage are not routine. Every nation is driven by the rational needs of survival and prosperity, and these can seldom be met without complete inclusion into today’s global economy. Open access to international trade and global supply chains are powerful motivators that nations will rarely risk. This is in many ways evidenced by the significant decline in state wars since the era of globalization.

Economic deterrence, thus, remains an effective—though not foolproof—foreign policy tool. Russia’s disregard for economic deterrence and its subsequent economic decline and international exile serves as an example of the risk of defiance and hostility.

Jerry Garzon is a graduate student in the Security Studies Program at the Georgetown University School of Foreign Service. His academic interests include the study of international economics and U.S. national security policy.

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Header Image: Russian Money, Moscow, Russia 2022 (Vardan Papikyan).

Notes:

[1] Holland, Steve. "Biden Says Any Russian Movement into Ukraine Will Be Considered Invasion." Reuters. January 20, 2022. https://www.reuters.com/world/europe/biden-says-any-russian-movement-into-ukraine-will-be-considered-invasion-2022-01-20.

[2] Lieven, Anatol. "For Years, Putin Didn’t Invade Ukraine. What Made Him Finally Snap in 2022?" The Guardian. February 23, 2023. https://www.theguardian.com/commentisfree/2023/feb/24/vladimir-putin-invade-ukraine-2022-russia.

[3] Schott, Jeffrey J. "Biden Says Any Russian Movement into Ukraine Will Be Considered Invasion." Peterson Institute for International Economics. February 1, 2022. https://www.piie.com/blogs/realtime-economic-issues-watch/will-tough-us-sanctions-deter-russian-aggression-ukraine.

[4] Cancian, Mark F. "Putin’s Invasion Was Immoral but Not Irrational." Center for Strategic & International Studies. May 10, 2022. https://www.csis.org/analysis/putins-invasion-was-immoral-not-irrational.

[5] Wilson, Peter A., and William Courtney. "How the War in Ukraine Could End Sooner Than Expected." The RAND Blog. RAND Corporation, January 7, 2023. https://www.rand.org/blog/2023/01/how-the-war-in-ukraine-could-end-sooner-than-expected.html.

[6] Landay, Johnathon. "Ukrainians Celebrate Soldiers Retaking Kherson, Russia's Latest Defeat." Reuters. November 11, 2022. https://www.reuters.com/world/europe/us-urges-ukraine-be-open-talks-with-russia-washington-post-2022-11-06/.

[7] "The Impact of Sanctions and Export Controls on the Russian Federation." U.S. Department of State. October 20, 2022. https://www.state.gov/the-impact-of-sanctions-and-export-controls-on-the-russian-federation/.

[8] Barnes, Julian E. "Russia Is Buying North Korean Artillery, According to U.S. Intelligence." The New York Times. September 5, 2022. https://www.nytimes.com/2022/09/05/us/politics/russia-north-korea-artillery.html.

[9] O'Toole, Brian, and Daniel Fried. "Sanctions Alone Won’t Defeat Russia in Ukraine. But They’re Having a Bigger Impact than It Might Seem." Atlantic Council. February 23, 2023. https://www.atlanticcouncil.org/blogs/new-atlanticist/sanctions-alone-wont-defeat-russia-in-ukraine-but-theyre-having-a-bigger-impact-than-it-might-seem/.

[10] Hanousek, Jan, and Matěj Bělín. "Making Sanctions Bite: The EU–Russian Sanctions of 2014." Center of Economic Policy Research. April 29, 2019. https://cepr.org/voxeu/columns/making-sanctions-bite-eu-russian-sanctions-2014.

[11] Some Russian banks and companies were kicked out of SWIFT in 2014 after Russia’s invasion of Crimea; "Russia and Iran Launch Payment System as an Alternative to Swift." Middle East Eye. January 30, 2023. https://www.middleeasteye.net/news/russia-and-iran-launch-payment-system-alternative-swift; Gamino, Lazaro, and Ana Swanson. "​​How Russia Pays for War." The New York Times. October 30, 2022. https://www.nytimes.com/interactive/2022/10/30/business/economy/russia-trade-ukraine-war.html; McElwee, Lily, Maria Snegovaya, Alexandra Chopenko, and Tina Dolbaia. "​​How Russia Pays for War." Center for Strategic & International Studies. March 28, 2023. https://www.csis.org/analysis/xi-goes-moscow-marriage-inconvenience.

