On March 1, France’s Minister of the Economy, Bruno Le Maire, had to back down on comments he made declaring “an all-out economic and financial war” against Russia. As understandable as his caution might be, one can also see why he went that far in the first place. The West’s answer not even to Putin’s invasion, but already to his recognition of the independence of Ukraine’s Donbas region came in a stronger, much more united manner than expected. Unwilling to engage directly in a war against Russia, fearing an escalation that could indeed lead to a third world war with a high risk of atomic catastrophes, the West focused on countering Russia financially and economically, and did so fiercely.

Starting with Germany’s blockage of the Nord-Stream-2 pipeline on February 22, harsher measures kept being unrolled as Putin marched deeper into Ukrainian territory. As of now, the G7 nations and the European Union have imposed personal sanctions on Vladimir Putin himself and his foreign minister Sergey Lavrov, closed their air space for Russian airplanes, banned many Russian banks from SWIFT (the only relevant organization able to facilitate international financial transactions), froze almost $500 billion worth of foreign currency reserves of the Russian Central Bank, banned exports of technological equipment to Russia and even confiscated yachts and other properties of Russian oligarchs close to Putin.

The question now is, however, not only how resilient Russia can be faced with these economic constraints, but for how long the West can keep them up. Forcing such a harsh break with the world’s 11th largest economy will be economically challenging for companies with investments in Russia and nations dependent on Russian exports of raw materials. When analyzing both sides of the dispute, much speaks to the strengths of the West, especially if united, but the question of who will prevail in this ‘economic war’ is still up for debate, not only for economic but also for political reasons.

The Russian Economy

Starting with the Russian economy: it is clear by now that Russia was not prepared to face this level of economic backlash, and the consequences will be felt hard. Shortly after the first sanctions were imposed, the shares of Russian companies listed abroad started plunging. In London’s stock market, Sberbank, Russia’s biggest lender, saw its shares fall by almost 70%, and the state-owned Gazprom, one of the world’s largest oil and gas companies, fell by 37%. The only reason why the damage was perhaps less significant was that Russian companies were suspended from trade on the Nasdaq and the Moscow stock exchange has remained closed since the beginning of the invasion. Moreover, the sanctions imposed on the Russian Central Bank cut off a large chunk of the country’s public savings available and, together with the overall climate of instability, prompted a steep fall in the ruble’s value and led to bank runs in all of Russia’s major cities. With its foreign reserves frozen, Russia’s Central Bank cannot purchase Ruble to stabilize the currency and the bank runs only add fuel to this loss of monetary control.

If that alone was not enough, dozens of companies, from oil giants such as ExxonMobil and BP to financial service providers such as Visa and Mastercard, have pulled out of investments and halted their economic activities in the country. International rating agencies were also quick to downgrade Russia’s sovereign debt, with S&P and Moody’s moving Russian credit to the “CCC-” category, a status labeled as “junk” by financial experts.

Overall, Goldman Sachs estimates a 9% fall in Russia’s GDP as a consequence of the war and the sanctions. Formerly expected to grow by 2% in 2022, Russia is now likely experience a deep recession.

Since the invasion of Crimea in 2014 and the economic sanctions imposed by the West at the time, Russia had been working to increasingly decouple itself from the West, trying to economically become what some have dubbed “fortress Russia.” From December of 2013 to December of 2021, Russia has increased its foreign reserves from US$ 510 billion to US$ 630 billion, mainly by increasing its amounts of gold, which grew from US$ 40 billion in 2013 to US$ 132 billion in 2021. Moreover, by running a current account surplus of 5% a year and having one of the world’s lowest debt to GDP ratios, at 20%, Russia put itself in a position that allows it to borrow large quantities of money without compromising its financial capabilities and reputation.

Fact is, however, that these protective measures were clearly not enough. The freezing of Russian assets in the West means that at least 50% of Russia’s reserves are now not accessible to Moscow. As they were held in government bonds of western nations, they can no longer be liquidated by Putin’s government. The Russians are claiming this constitutes nothing but default by the West, which is at least temporarily true, but the moral condemnation of Putin’s invasion is being clearly backed by financial authorities and the western economies as a whole, as the abovementioned voluntary exits of the Russian economy indicate. This means that the freezing of assets will not be interpreted by the markets as a default and will not negatively impact trust in the sanctioning nations.

Russia’s problems go further, reaching even its current abilities to liquidate its gold reserves and contract new debt, the two safety measures it tried to establish in the last years. The only big player still willing to buy Russian gold and bonds – and with it further finance the war – would be China, but even the Chinese will probably be skeptical towards doing so. As Yu-hsiang Wang analyzed here at The Paris Globalist, China has been facing a diplomatic dilemma with this crisis and will not fully embrace Putin’s plans despite its proximity to Russia.

To try to counter the consequences of the sanctions, the Russian government has already enfor