By: Aditi Sharma, Research Analyst, GSDN
Beginning on February 24, 2022, the conflict between Russia and Ukraine swiftly altered the course of European history. The fiercest conflict the continent had witnessed since World War II began as a full-scale invasion. Millions of Ukrainians had to flee, leaving everything behind, while thousands of people had been killed and entire cities destroyed.
The roots of this war go back to 2014 when Russia took Crimea and fighting started in Donbas. That set the stage for what exploded in 2022. After the invasion Western countries brought in sanctions that were described as the harshest in history. The war also forced millions of Ukrainians to run to other countries, while the United Nations counted thousands of civilian deaths. As time went on Russia still kept around one fifth of Ukraine’s land and the costs, human and economic and political, spread not just in Europe but also around the wider world.
The West was swift. Perhaps the most severe sanctions ever applied to a major state were imposed on Russia by the US, the EU, and its allies. In order to isolate Russia from the global monetary system, they sought to destabilise its economy. According to numerous early reports, Russia was supposed to fall apart in a few of months. At first, it appeared likely since markets were in disarray and the currency was declining, but Moscow intervened swiftly and somehow kept the economy intact.
Impact of Western Sanctions on Russia’s Economy
After the invasion, Russia’s financial system, technology sector, oil exports, military industries and even well-known figures quickly became the focus of Western sanctions. A broad coalition of the US, the EU, the UK, Japan and others introduced over 18,000 measures. These created sweeping limits on trade, investment and financial transactions. Major Russian banks were cut off from the SWIFT system, which made cross border transfers very difficult. At the same time imports of modern electronics and semiconductors, vital for defence and manufacturing, were heavily restricted.
The impact came fast. Inflation shot up as imported goods vanished from stores. The ruble lost more than half its value. Ordinary Russians rushed to turn their savings into hard currency, pushing capital out of the country. Western firms pulled back in huge numbers, some selling their assets at heavy losses while others simply walked away. To contain the shock, the Central Bank raised interest rates sharply and imposed tight capital controls. Exporters were ordered to exchange much of their foreign income into rubles. These moves, combined with fiscal support from the government, calmed markets and stopped a full panic in the currency and banking system.
Still, the war has exposed Russia’s deep economic weaknesses. The country depends too much on selling natural resources abroad, and now faces shortages of both funds and workers. Long term investment programs needed for growth are being stalled by the fighting. If sanctions continue, especially those aimed at advanced technology for mining and arms, rebuilding the economy will become even harder. In that case Moscow may find itself forced to channel more and more of its resources into militarisation instead of development.
Russia’s rapid economic progress is mostly driven by its war expenditures rather than continuous output. Meanwhile, the Central Bank has struggled to keep inflation under control as a result of increased salaries. Food costs are growing and business operations are becoming less profitable, which is placing pressure on both citizens and industrialists. Russia may be slowly heading towards stagflation, a dangerous confluence of high inflation and economic stagnation, according to some observers, rather than just surviving.
Following the implementation of extraordinary economic sanctions, restricted capital flows and significant state engagement, the Russian economy is increasingly dominated by extremely atypical commercial ties with the rest of the world. Russia’s economy is undergoing a considerable economic reorganisation, and the distribution of wealth and income across its many population groups is changing significantly.
The Russian economy has adjusted and important industries have discovered methods to obtain the components and items they require from other vendors or through more devious trade routes. Production was not permanently halted by logistical issues and Russia’s foreign exchange profits are currently on pace with those of the years prior to the conflict. The economy has undergone significant restructuring in order to accommodate the demands of the military. The manufacturing of military products has increased, encompassing both more sophisticated technologies like Il-76 cargo planes and unmanned aerial vehicles (UAVs) as well as more basic things like artillery ammunition.
However, there are still serious underlying vulnerabilities. Russia’s economy is heavily reliant on energy exports, which leaves it vulnerable to regulations and shifting demand worldwide. Nowadays, a large portion of Russia’s GDP growth is driven by war expenditures rather than profitable investments. Living standards have been weakened by inflation driven by growing wages, labour shortages, and logistical stress while the cost of food and consumer items has increased by double digits. Despite the significant contraction of the civilian sectors, high defence spending created the illusion of growth by distorting macroeconomic metrics.
The civilian sector is deteriorating due to persistent underemployment and high credit rates and a large portion of economic activity is shifting towards military-industrial production, according to analysts who warn of stagnation. Independent reports reveal notable recessionary trends concealed by short-term fiscal stimulus, while official statistics have become less open, making it challenging for outsiders to evaluate actual conditions. Russia’s current course is unsustainable, and the resilience mentioned in official reports may be exaggerated, the Stockholm Institute of Transition Economics warned.
Energy Exports as a Lifeline
Russia’s enormous energy reserves are the foundation of its capacity to resist sanctions. For a long time, natural gas and oil have supported government activities and kept the ruble stable, serving as the foundation of the Russian budget. Russia shifted a large portion of its natural gas and crude exports from Europe to Asia, particularly to China and India, following the implementation of G7 price ceilings and Western sanctions. Despite efforts to impose a price restriction, Russia’s energy sales generated tens of billions of dollars in 2023 and 2024. According to analyses by the BBC and Al Jazeera, oil exports to India have increased to around US$ 140 billion since the beginning of the war, while China acquired more than 100 million tonnes of Russian crude in 2024.
Russia has implemented alternate payment methods, such as settlements in Indian rupees and Chinese yuan and increased the use of a “shadow fleet” vessels that operate outside of official channels in order to get around Western prohibitions. Because of this, Russian oil has been able to reach international markets even as Western regulations on energy infrastructure and insurance have become more stringent.
