We are facing exceptional uncertainty and risks. Any analysis of the economic impact of the Russian war against Ukraine on the EU and the European economy is fundamentally contingent on how the war unfolds over the coming days, weeks, and months. So, this post is a first rough attempt to break down the direct and indirect channels through which the war – and the economic sanctions imposed by the West – will affect the Russian and European economies.

International economic sanctions on Russia

In the week since the start of the Russian invasion in Ukraine, the European Union, the United States, the United Kingdom, and several other countries have launched economic sanctions on Russia.

As of today, they include:

  • Individual sanctions on Vladimir Putin and on organizations and persons connected to the regime and the Russian war effort, with the aim of prohibiting trade and freezing (and sometimes seizing) their foreign assets;
  • Banning the export of energy refining technology and products and services related to the Airspace and transport sector;
  • Prohibiting the trade of Russian sovereign bonds and excluding Russian banks from SWIFT, the international payment messaging service;
  • And, most importantly, sanctions on the Russian Central Bank and its assets held abroad.

At the time of writing, additional sanctions on additional Russian banks and, crucially, stopping all European imports of Russian oil and gas are on policymakers’ tables in Berlin, Brussels, and beyond. An up-to-date overview of the latest sanctions can be found on the European Commission’s website.

Economic implications for Russia

We don’t know how much Putin cares about the immediate economic effects and considers them when making decisions in his ongoing invasion (probably very little). We also cannot judge right now how well the so-called Fortress Russia will hold. Over the past years, the government in Moscow has purportedly re-directed production capacities and has built buffers into the Russian economy. This has been done with the aim of decreasing its economic, financial, and technology dependency on the West (and the US-Dollar) and withstanding a longer period of sanctions as well as de-coupling Russia from international financial and trade flows. It was reported that before the war, Russia’s foreign exchange reserves were at a staggering 630 bn USD and could finance two years’ worth of imports (i.e., maintain import volumes even if it were to stop receiving revenues from exports).

Having said that, we can see the first effects of the unprecedented economic sanctions biting the Russian economy:

  • The value of many internationally listed Russian companies has plummeted so that on March 3, the London Stock Exchange announced that it had suspended trading in a number of Russian companies, including Gazprom and the country’s second-biggest lender Sberbank;
  • The Russian currency, the ruble, has lost considerable value over the past days, and the Russian government has forced companies to convert foreign currency they still receive from commodity exports into ruble;
  • And with the sanctioning of the Central Bank, Russia’s access to foreign reserves has been cut by an estimated 40%. This probably came as a surprise to Putin. The Russian government has to rely mainly on its gold reserves that are more difficult to transfer abroad and on its foreign exchange holdings in non-sanctioning countries (China) to stabilize its economy and currency.

Reports about Russians queuing in front of ATMs to withdraw foreign currency and buying high-value luxury goods as value storage indicate an evolving financial and economic crisis in Russia.

Over the long run, it is likely that the Russian economy will suffer considerably from its invasion of Ukraine:

  • Russian (and particularly foreign) investment will stall with the ongoing war and the sanctions, which will, in turn, decrease homegrown production, employment, and ultimately long-term growth of the Russian economy.
  • Imports into the Russian economy, for example, durable goods and machinery, will all but stop (and would be extremely expensive even in the absence of sanctions due to the massively devalued ruble). And despite a strategy of self-reliance, about 30% of Russian imports still come from G7 countries. In some industries, such as chipmaking and computers, Russia remains wholly dependent on European and American parts.
  • The big question at the time of this writing is the revenues from commodity exports to Europe. They still provide the Russian economy around 1 bn USD per day, making up an estimated one-third of the Russian budget. Any rise in energy prices increases the revenue flow into Russia. Halting gas trade between Russia and Europe will immediately hurt the Russian economy, as it cannot diversify its gas exports that rely on pipelines as quickly away to other non-sanctioning parts of the world as it can with oil.

