Russia’s War Economy: Resilience, Sanctions, and the China Factor

In 2025, Russia will mark its fourth year of war in Ukraine, with the country facing escalating human and economic costs that show no signs of abating. Remarkably, the Russian economy continues to defy Western expectations of imminent collapse. Despite significant sanctions and attempts to restrict its energy industry, the Russian economy has demonstrated remarkable adaptability in the face of adversity, even showing some indications of growth. But is this truly the case, or are reports of the fragility of the Russian economy purely Western misinformation aimed at undermining the Russian government? Is there a more complex picture emerging around the Russian economy, particularly its deepening economic relationship with China?

Since the invasion of Ukraine in 2022, the Russian economy has been under intense international scrutiny as the West targeted Russia’s energy, finance, shipping, and technology sectors in an attempt to restrict its funding of the war in Ukraine. The West has imposed extensive sanctions on Russia, including freezing nearly $350 billion of Russia’s currency reserves globally and banning the import of Russian oil and gas to many countries while also sanctioning key individuals critical to Russian industry. In addition to restricting Russian exports, the West has prohibited the importation of goods into Russia and limited investment in key Russian industries such as energy and technology. The West has also strived to prevent Russia from circumventing the imposed sanctions and to stop third-country entities from assisting Russia with shipping, access to technology, and the purchase of Russian energy.

Calculating the true cost to the Russian economy from Western sanctions is a complex challenge, as the long-term economic impact encompasses both immediate effects and longer-term consequences, such as potential economic decline, reduced global investment, and diminished energy industry development. However, Western sanctions are reported to have cost Russia almost half of its foreign currency reserves globally (approximately $350 billion), nearly $20 billion in frozen assets belonging to sanctioned individuals, $38 billion in lost exports to the EU, along with EU sanctions imposed on over $200 billion of Russian state assets. One thing is certain; the Russian economy has been hit hard. But is it truly on the brink of collapse?

Despite Western predictions of a catastrophic economic collapse, the Russian economy has continued to show surprising resilience. Gross Domestic Product (GDP), the total monetary value of all goods and services produced within a country’s borders over a specific period, serves as a key indicator of economic performance. After an initial contraction of 2.1% in 2022, Russia’s GDP rebounded strongly, growing by 3.6% in 2023. In 2024, Russia’s GDP growth reached nearly 4%, a figure that surpassed many G7 countries. This growth reflects the Russian economy’s war footing, with the government spending vast amounts on military hardware production for the war in Ukraine, rather than sustained economic development.

In preparation for the war in Ukraine and its subsequent costs, Russian military spending has tripled and is now reported to account for over 40% of the Russian state budget. However, while this significant increase in government spending has been a critical driver of economic growth, it has also fueled inflation. Inflation rose sharply from 8.9% in November 2024 to 9.5% in December 2024, the highest rate since February 2023. The Central Bank of Russia has responded by raising interest rates to a post-Soviet high of 21% in October 2024.

A pivotal factor in Russia’s economic resilience has been its continued relationship with China. Russia has been developing economic ties with China for decades, but these ties have intensified since the invasion of Ukraine. In 2022, bilateral trade between Russia and China reached a record $190 billion. In 2023, this figure increased by nearly 24% to $240 billion.

The gap in Russia’s energy export market has been a major component of this increased trade. In February 2022, at the start of the war in Ukraine, Russian state-owned energy company Gazprom and the China National Petroleum Corporation (CNPC) signed an agreement to increase gas supply to China by 10 billion cubic meters (bcm), raising the annual export of gas to China to 48 bcm. Additionally, China imported 108.5 million metric tons of Russian crude oil in 2024, equivalent to approximately 2.17 million barrels per day (bpd).

China’s investment in the Northern Sea Route and Polar Silk Road, aimed at integrating these projects into its wider Belt and Road Initiative, has seen China invest nearly $10 billion in Russian energy projects in the Arctic region. The void in technology left by Western sanctions in Russia has also been filled by China. Chinese exports of electronics, vehicle parts, machinery, and technology soared in 2023 to Russia, reportedly worth $25 billion. This pattern of economic growth and partnership between the two countries highlights their mutual strategic and economic interests and their shared goal of countering Western sanctions aimed at restricting funds to the Kremlin’s war chest.

There is no doubt that China has significantly bolstered the Russian economy since the invasion of Ukraine. Russia’s economy remains on a war footing, with government spending increasing and economic policies prioritizing military production to support the war in Ukraine. However, while the Russian economy has displayed remarkable resilience despite Western sanctions, it still faces significant challenges.

Is the Western portrayal of a Russian economy on the brink of collapse an exaggeration or simply misinformation? Reports that Russia is headed for economic collapse appear overstated. This Western narrative risks underestimating the resilience and adaptability of Russia and its developing global partnerships. As Russia continues to increase trade in Asia, the Middle East, and Africa, while maintaining its considerable economic partnership with China, it will likely continue to circumvent the full impact of Western sanctions. As long as it can do this, then in the short to medium term, Russia is likely to maintain a relatively stable domestic economy. However, long-term risks remain. The continued costs of war and the likely increased expenses required to achieve significant long-term objectives will be a continuous drain on the Russian economy. Russia needs to broaden its economic base, expand trade relationships, and diversify energy exports while preserving its existing strategic alliances, particularly with China. So far, it seems to be managing this effort quite effectively. To counter this, the West must find ways to implement more robust and comprehensive sanctions that effectively target Russia's ability to sustain its economic resilience and fund its military ambitions. To date, the West is failing.....