The impact of sanctions on the Russian economy

The article was prepared for the Latvian Institute of International Affairs' publication "Latvian Foreign and Security Policy. Yearbook 2026" prior to the adoption of the 19th package of sanctions. The article was first published in "Latvian Foreign and Security Policy. Yearbook 2026".

The background context

It is important to note at the very beginning that obtaining an accurate picture of Russia’s economy is hindered by the fact that Russia is using its statistical data as a tool of propaganda and hybrid warfare, which means that one can only speculate about their accuracy. Moreover, Russia periodically ceases publishing various statistics. For instance, detailed data on the foreign trade have not been available already since the onset of the war (Rosstat last updated these figures in 2022), while demographic statistics are no longer accessible after Russia discontinued their updating in the summer of 2025 without prior notice. [1] It means that Russia is waging the war not only on the battlefield but also in the realm of statistics and data to prevent an easy insight into the developments within its borders. Without detailed breakdowns of foreign trade, it has been more difficult to assess the impact of sectoral sanctions on the trade of specific goods, thus also concealing attempts to circumvent these sanctions and thereby complicating efforts to improve their effectiveness. Nevertheless, Russia still publishes certain statistical indicators, and it is equally possible to gain some insight into the trade developments from the other side, namely Russia’s trading partners, including the EU.

Overall, it is possible to conclude that following the introduction of sanctions, the EU trade with Russia has significantly decreased. Figure 1 shows that EU exports to Russia are about three times smaller than they were just before the start of the war, falling from 7.3 billion EUR in February 2022 to 2.4 billion EUR in June of this year. Meanwhile, imports of goods (Figure 2) have decreased to around 2 billion EUR per month, whereas at the beginning of 2022 they exceeded even 20 billion EUR per month (mainly due to the very high energy prices). A substantial share still consists of various oil and gas products, while imports of other goods have sharply declined.

Trade data show that sanctions are working. We do not export or import (at least directly) goods subject to sanctions. Over time, we have also managed to close the loopholes by aligning the sanction regimes for Belarus and Russia, for instance. Before this alignment, Belarus could be used to continue transporting goods to Russia (one such example was the trade in passenger vehicles, where a decline in exports to Russia was followed by a similar increase in exports to Belarus) [2]. If any trade in sanctioned goods does occur, it is most likely during a transitional period in which previously concluded contracts can still be fulfilled, or it is permitted as an exception for certain reasons. Outside of these exceptions, trade in sanctioned goods virtually does not exist.

As trade volumes with Russia have significantly decreased, the EU is engaging in a substantially more intensive trade with the countries of Central Asia and the Caucasus. Since the route to these countries often passes directly through Russia, there is a high probability that a part of these exports never actually reaches their official destination (there have also been cases where imported goods have in reality originated from Russia).

Undoubtedly, the increased exports to the Caucasus and Central Asian countries can be partially explained by the fact that these goods have in reality always been routed through Russia directly to Central Asia, but Russia was previously listed as the destination country. After the start of the war, the recipient country has been simply changed to the actual one. However, this increase is often more likely linked to the circumvention of sanctions. As shown in Figure 3, the bulk of the increased EU exports to these countries accounts precisely for the categories of goods subject to sanctions. Ultimately, the import statistics of these countries often do not show the same increase in imports as EU statistics indicate for exports to them.

Meanwhile, Latvia (in contrast to the EU) still conducts a relatively extensive trade with Russia. As we can see in Figure 4, the monetary value of goods exports to Russia has not significantly changed in recent years. However, the overwhelming majority of current exports to Russia consists of various so‑called luxury goods – product categories to which export bans apply only if the value of the goods exceeds a certain threshold. In Latvia’s case, these are most often various alcoholic beverages (most frequently re‑exports) and textile products. Latvia also continues to export pharmaceutical products, which in this case are domestically produced, and these exports are not subject to any restrictions.

As shown in Figure 5, imports reduction has been much more successful – the imports from Russia have seen a significant decrease. Latvia no longer imports natural gas from Russia since the beginning of 2023 and other petroleum gases – since the beginning of 2025. It has also rather successfully replaced Russian timber and metals with materials from other countries. This transition occurred already at the begging of the imposition of sanctions in 2022. Consequently, Russia’s revenues from the export of various resources to EU countries and Latvia have declined substantially, with trade in certain product groups ceasing altogether. Meanwhile, the examined trade data also clearly demonstrate that Russia has not yet been fully isolated, even by the EU. The trade still goes on. In some cases, one could argue that sanctions on certain product groups were introduced belatedly, since the impact of each subsequent sanctions package on trade volumes has been relatively small, and this has also given Russia time to readjust and strengthen its trade ties with other, friendlier countries.

