Russia invaded Ukraine almost two years ago – without the war, according to estimates by the US Treasury Department, it could have been five percent larger. VLADIMIR SMIRNOV/POOL/AFP via Getty Images
Vladimir Putin's invasion of Ukraine is approaching the two-year mark. Recently, Russia has lost economic growth as it continues to be under pressure from within and without.
Without the war in Ukraine, Russia's GDP could have been 5% higher, according to US Treasury estimates cited by the Financial Times on Thursday.
After the invasion, Moscow's political response and sanctions by the U.S. and its allies have placed its “economy under significant economic pressure,” said Rachel Lyngaas, chief sanctions economist at the Treasury Department.
The aftereffects of Putin's invasion on the economy include “soaring spending, a depreciating ruble, rising inflation and a tight labor market reflecting a loss of labor,” Lygaas wrote in a draft memo outlining the financial impact of Ukraine -War, seen by the FT.
Since the invasion last March, Russia has been under a long list of additional sanctions from the United States and the European Union, making it the most heavily sanctioned country in the world. Even under severe economic pressure, the country has spent large sums on defense – around 6% of its GDP in 2024, compared to 3.9% in 2023. By comparison, the UK spent 2.2% of its GDP in 2022 for military spending. while the US spent 3.5%.
Other concerns highlighted by the Treasury include inflation, which is almost double the central bank's target rate of 4%, and record emigration. The Russian economy is also lagging behind other energy exporters, including the United States
“Russia is now more isolated, relying on individuals and organizations willing to expand its military and continue its heinous war against Ukraine,” Lyngaas wrote.
The memo comes just as the Biden administration warned that it would need tens of billions of dollars to continue supporting Ukraine. Last week, Republicans in Congress blocked a White House request for $61 billion to help Kiev fight Russia.
Questions about the effectiveness of price caps and sanctions
Skeptics have expressed concerns about whether Western sanctions and price caps on oil and petroleum products are having the desired effect. The $60 per barrel cap set by the United States, Australia and the G7 nations was introduced last December with the aim of reducing Russia's revenues from seaborne crude exports so that oil supplies could be maintained and market stability could be maintained , while Russia is forced to sell at a steep discount. In the first nine months of 2023, oil and gas producers reported a 41% drop in income, indicating lower export volumes than originally intended.
According to the EU, the sanctions had “harsh, tangible effects” that could have long-term effects on Russia’s economy and budget. Due to the effects of the war, a decline in GDP growth is also forecast for the current year.
The Treasury Department said the cap “helped reduce Russia's export revenues by imposing significant price discounts on Russian exporters where the embargo reduced demand.”
But recently Russia has found ways to circumvent the price cap and has remained well above the $60 mark as oil prices rise. Putin also requested a ban on exports of gasoline and diesel to keep stocks high and supply the average Russian consumer as the war with Ukraine continues. Although the Russian ruble has fallen to an astonishing low this year, the economy has continued to grow.
Russian authorities, in turn, argued that the Russian economy remained robust despite economic sanctions and the additional financial burden of the war. According to state statistics agency Rosstat, Russia's GDP grew 5.5% in the third quarter compared to the same period last year, putting it on track to recover from its 2.2% GDP decline in 2022.
Putin recently praised Russia for remaining strong despite isolation from the West and transforming itself into a “growth center of the new global economy.” The Kremlin has celebrated other victories, including low unemployment and increases in average income.
Western sanctions could have a more gradual impact over time as they begin to impact Russians' everyday lives and their cost of living. The Treasury Department on Tuesday introduced a new round of sanctions targeting companies in Turkey, the United Arab Emirates and China believed to be facilitating Russia's access to technology.
U.S. Treasury Department officials did not immediately respond to Fortune's request for comment.
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