In the first seven months of 2025, Russia’s crude oil exports increased by 64% year over year, with the Jamnagar refinery in India alone buying 18.3 million tonnes of Russian crude. By utilising creative strategies like converting payment settlements into local currencies and taking use of LNG’s adaptability, which permitted exports to the EU to continue even as pipeline volumes decreased, Russia is continuing to adjust to global dynamics. Energy analysts noted that full enforcement could have cut Russia’s export earnings by about 28% in June 2025, while the price of Urals crude actually climbed above the G7 cap. Even so, Russia pulled in close to US$ 235 billion from oil and gas in 2024, supported by steady export flows, workaround shipping methods and alternative payment deals. How long this can continue is uncertain as stricter controls and global price swings keep shifting the ground.
Still, such a heavy reliance on oil exports brings real risks of its own. Some sectors already lost about half their revenue, and earnings could easily fall further during periods of oversupply or shifts in international politics. Analysts caution that if this level of reliance continues, and if investment at home and progress in technology keep falling behind, Russia’s long-term development may be seriously undermined.
Pivot to Asian and Non-Western Markets
Because of sanctions, Russia had to rethink where it trades. Europe was mostly closed off, so Moscow started looking harder at Asia, Turkey, the Gulf states and parts of Africa too. By 2023, the trade between China, India and Russia was reported at about US$ 452 billion. Out of that, China alone bought close to US$ 129 billion, mostly fuel and raw materials. Turkey and a few others stepped in as well, selling Russia things it suddenly could not buy from the West and helping with shipping routes that were cut off.
Settlements are now happening more often in yuan and rupees, which has given Russia some breathing space from US dollar pressure. That shift ties in with its long-running talk of “de-dollarization,” even if in practice it only partly works. To back this up, Russia leans more on groupings like BRICS or the Eurasian Economic Union (EAEU). They are not perfect replacements for Western markets, but they do offer at least some space for trade and maybe technology.
After the first slump right after the invasion, Chinese exports to Russia bounced back in a big way. Cars, electronics, heavy machinery, all of it began flowing again. By 2022 and especially 2023 the trade levels were actually higher than before, despite Western pressure. Russian officials keep pointing to this rebound as proof that sanctions are not working. For them, this partnership is not just a shield, it is also a story they use to show that Russia still has friends and options.
Domestic Economic Adaptations
Russia increased import substitution and support for indigenous production in response to supply chain disruptions and a declining number of international partners. In an effort to lessen reliance on imported components and technology, state-driven investments have focused on industries ranging from food processing and agricultural to automotive and aerospace. Between 2022 and 2023, the proportion of imported inputs from sanctioning nations decreased by about half, a significant reorganisation made possible by forced innovation and regulatory improvements.
With increased spending in R&D particularly for dual-use civilian and military technology, technological self-reliance has become state policy. The military-industrial sector had a boom throughout the war producing more artillery, aeroplanes, drones, and transport vehicles to support activities on the battlefield.
Grey markets and parallel imports which accounted for $20 billion in imports in 2022 alone and helped sustain retail inventories and some industrial supplies, were officially legalised as short-term ways to get over Western regulations. As domestic industry grows stronger, Russia has recently tightened regulations on parallel imports reducing their scope. The government demonstrated a long-term commitment to this policy by allocating 27.6 billion rubles for the aerospace sector’s maximum import substitution for 2025–2027.
Socio-Economic Pressures and Challenges
Behind the official talk of resilience, daily life in Russia is getting harder. Inflation climbed to nearly 10% a year, pushed up by higher wages, labour shortages and constant war spending. Prices of basic food and household items jumped in double digits. Borrowing also got more costly when the Central Bank raised rates to try and keep inflation down. Both ordinary people and policymakers worry that the economy may slide into stagflation, that mix of high prices with weak growth.
The labour crunch has only deepened. Mobilisation, battlefield deaths, and the flight of young professionals have left serious gaps. By 2024 businesses were hiring more retirees and even teenagers just to keep running. Births fell to a record low while deaths went up. Estimates suggest close to a million people left the country in the year after the invasion, many of them young and skilled, which only makes it harder for Russia to innovate or grow in the long term.
At the same time inequality has widened. Wealthy elites, thanks to government contracts and the takeover of assets left by Western firms, managed to protect or even expand their fortunes. The middle class instead faces shrinking incomes and more uncertainty. Official media keeps stressing nationalism and stability, which does help maintain some public morale. But surveys show that as costs keep rising, more Russians are quietly doubtful about the future.
Conclusion
The war with Ukraine has a significant impact on Russia’s economic policy, even though it is not totally subservient to the continuing military action. Due to the oligarchic system, corruption, delays in state investment programs, lack of reform, and years of reliance on hydrocarbon sales for state funding, the war has also made Russia’s structural economic issues worse.
In addition to attempting to maintain its war effort by controlling internal imbalances, Russia is stepping up its communication campaigns to present the country’s economy as robust in spite of sanctions. However, is Russia’s economy really as robust as its authorities say, or are growing problems starting to seriously threaten the government?
While Russia’s adaptation has forestalled outright collapse enabled by the reorientation toward Asia, legalization of parallel imports, aggressive import substitution, and fiscal stimulus, these are measures of survival, not transformative growth. Resilience may be real in the short term, but as Western sanctions tighten, military spending strains the budget, and brain drain divests the future fundamental problems increasingly threaten Russia’s long-term prosperity and stability.
About the Author
Aditi Sharma has recently completed her Master’s in Geopolitics and International Relations, from Manipal Academy of Higher Education, building a strong academic foundation in global affairs. She has previously interned at the Vivekananda International Foundation and is passionate about International Relations, Geopolitics, and Media and Journalism. Her core interests lie in Indian National Security, Defence, Counterterrorism, and West Asian Studies. She is committed to continuous learning and aims to contribute meaningfully to public and academic discourse.