For instance, trade volumes with Asian countries have grown significantly since the start of the war, as both exports and imports in the direction of China and India have increased substantially. Russia has multiplied its exports of various energy resources to India (as shown in Figure 6). It is worth noting that the EU has also augmented its imports from India, with imports rising considerably also in terms of refined petroleum products…

China has successfully taken advantage of the situation where Russia can no longer obtain everything it needs from the European market. As shown in Figure 7, China has significantly increased its exports to Russia, with the value of goods exports exceeding even 11 billion USD by the end of 2024. The largest growth has been in the category of various types of vehicles, while exports of machinery and electronic goods have also risen. At the same time, China has substantially increased its imports from Russia – primarily by strengthening cooperation in the energy sector, which accounts for an overwhelming majority of Russia’s exports to China.

Adding together the increase in Russia’s exports to China and India and comparing it with the decline in exports to the EU, one could argue that Russia has managed to redirect its exports, at least partially compensating for the lost trade ties with the EU. This is most evident in terms of volumes (for instance, the volumes of oil exports have not significantly decreased over time ). This trade certainly does not always proceed under conditions favourable to Russia, and overall revenues have declined, not only due to the normalization of energy prices, but also because, for instance, Russia earns less from the gas trade with China than it previously did from the trade with the EU [3]. 

Overall, we can observe that the EU currently no longer supplies Russia with the most critical goods, but it has continued to import its energy resources, albeit on a considerably smaller scale than before. Russia, in turn, has compensated for this decline through cooperation with other partners. And it is rather probable that a certain share of goods now simply takes a somewhat longer route to reach Russia through third countries. Therefore, Russia is certainly not completely isolated, not even from the EU, and has strengthened its cooperation with other countries.

Current economic outlook

As previously described, it would certainly be much easier to analyse Russia’s economic situation if Russia published its data at a detailed level. But even if such data were available, one could hardly fully trust them as Russian statistics are partly aiming to show that everything is better than it actually is, creating an illusion that sanctions are pointless and ineffective (interestingly though, this often leads to situations where one frequently hears that these “ineffective” sanctions should be lifted as soon as possible). As a result, any statistical indicators provided by Russia must be treated with a certain degree of caution.

As shown in Figure 8, Russia’s gross domestic product (GDP) in real terms has grown rapidly since 2022. Interestingly, however, the trade balance has not been published since 2022, while the other GDP components continue to be reported. Growth has mainly come from the consumption side, while the shift towards a war economy is clearly indicated by the significant increase in government consumption. Since 2022, the negative contribution to GDP growth has come from the trade balance and changes in inventories. Even though the high energy prices of 2022 allowed exports to remain very strong, sanctions may have forced faster use of inventories, with military needs rising sharply and Russia unable to procure everything it previously imported from the EU countries.

Official inflation data in Russia show an inflation of around 10% over the past year. Meanwhile, the key interest rate of the Central Bank has been as high as 21% for already a long time, and it was only reduced to 17% since the beginning of summer 2025. It is entirely possible that inflation is actually higher, but even sticking to the official figures, it is clear that the Central Bank is not capable to fully control the inflation, since the fiscal policy is working in the completely opposite direction to monetary policy – with government spending and budget deficits driving inflation upwards.

One would hope that this prolonged inflation at least partly arises from the fact that, under the impact of sanctions, Russia has to look for detours to obtain goods that were previously available from EU countries, but now must be purchased at a premium via transit through third countries. It is also possible that some goods now have to be produced domestically, and producing everything needed within a single country will always be more expensive than being able to purchase goods from other countries, as each country can specialize in a narrower sector. Autarky certainly brings fewer benefits to the economy than free trade. This is felt especially strongly in situations where there is a high need for various specific goods, such as microchips, processors and other high value‑added products, whose production requires specialized knowledge. Moreover, modern supply chains are long and complex and their redirection is difficult. Therefore, the aim to concentrate the entire production process in one place is not feasible, and doing so would only make the costs substantially higher. In addition, the final product could still be uncompetitive in the case of specific goods.

The lack of available labour force provides an additional pressure on inflation and the economy. It is no surprise that the Armed Forces demand a large share of human resources, while industry also has a great need for workers, especially under wartime conditions, when many goods can no longer be imported and must be produced domestically. On the top of all this, demographics exert further pressure. The fact that statistical data in this area are no longer published most likely point to the probability that demographic situation is not great, particularly taking into account that a large number of people left Russia when the war began. Taken together, all these factors have created conditions where the unemployment rate in 2024 was only 2.5%, [4] which is a very low level. By comparison, Latvia has maintained a 6-7% unemployment rate in recent years, which is already considered a relatively low indicator. Thus, Russia has already mobilized most of its labour force, and the shortage of workers in the future could mean even faster price increases and a general economic recession. Sanctions undoubtedly play a significant role in this downward spiral as they force Russia to produce domestically what was previously imported.

