Russia’s invasion of Ukraine on February 24th, 2022, has triggered damaging ripple effects on the global economy. With more than 12 million people estimated to be displaced and more than 13 million people in need of humanitarian assistance, according to the World Bank Group, the war in Ukraine is causing a great humanitarian crisis. 

In the surrounding regions, a mass of refugees has put pressure on basic services, and the main global economic impact has been through the commodity markets. Prices for commodities that Russia and Ukraine supply have dramatically increased including energy, wheat, fertilizers, and some metals. Russia has the world’s largest natural gas reserves with 48,938 bcm in reserves, and it is the world’s largest exporter of gas accounting for about 45% of the European Union’s imports in 2021, according to Al Jazeera. 

Because of the limited sanctions during the 2014 Crimea annexation and a false sense of security with hundreds of billions of dollars in reserves, President Vladimir Putin believed he could ride out any economic sanctions the West fired. However, the invasion of Ukraine produced a mass unity of the European Union in their economic response. 

The first month of the war was characterized by disarray in politics and on the battlefield, according to the Foreign Policy Research Institute. Multiple Russian generals died on the battlefield, Ukrainian farmers towed away disabled Russian tanks, and many Russian oligarchs fled the country along with their assets. After initial major setbacks, Russia reoriented the army towards a concentration of forces in eastern Ukraine, drawing out the war as long as possible. 

Countries around the world condemned the move to invade Ukraine, abruptly cutting economic, business, and diplomatic ties. Over 1,000 companies – American, European, and Japanese – abandoned business operations in Russia. 

According to Fortune, “Western nations booted Russia from SWIFT—the international payments system that moves money around the world—and froze Russia’s central bank assets, barring it from accessing its $630 billion foreign reserve stash.” 

The combined economic impact on Russia caused the ruble to tank, yet recently the ruble has rebounded and is doing quite well despite the war. However, in an interview with NPR, Russian political scientist Ilya Matveev explains that the strong ruble is a bad indicator of Russian economic importance because it reflects how sharply imports have fallen. Importers no longer need so much foreign currency because they are not allowed to import goods from the European Union, the U.S., and other Western countries. Because there is no use for foreign currency in Russia as of now, this will hurt the Russian economy even more. 

Matveev explains there is rampant inflation in Russia, with yearly inflation estimated at around 20%-25%. There are shortages of goods causing prices to spike, and employment is cascading due to the closure of factories belonging to Western companies and businesses. The effects are projected to become worse in the coming months as the war continues along with harsh economic sanctions. 

Sanctions have also done great damage to Moscow’s military-industrial complex. The war in Ukraine and sanctions have limited the Kremlin’s ability to produce advanced military technology. Shortages on microchips and some high-precision equipment due to the blockade all have restricted Russia’s ability to construct more and more arms. The Russian military-industrial complex is heavily dependent on imported high technologies, especially from Germany. However, with sanctions and diminishing supply, it has proven incredibly difficult to produce modern weapons. 

Russia’s military is even losing civilian contractors due to its lack of financial compensation, according to a letter from the trade union of the civilian personnel of the Russian military in the Siberian region. The trade union complained to Russian Prime Minister Mikhail Mishustin in a letter about extremely low wages and mass layoffs. In April, a Vladivostok shipyard was supposedly unable to meet 25 billion rubles worth of government orders to build two tankers, missile boats, and maintain other vessels.

Russia has the world’s largest natural gas reserves with 48,938 bcm in reserves, as previously mentioned, and it is the world’s largest exporter of gas accounting for about 45% of the European Union’s imports in 2021, according to Al Jazeera. 24.8% of the EU’s oil imports come from Russia. Though gas exports attract more attention, Russia earns much more from its oil sales. Rystad Energy estimates that higher oil prices will generate $180 billion in oil tax revenues this year which is equivalent to 60% of Moscow’s 2022 federal budget. Many democracies have been calculating how to phase out Russian oil in a way that will not drive prices too high and crash the global economy. 

In May, EU leaders agreed to ban most Russian oil imports by the end of 2022. According to BBC, the ban will affect oil arriving by sea, but not pipeline oil, following opposition from Hungary. With Poland and Germany pledging to end pipeline imports, about 90% of Russian oil imports will be blocked, cutting off a major source of financing for Putin. 

Despite the EU’s efforts to block oil imports, Russia has reoriented its export strategy towards Asia – notably China and India which have large, rapidly growing economies. Though, the Asian markets do have limits. According to The Washington Post, oil has a finite pipeline capacity in the region, and oil tankers must make long journeys to deliver loads. This will eventually take a great financial toll on the Kremlin. 

Senior analyst Daria Melnik at Rystad Energy stated that Russia’s production by 2030 will be 2 million barrels a day lower than before the war due to permanent damage from closing down production in wells that cannot be restored. 

Though Russia benefits now from high prices of oil – and in turn tax revenues – pivoting exports to Asia will take massive infrastructure investments that will make Russia’s production and revenues drop immensely in the medium term.