Implications for the EU financial sector and trade

The war also comes at an economic cost to the European economy. On March 2, the first bank, the Vienna-based subsidiary of Russian Sberbank, had to suspend its business in the EU. After the bankruptcy, about 35,000 customers (mainly in Germany) will be compensated. There is also a (so far limited) danger of financial distress for European banks that have credit claims against Russian customers. However, the risk of financial instability – particularly for Austrian banks – will rise if we see more payment defaults across Eastern Europe over the coming weeks.

Moreover, European companies have all but disbanded their trading with Russia. Some companies have announced that they will divest from the country even if their activities are technically (still) compliant with the sanctions. Beyond the direct effects of the sanctions, a collapse of the Russian and Ukrainian economies will mean that European companies in the EU will export little or no goods and services to the region in the foreseeable future. This especially impacts Finland, the Baltic countries, Poland, Romania, and Slovakia because of their geographical proximity and close economic ties to the two countries.

Europe’s energy dependency: lower output, higher inflation

Russia has the world’s largest natural gas reserves and is the world’s largest natural gas exporter. There is a high dependency on commodity imports from Russia in some European countries – especially natural gas (and oil). For example, as of 2020, Germany obtained around 50% of its total gas consumption from Russia. Hungary and Austria are also dependent on Russian energy.

A further escalation of Russia’s war in Ukraine will raise the stakes for European policymakers to stop all energy imports to Europe over the coming days. In addition to possible energy shortages, the war will see international energy prices rise steeply across the board. Higher energy prices will lead to an increase in production costs, particularly in energy-intensive sectors, such as the chemical, pharmaceutical, and plastics industries, as well as in the fertilizer, machinery, and automotive industries. This, in turn, will reduce their international competitiveness and will seriously bite into their earnings.

Before the war, the inflation outlook in the Eurozone pointed to a gradual normalization of monetary policy, following an exceptionally accommodative stance policy during the pandemic. However, the invasion of Ukraine is expected to turn the economic outlook for Europe negative again. At the same time, rising energy prices will further fuel the inflationary pressures that we have seen in Europe over the past weeks and months. This will put the European Central Bank in a tight spot. It will have to navigate an environment of increased inflation while at the same time giving European policymakers the fiscal space that is needed in times of heightened uncertainty to buffer energy compensation and defense spending.

Public finances and European solidarity

Investments in renewable energy to reduce dependence on Russian fossil energy might act as a stimulus package to the European economy that can compensate (at least partially) for the loss in European GDP. At the same time, turbocharging public investment into renewables – together with offsetting some of the social hardship that high energy prices afflict, particularly on low-income households – means further pressures on public finances in Europe that have already been under stress during the two-year pandemic.

The so-called “general escape clause” of the European fiscal framework (Stability and Growth Pact, SGP) means that countries could spend more without breaking the deficit and debt rules of the EU during the pandemic. The escape clause was scheduled to expire at the end of 2022. Without going into detail here, the ongoing debate on EU countries’ debt and deficit levels and the reform of the SGP that has been scheduled for later this year will most certainly now be a different one.

Different EU countries will be hit differently in economic terms, depending on their energy dependence and production and trading structures. The coming weeks will most likely intensify the debate on what European solidarity entails. Apart from questions on burden-sharing in the realm of security and integrating Ukrainian refugees into European societies, it will most certainly also include access to energy across the EU.

Thinking about the economic implications of the Russian war against Ukraine will necessarily be schematic at this point. There are many more questions regarding the economic implications that we need to answer to give a complete picture of the economic impact of the war. One key factor, for example, is how China will position itself. Will it help Russia rid itself further from financial and economic ties to Europe, North America, Japan, Oceania, and South America, thereby risking its economic ties to the West? Most importantly, however, the size of the economic shock and its ripple effects will depend on the paramount question of how the war unfolds.


Katharina Gnath is Senior Project Manager at the Bertelsmann Stiftung. She is an expert on European and international economic governance and is in charge of the foundation’s work on the European economy. 

Read more on the geopolitical and economic impact of Russia’s invasion of Ukraine:

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Follow all of the Bertelsmann Stiftung writings on this developing situation here