Sanctions & outages: How 3 years of war have sent Russian and Ukrainian economies into a tailspin

As the Russia-Ukraine war enters its fourth year, the three years of conflict have wreaked havoc on both nation’s economies. Not only this, but the war, sanctions and trade restrictions that came with it also impacted global trade in a significant manner. Amid all these challenges and during three years, both Russia and Ukraine relied on their allies in harsh times.

While the market for ammunition and weapon systems boomed, the daily lives of Ukrainians and Russians became harsher and harder. This can be seen in the rising inflation rates in both nations which have continued to take a toll on the citizens. According to the International Monetary Fund (IMF), the price rises run at 9.5 per cent in Russia and 12 per cent in Ukraine.

Since the conflict is mostly being played out on the other side of the border, standard measures of economic growth favour Moscow, as do the outstanding costs of rebuilding damaged infrastructure. However, at every point in the crisis, Ukraine found its Western allies, who not only provided the country with military aid but also helped the nation with humanitarian aid as well.

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Here’s a look at what kind of toll three years of ravaging war has taken on both economies.

Ukraine: The country which took the most hit

Since most of the conflict played out on the eastern front of Ukraine , the eastern European nation took the most hit. According to the latest figures released by the IMF, Ukraine’s GDP had sunk 36 per cent by the summer of 2022 before finishing the year down at 28.3 per cent.

However, as the war continued things stabilised for Ukraine and the country started adapting to the challenges the conflict had to offer. In 2023, the country’s GDP rebounded to 5.3 per cent and 3 per cent in 2024. One of the key aspects of the ongoing conflict was the fact that the Russian forces kept on attacking the key energy infrastructure of Ukraine.

Power outages became a common phenomenon, and affected several businesses across the country. While the country was able to switch to alternative sources of energy, the country’s reliance on natural gas and nuclear power plants could not have been replaced. As mentioned before, with the rising inflation, things became costly in Ukraine. Not only this, the country also saw a sharp decline in tourism, foreign business investments, and the money it acquired from facilitating the transfer of natural gas from Russia to Europe.

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Russia: Conventional tactics didn’t work

When Russia started with its invasion of Ukraine, Europe and other allies of Kyiv started imposing sanctions on Moscow. From day one several economists predicted that the Russian economy would face a double-digit contraction. However, this estimation never materialised and the country continued to defy expectations.

That doesn’t mean that the Russian-Ukraine war did not have any impact on the Eurasian nation. According to the IMF, Russia’s GDP slumped to 1.3 per cent at the outset of the war but has since recovered to post 3.6 per cent growth in each of the last two years, reflecting the resilience of the erstwhile superpower.

Despite wide-ranging sanctions, Russian factories have continued to source the components and raw materials needed to keep the war machine going. Apart from this, an influx of funds from the illicit sale of oil, and to a lesser extent natural gas, nickel and platinum, has allowed for an expansion of a state apparatus which was struggling at the start of the war.

However, many believe that the current Russian economy symbolises “steam without substance” According to Carnegie Politika, the rapid expansion of government spending—both direct budgetary outlays and state-subsidized loan programs—has been the main driver of Russia’s recent economic growth. The cracks in the economy have started to become more apparent. By the third quarter of 2024, GDP growth had slowed to 3.1 per cent, down from 4.1 per cent in the previous quarter.

The war has affected Russia’s production capacity as well. Industrial facilities are operating at 81 per cent of capacity, and 73 per cent of enterprises in the country are now reporting labour shortages. According to IMF, an estimated 1.6 job positions in Russia are unfilled, since most of its working-age population have been deployed on the battlefield (Ukraine is suffering from the same struggle). Hence, things are not hunky dory for Russia as it looks like.

Impact on global trade

At the start of the war, the World Bank predicted that international trade due to the conflict would drop by 1 per cent, lowering global GDP by 0.7 per cent and the GDP of low-income countries by 1 per cent. However, they noted that the war’s long-term implications for global trade and investment will largely depend on how governments respond to the changing geopolitical environment.

The ongoing conflict’s long-term implications for global trade and investment will largely depend on how governments respond to the changing geopolitical environment. Disruption to Ukraine’s grain exports has raised concerns over food shortages in regions heavily reliant on these supplies, particularly in the Middle East and Africa.

Russia’s reduced gas exports to Europe have led to significant price hikes in natural gas, impacting energy costs for businesses and consumers across the continent. It has also pushed some of these nations closer to recession.

While Ukraine’s resilience gives it hope Russia’s doors are being opened by Trump

Despite the lengthy war, several economists believe that Ukraine has a brighter future as an independent nation. Christopher Dent, a professor of economics and international business at Edge Hill University’s business school told The Guardian that the “Russian president’s best efforts to cause the kind of devastation needed to subdue Kyiv, Volodymyr Zelenskyy and Ukraine’s population have failed, making Ukraine the better bet for an investor should the war end.”

He supported his argument by pointing out how Ukraine’s resilience can be found in its electricity market which continues to carry on despite bombs being rained down on power stations and transmission cables. Meanwhile, Ukraine’s ports on the Black Sea are still functioning and trade is flowing west along the Danube. The country’s agriculture sector has also seen a steady recovery and has become more self-reliant.

Russia’s overheating economy may have been receiving a lifeline from Trump and his new administration. Officials from both Russia and the US have floated the idea of increased economic cooperation following the Riyadh talks . Not only this, Trump can also ease sanctions with which Moscow is still struggling.

Meanwhile, Russian markets have already seen a boost. The rouble surged to a near six-month high against the dollar on Friday, buoyed by prospects for sanctions relief. “For economic reasons, Russia is interested in negotiating a diplomatic end to the conflict,” Oleg Vyugin, former deputy chairman of Russia’s central bank told Reuters. “(This) will avoid further increasing the redistribution of limited resources for unproductive purposes. It’s the only way to avoid stagflation,” he added.

Hence, both nations might be eying for the peace talks to ease the strains on their economies. It’ll be interesting to see whether the year 2025 will see the end of the Russia-Ukraine war.