[12] "EU Sanctions against Russia Explained." Council of the European Union. March 15, 2023. https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-against-russia-over-ukraine/sanctions-against-russia-explained/.; "FACT SHEET: United States, G7 and EU Impose Severe and Immediate Costs on Russia." The White House. April 6, 2022. https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/06/fact-sheet-united-states-g7-and-eu-impose-severe-and-immediate-costs-on-russia/.

[13] "Targeting Key Sectors, Evasion Efforts, and Military Supplies, Treasury Expands and Intensifies Sanctions Against Russia." U.S. Department of the Treasury. February 24, 2023. https://home.treasury.gov/news/press-releases/jy1296; Gilman, Azure. "Russia’s Economy Is on Track to Lose $190 Billion as Putin’s Invasion of Ukraine Becomes a Slow Motion Financial Crisis." Fortune. February 17, 2023. https://fortune.com/2023/02/17/economy-economy-losing-190-billion-putin-ukraine-invasion/; "UK and Coalition Partners Announce Price Caps on Russian Oil Products." Government of the United Kingdom. February 3, 2023. https://www.gov.uk/government/news/uk-and-coalition-partners-announce-price-caps-on-russian-oil-products

[14] "FACT SHEET: Disrupting and Degrading – One Year of U.S. Sanctions on Russia and Its Enablers." U.S. Department of the Treasury. February 24, 2023. https://home.treasury.gov/news/press-releases/jy1298.

[15] Other sources listed this as 40 percent of Russia’s economy in 2018: "Russia’s Economy Is Becoming Heavily Dependent on Hydrocarbons." Warsaw Institute. February 24, 2020. https://warsawinstitute.org/russias-economy-becoming-heavily-dependent-hydrocarbons/; "Share of the Oil and Gas Industry in the Gross Domestic Product (GDP) of Russia from 1st Quarter 2017 to 3rd Quarter 2022." Statista. March 23, 2023. https://www.statista.com/statistics/1322102/gdp-share-oil-gas-sector-russia/; https://www.iea.org/articles/energy-fact-sheet-why-does-russian-oil-and-gas-matter

[16] "Energy Fact Sheet: Why Does Russian Oil and Gas Matter?" International Energy Agency. March 21, 2022. https://www.iea.org/articles/energy-fact-sheet-why-does-russian-oil-and-gas-matter; "Oil Market and Russian Supply." International Energy Agency. February 2, 2022. https://www.iea.org/reports/russian-supplies-to-glbal-energy-markets/oil-market-and-russian-supply-2.

[17] Korsunskaya, Darya, and Jake Cordell. "Western Sanctions Push Russia's Energy Revenues to Lowest since 2020." Reuters. February 3, 2023. https://www.reuters.com/business/energy/western-sanctions-push-russias-energy-revenues-lowest-level-since-2020-2023-02-03/.

[18] For instance, Russia’s automobile industry, a multi-billion USD export-reliant industry employing millions of Russian workers, has suffered an estimated 97 percent loss of its value by the end of 2022 since the war’s start: "Russia's Car Manufacturing Collapses by 97% in May." The Moscow Times. June 30, 2022. https://www.themoscowtimes.com/2022/06/30/russias-car-manufacturing-collapses-by-97-in-may-a78151; "Infographic - Impact of Sanctions on the Russian Economy." Council of the European Union. March 17, 2023. https://www.consilium.europa.eu/en/infographics/impact-sanctions-russian-economy/.

[19] The Russian Ruble has remained stable because of various capital controls placed on it by the Russian Central Bank, many of which are unsustainable and which create inflationary pressures within the economy: McCabe, Caitlin. "Russia’s Economy Is Tanking but the Ruble Soared. Here’s Why." The Wall Street Journal. May 26, 2022. https://www.wsj.com/articles/russias-economy-is-tankingbut-the-ruble-is-soaring-11653559916.

