KSE Institute releases its latest Russia Chartbook, “Sanctions Are Working, But No Inflection Point in Sight“, providing an in-depth analysis of the Russian economy under sanctions. While the impact of sanctions on Russia’s economy is significant, particularly on external dynamics and budget revenues, Russia is not approaching any kind of immediate tipping point that might force it to halt its war of aggression in Ukraine. Therefore, KSE Institute calls upon Ukraine’s allies to significantly step up pressure in the coming months.

The Russian economy is still being hit by international sanctions, which are having a  significant impact on exports and the budget. Oil exports are down 23% compared to H2 2022 and 46% year-over-year – and overall exports by one-third (vs. H1 and H2 2022). This has led to a sharp decline in trade balance – $54.3 billion in H1 2023 vs. $179.8 billion a year ago (-70%) – and current account surplus – $20.2 billion vs. $147.6 billion (-86%). Nonetheless, Russia continues to earn substantial revenue from oil – $425 million per day in the first half of 2023 – providing it with macro stability and financing.

As exports dropped and inflows of foreign currency declined sharply, the ruble has been hit. Russia’s currency has lost a significant portion of its value since last fall – 39% against the dollar and 47% against the euro – and now stands at around  ₽90/$ and ₽100/€. While this poses risks to price stability, it may help with the budget.

Here, the situation has improved markedly. The deficit of the federal government declined from 3.4 trillion rubles in January-April to 2.6 trillion in H1 2023, mainly due to reduced spending and an increase in non-oil and gas revenues. Due to lower financing needs, Russia’s macro buffers, most notably the National Wealth Fund, will last longer than previously expected. More broadly, Russia’s economy has proven to be resilient in the face of sanctions. In Q1 2023, real GDP was only 1.8% lower than a year ago.

While the impact of sanctions is clear, KSE Institute emphasizes the importance of tightening restrictions, especially in light of evidence for widespread violations of the G7/EU price caps. Russian companies may be able to capture oil market arbitrage through commercial relationships with third-country intermediaries. For instance, inflated transport costs related to oil exports to India are a red flag.

With no immediate inflection point in sight for the Russian economy, we underscore the need for Ukraine’s allies to ramp up pressure in the coming months – to coerce Russia to halt its war of aggression in Ukraine.