The Russian national budget has not been lately performing as well as expected either, since oil prices are now considerably lower than a year ago. [5] Stricter measures, such as restrictions on Russia’s shadow fleet and the lowering of the oil price cap, have also significantly reduced Russia’s revenues from energy exports, putting additional pressure on the fiscal situation and its ability to finance the war. As Russia is depleting its National Welfare Fund reserves, [6] it is unlikely for it to sustain this deficit for too long without borrowing, but present borrowing costs for Russia are high. Ultimately, the current arrangement cannot be maintained indefinitely, given that sanctions also restrict Russia’s development of new oil deposits.

Future development prospects and conclusions

Although Russia may be a self‑sufficient economy, autarky is by no means the most effective solution in the long term. Russia is far from being completely isolated from the rest of the world, yet the pressure of Western sanctions still has a noticeable impact on its economy. Beneath the seemingly impressive economic growth figures there lie a shortage of labour and high inflation. Russia has created a war economy and may have to make even more substantial future sacrifices just to simply continue the war.

From the European perspective, sectoral sanctions are achieving less and less results as trade volumes continue to decline. Yet even the smallest amount of money paid for Russian goods enables Russia to finance its war machine, meaning that no imports from Russia can be justified. The mild restrictions on luxury exports allow Russia’s elites to continue their lives in a relatively undisturbed manner. Latvia also exports a significant amount of such goods to Russia, including alcoholic beverages and clothing. A ban on the export of these goods could alter the lives of the wealthier population, create dissatisfaction with the current situation and perhaps even prompt attempts to change it. This could generate an even greater demand for domestic products, potentially diverting labour away from the military sector, or else leave these people deprived and discontented.

At some point, even pharmaceutical products may not be so straightforward as they seem at the first glance. On the one hand, from a humanitarian perspective, such exports should not and could not be banned, but on the other hand, these goods could just as easily serve military purposes. A shortage of medicines could change the average person’s view of what is happening, but it would be unlikely for this aspect to significantly alter the leadership’s stance on the necessity of continuing this war.

The EU sanctions cannot change the fact that Russia is, to some extent, a self‑sufficient economy and can trade with other countries, such as China and India. Yet here too Europe has work to do. It must make more efforts to cooperate with third countries and exert pressure on them to ensure that the transit through these states does not serve as a way to circumvent sanctions. It is certainly complicated to monitor the execution of this goal but not impossible. The EU sanctions regime against Russia already has a tool embedded in its legislation which is intended to be used against countries actively participating in the transit and re‑export to bypass sanctions. This tool is the Article 12f of the Council Regulation (EU) No. 833/2014 which stipulates that the goods listed in the Annex XXXIII are prohibited from being supplied or exported to the countries mentioned in the said Annex. At present, however, this Annex is completely empty, serving only as a warning signal to countries through which Russia may circumvent the EU sanctions. Still, this is one of the ways to exert a greater pressure on Russia. Moreover, it is crucial to take these decisions sooner rather than later, otherwise Russia is given more time to restructure its economy and adapt to a situation where these goods and technologies must be obtained elsewhere or produced domestically, and then, at a later stage, these sanctions may not have the intended effect. Almost symbolic restrictions yield little result and only raise questions as to why certain goods could not have been restricted earlier.

We must aim where it hurts – and it is precisely oil and gas that provide Russia with a large share of its income. It is clear that EU member states do no share a unified vision on the issue of support for stricter sanctions and for ending energy imports (Hungary and Slovakia continue importing oil and gas, while other countries purchase LNG) [7]. Such an agreement would be necessary to further hinder Russia’s ability to continue the war, and better sooner than later, since the impact of the existing sanctions is already being felt. Of course, one may hope that Russia’s economy is on the path of self-destruction, but it is unlikely for this to happen any time soon, as Russia still has its reserves. And if history has taught us anything, people in Russia will be willing to endure certain hardships, which makes it all the more important not to postpone the introduction of stricter sanctions.

[1] Russia’s demographic vanishing act: A warning from history | Russia matters. Accessed 28 September 2025.

[2] "Kā sankcijas ietekmējušas tirdzniecību ar Krieviju?” [The impact of sanctions on the trade with Russia], Macroeconomics, Figures 5-6. Accessed 28 September 2025.

[3] Tracking the Impacts of G7 & EU’s Sanctions on Russian Oil. Centre for Research on Energy and Clean Air. Accessed 28 September 2025.

[4] Russia will sell gas to China almost 30% cheaper than to Europe. Accessed 28 September 2025.

[5] “Exclusive: Russia's September Oil and Gas Budget Revenue Seen Falling 23%.” Reuters. Accessed 28 September 2025.

[6] “Falling Oil Prices Reduce Russia’s Budget Revenues.” Bank of Finland Bulletin. Accessed 28 September 2025.

[7] August 2025 — Monthly Analysis of Russian Fossil Fuel Exports and Sanctions. Centre for Research on Energy and Clean Air. Accessed 28 September 2025.