[20] For example, Russia has increased the transport of natural gas to China through the Power of Siberia pipeline, among many other projects: Rosen, Phil. "Explainer: Does China Need More Russian Gas via the Power-of-Siberia 2 Pipeline?" Reuters. March 2, 2023. https://www.reuters.com/business/energy/does-china-need-more-russian-gas-via-power-of-siberia-2-pipeline-2023-03-22.

[21] China, for instance, only imported 15 percent of its petroleum and 10 percent of its natural gas from Russia in 2022, with the remaining needs being met by the Middle East and other nearby regions: "China: Executive Summary." Energy International Agency. August 8, 2022. https://www.eia.gov/international/analysis/country/CHN.

[22] Rosen, Phil. "Russia Is Offering to Discount Its Oil by as Much as 30% for Asian Buyers as the G7 Pushes Its Price Cap." Business Insider. August 24, 2022. https://markets.businessinsider.com/news/commodities/russian-oil-discount-asia-buyers-price-cap-sanctions-china-india-2022-8.

[23] "How Europe Can Cut Natural Gas Imports from Russia Significantly within a Year." International Energy Agency. March 3, 2022. https://www.iea.org/news/how-europe-can-cut-natural-gas-imports-from-russia-significantly-within-a-year.

[24] Horton, Jake, and Daniele Palumbo. "Russia Sanctions: What Impact Have They Had on Its Oil and Gas Exports?" BBC News. January 26, 2023. https://www.bbc.com/news/58888451.

[25] Reed, Stanley. "Why Natural Gas Prices in Europe Are Suddenly Plunging." The New York Times. November 10, 2022. https://www.nytimes.com/2022/10/25/business/europe-gas-prices-winter.html.

[26] Only the International Money Fund forecasts an increase in Russia’s GDP. Two other major global finance organizations predict a further contraction of up to 5 percent in 2023; Much of Russia’s oil revenue in 2022 occurred prior to the implementation of a price cap, as well as through sanctions evasions by Russian firms through temporary financial loopholes and capital restrictions and foreign reserve sales by Russia’s Central Bank.

[27] Snegovaya, Maria, Tina Dolbaia, Nick Fenton, and Max Bergmann. "Russia Sanctions at One Year." Center for Strategic & International Studies. February 23, 2023. https://www.csis.org/analysis/russia-sanctions-one-year.

[28] Gilman, Azure. "Russia’s Economy Is on Track to Lose $190 Billion as Putin’s Invasion of Ukraine Becomes a Slow Motion Financial Crisis." Fortune. February 17, 2023. https://fortune.com/2023/02/17/economy-economy-losing-190-billion-putin-ukraine-invasion/.

[29] Russia is expected to lose $190 billion by 2026. The GDP of Ukraine in 2021 was $200 billion.; Williams, Michael J. "How Putin’s Fear of Democracy Convinced Him to Invade Ukraine." Atlantic Council. March 6, 2023. https://www.atlanticcouncil.org/blogs/ukrainealert/how-putins-fear-of-democracy-convinced-him-to-invade-ukraine/.

[30] O'Toole, Brian, and Daniel Fried. "Sanctions Alone Won’t Defeat Russia in Ukraine. But They’re Having a Bigger Impact than It Might Seem." Atlantic Council. February 23, 2023. https://www.atlanticcouncil.org/blogs/new-atlanticist/sanctions-alone-wont-defeat-russia-in-ukraine-but-theyre-having-a-bigger-impact-than-it-might-seem/.; Sonnenfeld, Jeffrey, and Steven Tian. "Actually, the Russian Economy Is Imploding." Foreign Policy. August 1, 2022. https://foreignpolicy.com/2022/07/22/russia-economy-sanctions-myths-ruble-business/.

[31] Snegovaya, Maria, Tina Dolbaia, Nick Fenton, and Max Bergmann. "Russia Sanctions at One Year." Center for Strategic & International Studies. February 23, 2023. https://www.csis.org/analysis/russia-sanctions-one-year.

[32] Everett, Burgess. "McCain: Russia Is a ‘Gas Station’." Politico. March 26, 2014. https://www.politico.com/story/2014/03/john-mccain-russia-gas-station-105061.