Even if sanctions are eased, Russia's economy will be strained

While some indicators are positive, others are troubling. The arrival of Donald Trump in the White House has given the Kremlin a political boost, and lifting sanctions will help, but it is no panacea.

A currency exchange shop in Moscow displays the Russian ruble to dollar exchange rate on November 27, 2024.
AFP
A currency exchange shop in Moscow displays the Russian ruble to dollar exchange rate on November 27, 2024.

Even if sanctions are eased, Russia's economy will be strained

In February, Russian Prime Minister Mikhail Mishustin had a televised 1:1 meeting with President Vladimir Putin. In it, he told his boss that the Russian economy had “successfully dealt with the unprecedented pressures related to the sanctions, in contrast to many of the countries that actually imposed them”.

Putin’s stilted, formal, televised meeting with senior government officials is par for the course in Russia, the contents having first been vetted by the Kremlin before broadcast, lest the populace hear bad news. From Mishustin, the news was mainly good.

Mishustin said Russia’s gross domestic product (GDP) had grown by 4.1% in 2024, or 0.2% above expectations, and that Rosstat, the Federal State Statistical Service, had now revised its economic data for 2023. “Our GDP growth in 2023 was not 3.6% as originally reported, but in fact 4.1%,” he said, explaining that the correction was prompted partly by the subsequent publication of companies’ annual reports.

The Trump effect

Russia’s economic growth has been stimulated by state spending on defence, given its problems in Ukraine. Late last year, it even appeared close to overheating, but Donald Trump’s return to the White House—and his efforts to re-engage Russia—have been a cause for optimism in Moscow.

SAUL LOEB / AFP
(COMBO) US President Donald Trump and Ukraine's President Volodymyr Zelensky meet in the Oval Office of the White House in Washington, DC, February 28, 2025.

Trump speaks to Putin regularly, his administration avoids blaming Russia for the war in Ukraine, together with US Vice-President JD Vance he gave Ukrainian President Volodymyr Zelenskyy a public dressing down in Washington, and his team talks of ending sanctions against Russia for its invasion. It is therefore little wonder that the Russian stock market is up 11.1% since January, when Trump took office.

Although the Russian ruble dropped briefly to 113 US dollars in the new year, it has since recovered to around 85 dollars at the time of writing. Unemployment in Russia was only 2.5% for most of 2024, according to official Rosstat figures, dropping to 2.3% in March 2025, as Mishustin said incomes had increased by 8.4% and real wages by 8.7% last year.

How Europe reacts

Despite Europe’s divestment from Russian energy, it is far from weaned. The annual State of the EU Energy Union report showed that Russia is still Europe’s second-largest supplier of liquid natural gas, covering 18% of the continent’s needs.

The Centre for Research on Energy and Clean Air (CREA) published data recently suggesting that the European Union bought more than $205bn of Russian fossil fuels since the full-scale invasion was launched in February 2022. This may have been behind Trump’s comments to the US Congress that “Europe has sadly spent more money buying Russian oil and gas than they have spent on defending Ukraine, by far”.

Russia is still Europe's second-largest supplier of liquid natural gas, covering 18% of the continent's needs

Trump's offer to ease sanctions on Russia is a carrot he can dangle to push Moscow into a ceasefire during negotiations hosted by Saudi Arabia. Yet even if American sanctions ease, this may not boost the Russian economy, at least in the short-term. Prior to the sanctions, the US accounted for just 3.6% of Russia's total exports, and was the source of just 5.9% of Russia's imports.

Most of the impact will depend on Europe, where most leaders still want to keep (and even tighten) the sanctions. Europe was the source of around 40% of Russia's pre-2022 imports, including major components in key industries. For example, S7 Airlines in Russia grounded 31 of its 39 Airbus A320s at the end of 2024 owing to a lack of spare parts.

Meanwhile, global prices for metals and coal have dropped, causing real losses for key Russian industries. More than 500,000 Russians are employed in mines and refineries. Financial losses in this sector would be bad news in Russian provinces, potentially threatening popular discontent. 

European companies hold the key to any possible return of Western companies to Russia. On 6 March, French President Emmanuel Macron called Russia a "threat to Europe". With Trump having pulled US support for Ukraine, France and the UK have stepped up. This could be bad news for Russia's economy.

@EmmanuelMacron
European leaders gather at the Palais de l'Élysée in Paris to discuss a coordinated European response to US President Donald Trump's policies toward the continent and the war in Ukraine.

Deeper problems

While the Russian economy has proven resilient in the face of sanctions so far, 2025 poses a series of major problems for the country. Inflation jumped above 10% in February, the highest it has been for two years. Pension increases and state-subsidised loans have also contributed to the inflation rate. Prices of staples like butter, eggs, and vegetables are now putting real pressure on some households.

Seeking to combat this, the Central Bank has kept interest rates at 21%, one of the highest rates in the world. Meanwhile, the Kremlin is reportedly set to spend more than 40% of its 2025 budget on defence. 

A more long-term worry is the shortage of talent in the country. In the weeks and months after the invasion in February 2022, around 900,000 largely young, professional Russians left the country, to avoid conscription. 

Around half a million who chose to stay have been drafted into the war effort. High wages are paid to those who agree to fight in Ukraine, but those high wages are expected to pose problems in the medium- and long-term, if those fighters then need to find other jobs after the fighting ends. 

Prior to the sanctions, the US accounted for just 3.6% of Russia's total exports, and was the source of just 5.9% of Russia's imports

Russian media report that three quarters of all industries have labour shortages, with around 1.6 million jobs currently unfilled. This will impact the economic outlook. Mishustin was candid with Putin: the economy would slow in 2025.

Correction needed

Writing for The Moscow Times, Alexandra Prokopenko at the Carnegie Russia Eurasia Centre said: "Over the past two years, Russia's economy has operated like a marathon runner on fiscal steroids, that are now wearing off". Momentum may falter "within a year" without a correction, she said. 

Despite the Trump bounce, there is no cheering from the Kremlin, where officials know that the country's economic problems are serious and that sanctions relief from the US will not be a cure-all. Elina Ribakova at the Peterson Institute for International Economics, is among those who think the US companies that divested will not rush back to Russia, which is no longer the big oil market player it once was.

The US has significantly boosted production to change the situation, and even though Trump appears to like Putin, he will not want to give up this pole position, so Mishustin and Putin have every reason to remain cautious. They will know that a ceasefire with Ukraine may not come with a lifting of all sanctions. In the meantime, the Kremlin will struggle to keep its economy from fraying at the seams.

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