Russia's Economy Faces Severe Strain Amid Ongoing Ukraine Conflict

Russia's Economic Challenges Deepen Amid Prolonged Conflict As the war in Ukraine persists, Russia is facing increasing economic pressure, according to remarks from noted economist Torbjörn Becker. After briefing European finance ministers in Brussels, Becker highlighted the struggles of Russia's economy under the weight of Western sanctions, which he indicated may be hindering President Putin's capacity to continue military operations. Becker, who directs the Stockholm Institute of Transition Economics, pointed out that if Russia were to be victorious in its conflict, European Union (EU) nations might need to drastically increase their defense budgets by two to three times the current levels for several years. This statement underscores the geopolitical repercussions that may emerge should Russia alter the balance of power in the region. The economist elaborated on the condition of Russia’s financial landscape, stating that it is not fully balanced and faces escalating risks. “Russia’s financial system, their macroeconomic performance, is under pressure. It’s not in balance. Risks are mounting. But it doesn’t mean that we can sit back and relax,” Becker remarked to reporters, emphasizing the urgency of the situation. During the briefing, the EU’s Polish presidency noted that gathering accurate insights into Russia's economy was crucial for refining sanctions aimed at undermining its capabilities. Becker explained to the finance ministers that while Russia's economy composes around 12% of the combined GDP of the world’s leading trading bloc, it heavily relies on oil and gas revenues and the importation of high-tech goods necessary for supporting its military endeavors. Despite the negative forecasts, he acknowledged that Russia's economic situation has been more robust than expected. Increased military spending has driven economic growth and maintained low unemployment rates, even as it contributed to rising inflation. Notably, wages have adjusted accordingly, and many workers are reportedly better off as a result. Additionally, lucrative recruitment bonuses for military personnel, along with financial benefits for the families of soldiers killed in action, have supplemented incomes in less affluent regions of the country. However, the long-term outlook for Russia’s economy is overshadowed by inflation and a diminishing flow of foreign investments. The crucial question remains: how long can the militarized economy sustain itself against these challenges, particularly in contrast to Ukraine and its Western allies? In an effort to escalate economic pressure on Russia, EU diplomats have proposed new sanctions targeting the maritime vessels in Russia’s “shadow fleet,” which aim to circumvent the price cap of $60 per barrel imposed by the Group of 7 democracies. These sanctions may also include measures to freeze assets associated with the Nord Stream II gas pipeline, a project currently inactive but seen as a potential investment risk. These actions could take effect as early as Thursday. Becker stated, “If we can lower oil prices and gas revenues and put tighter sanctions on what they can import, that’s great,” and remarked on the role of U.S. President Donald Trump in encouraging China and India to consider the implications of their trade connections with Russia. In light of the EU's near-total ban on Russian oil, the country has sought new markets, particularly in India and China, which continue to be significant sources of revenue from oil and gas exports. Becker also advised on measures to impact Russia’s banking system by limiting international transactions, suggesting that “if something ruins an economy pretty quickly, it’s a banking crisis.” According to a recent report from Becker's institute, Russia's oil revenues saw a sharp decline in early 2025 due to intensified sanctions targeting its maritime operations, leading to a depletion of its sovereign wealth fund. This financial reserve is now estimated to constitute less than 3% of Russia’s GDP. "If oil prices stay as they are, they will certainly run out of these funds in a year," Becker concluded, exacerbating concerns about the sustainability of Russia’s economic strategy.