Sanctions did not collapse Russia’s economy. They have, however, had a significant impact and are reshaping it. Almost four years since Russia launched its full-scale invasion of Ukraine, the debate over their effectiveness has shifted. Early expectations that sweeping financial and trade restrictions would trigger a rapid economic collapse no longer hold. Instead, the central question is whether the cumulative pressure of sanctions and war mobilisation will begin to erode Russia’s economic model.
European officials are increasingly confident that pressure is building, with some suggesting the economy may be approaching a tipping point. David O’Sullivan, the EU’s sanctions envoy, said in an interview with The Guardian that Western measures were having a “significant impact” on Russia’s economy and suggested the war-driven model could become economically unsustainable if current trends persist. The question is no longer whether sanctions work, but how and when their effects will reshape Russia’s economic choices — and whether they can ultimately deliver a decisive blow. It also raises a related question: whether that uncertainty is already influencing cautious diplomatic positioning in ongoing peace talks.
Resilience
The picture remains contested. Russia’s economy has proved far more resilient than many analysts predicted in 2022, its GDP stabilised after an initial contraction and rebounded to growth of roughly 4.1 per cent in 2023 and around 4.3 per cent in 2024, according to International Monetary Fund estimates.
Russia’s outlook is already shifting. International institutions have revised down growth projections for 2025, warning that labour shortages, high borrowing costs and the demands of a war economy will increasingly weigh on performance.
Russia stabilised its economy by rapidly shifting towards a war-focused model. Defence and security spending now dominates Russia’s federal budget, with Western defence and fiscal estimates suggesting military and related expenditure accounts for roughly a third of total government spending. Industrial output linked to arms production has expanded, helping sustain employment despite 19 rounds of EU and allied sanctions
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Structural distortions
Yet the very policies that have stabilised growth are also creating new pressures. Labour shortages are emerging as one of the most significant constraints. Military mobilisation, outward migration and demographic decline have reduced the available workforce, while defence industries offer higher wages that draw labour away from civilian sectors.
Russian labour shortages and workforce strain have been repeatedly highlighted in economic reporting, as well as international financial institution outlooks. The result is an economy increasingly sustained by state demand rather than private investment—a model that can function in the short term but is harder to maintain over longer periods.
Mounting pressure
Inflation remains high and borrowing is expensive, adding to the strain. Russia’s central bank has maintained a key interest rate of around 16 per cent in recent periods to stabilise the currency and contain inflation. While such rates are manageable within a state-directed wartime economy, they place increasing pressure on private investment and household consumption.
At the same time, the fiscal outlook is becoming more uncertain as energy revenues fluctuate. Oil and gas remain the backbone of Russia’s federal budget, historically accounting for roughly a third or more of state revenues. Sanctions and price caps have not halted exports, but they have reshaped them. Russian crude is now sold at discounted prices relative to global benchmarks, particularly to buyers such as India and China, while transport costs have risen due to reliance on a “shadow fleet”.
Sanctions as cumulative pressure
European officials argue that these pressures build over time and are biting significantly. EU foreign policy leaders have repeatedly stressed that successive sanctions packages are designed to limit Moscow’s ability to finance the war and restrict access to technology and logistics. Export controls on high-tech components have forced Russia to rely on indirect procurement through third countries, increasing complexity and cost.
None of this suggests an imminent economic collapse. Russia continues to export large volumes of energy, maintains significant fiscal buffers and has deepened trade with China and other non-Western partners. War spending itself functions as a powerful economic stimulus, supporting industrial output and employment.
Will the impact increase?
The longer-term challenge lies in whether a war-driven economy can maintain both military expenditure and domestic stability without creating deeper trade-offs. High interest rates, labour shortages and volatile energy revenues are narrowing the state’s room to manoeuvre.
Four years into the conflict, the economic contest between Russia and the West has become one of endurance. Sanctions have not delivered the rapid collapse once predicted, but they have reshaped the structure of Russia’s economy in ways that could prove increasingly difficult to sustain. The issue for 2026 is how far mounting economic pressure will further constrain the Kremlin’s room to manoeuvre and whether, at last, it will start to narrow Moscow’s options for continuing the war.
