The Economic War Against Putin Has Only Just Begun

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In the early hours of Feb. 24, 2022, Russian President Vladimir Putin invaded neighboring Ukraine and precipitated Europe’s worst crisis since World War II. In response, the US and its allies imposed waves of sanctions aimed at cutting Russia off from the global financial system, crippling its industry and depriving Putin of the revenue needed to sustain his campaign of naked aggression.

One year later, the West’s strategy has succeeded — up to a point. Russia has suffered losses in technology and talent that will impede its growth for years. Barred from trading with the West, the regime is now increasingly beholden to China. The war has left Russia weaker, poorer and more isolated. Yet Putin’s grip on power appears unshaken and his military continues to devastate Ukraine.

For all the damage his forces have sustained, Putin believes he can outlast the allies’ willingness to back Kyiv. Such an outcome would be a cataclysm for Ukraine, Europe and the world. Averting it requires Western leaders to understand the shortcomings of the sanctions imposed on Russia so far and take decisive action to strengthen them.

In the face of Western punishments, Russia’s economy has proved surprisingly resilient. There has been no sharp collapse in output: The economy contracted 2.1% last year, according to official figures, and the central bank estimates that picture may even turn marginally positive during 2023. Defying forecasts for a decline of up to 20% in capital expenditure, Russia instead saw it increase just over 5% last year, as companies spent to adapt.

How did this happen? The country was well-prepared for an initial shock, thanks to conservative fiscal and monetary policies and a trade surplus that helped build up foreign-exchange reserves. Accelerated import substitution and the economy’s shift to support the war machine are propping up industrial production. Stiff Western restrictions on oil and related products have only recently gone into effect, giving Russia time to turn east and find willing buyers in China, India and other Asian markets.

This doesn’t mean sanctions have failed. Without access to Western technology imports, Russian companies are relying on less sophisticated materials — what the central bank terms “reverse industrialization.” The economy is chronically short of manpower and talent, as hundreds of thousands have either fled the war or been drafted into it. A November study found up to a third of Russian industry may face a deficit of personnel because of the draft, the most severe crunch since 1993.

Just as ominously, the war chest the Kremlin built up is depleting. Last month’s budget deficit was the biggest in a quarter-century. The escalating costs of the war are forcing the regime to make deeper cuts and will eventually hit even social spending, making it more vulnerable to public discontent from both the top and the bottom.

The West can do more to increase the pressure.

First, the US and Europe should continue to add to the sanctions list. The EU should approve the latest package, its 10th, which would further cut off imports of goods used by Russia’s military and impose penalties on banks and media groups spreading propaganda. Restrictions on financial services should be tightened, and curbs imposed on metals and diamond exports. Next, enforce measures already in place to block access to dual-use technology and dampen hydrocarbon revenues. More assertive diplomacy is also needed to limit Russia’s ability to circumvent sanctions. Western leaders should engage India, Turkey and others who continue to do business with Russia and make clear the potential consequences of aiding the regime, including losing access to the US market.

One year on, the democratic world is still showing impressive resolve in pushing back against Putin’s assault on Ukraine. Patient, unflinching use of its greatest strategic advantage — economic power — remains necessary to defeat him.