Press release

Ukraine: The costs of war. Russia faces crippling sanctions as conflict expenses mount.


Written by Shane Markowitz

Russia’s war against Ukraine has inflicted major loss of life and a rapidly intensifying humanitarian toll during four days of continuous assault. The mounting economic costs of the war on both sides will further exacerbate these effects in the coming weeks and months. GLOBSEC will be monitoring the financial aspects of the conflict including the costs of the war, sanctions, devastation, and eventual restoration of the country.

This brief aims to provide an overview concerning the substantial costs that the Russian state, elites, and general population will be forced to absorb because of the invasion. This review comes as the EU, US, UK, and other countries unleash an avalanche of sanctions against Russia. The assessment underscores that Russia will suffer from a severely stagnant economy and inflationary environment that threatens to considerably erode the wealth of Russian citizens and afflict acute adversity on society.

Some of the costs incurred (or projected to be incurred) by Russia include:

  • From the invasion itself, a forecasted  0,7% loss in GDP growth in 2022 and at least 1% in 2023 and 2024 compared to the no conflict baseline (a protracted war would significantly compound these figures). The vigorous sanctions imposed on Moscow are expected to further spur a cumulative multiple point drop in economic growth.
  • The value of the ruble has plummeted to records lows against the US dollar (experiencing over 30% declines since January 1st). The weaker currency will heighten the price of imports and aggravate already high inflation for consumers as Moscow faces impending economic turmoil.
  • While the Russian Central Bank (CBR) had been propping up the ruble to prevent a freefall over the past week, this policy course will prove difficult to sustain as crippling sanctions take hold. The EU introduced stiff measures over the weekend (Feb 26-27), including an asset freeze and transaction ban, that will curtail the CBR’s ability to access its hefty foreign reserves (estimated at $630 billion) and prevent it from stabilizing the currency. The CBR, notably, has invested its reserves significantly in euro-denominated securities and euro foreign currency deposits (many of them suspected to be held by the German Bundesbank). The freeze could leave the CBR with access to only half its reserves (mostly gold and securities held in the Chinese renminbi). A possible turn to the use of capital controls would deal a final death-knell to the financial credibility of Russia.
  • In a bid to stave off rapid depreciation in the ruble, the CBR more than doubled the country’s key interest rate from 9.5% to 20%. These measures, however, will considerably raise the price of borrowing for businesses and consumers which could additionally batter the economy.
  • Sberbank, which holds over a third of total banking assets in Russia and counts around half of Russian families as account owners, will lose all access to the US financial system. The move will restrict the bank from conducting international transactions (e.g. customers have been unable to use Sberbank-issued VISA cards outside Russia). The European Central Bank has assessed that the bank’s European subsidiary is failing or likely to fail as it experiences “significant deposit outflows as a result of the reputational impact of geopolitical tensions”.
  • A further wide range of Russian banks will face Western asset freezes, debt and equity restrictions, and blocking sanctions. The measures will widely constrain Russian businesses from engaging in foreign transactions and international trade given the importance of these financial systems (particularly the US) to global payments.
  • Numerous Russian banks are expected to be cut off from Swift, the communication platform that facilitates financial transactions between 11,000 banks and institutions in more than 200 countries (over 1% of total messages involve Russian interests). The ban would tag on additional onerous inconveniences and transactional fees to Russian entities (including the government and private businesses alike) when carrying out international payments. A 2014 assessment underlined that Russia’s removal from Swift could amount to a 5% GDP loss in the country. Though Russia has since attempted to establish its own payment system, known as Mir, to pre-empt these measures, few countries have adopted it.
  • Russians will face steeply higher mortgage interest rates even as the economy endures a slowdown. VTB, Russia’s second largest bank, announced that sanctions would force it to hike its mortgage rate an astounding four percentage points to 15.3% beginning February 28th.
  • Russia’s credit rating was downgraded to “junk” status by S&P Global - the risk rating will reinforce the onset of higher borrowing costs.
  • The RTS Index, which includes 50 Russian companies traded on the Moscow Exchange, had already fallen 39% since February 16th (before market open on February 28th). The crash has wiped out over $100 billion in market value of Russia’s largest companies.
  • Russia will also face broad-based restrictions limiting its import of critical technologies, high-tech products including semiconductors and computers, and oil refining technologies. It is expected that these sanctions will stifle Russia’s defence, aerospace, maritime, and energy sectors and further heighten inflationary pressures on consumers.
  • FedEx and UPS, two of the largest shipping and supply chain management companies in the world, have announced a temporary halt to deliveries in Russia.
  • All Russian aircraft and private jets have been banned from EU airspace, effectively severely disrupting the operations of Russian airlines and charter flights.
  • Western sanctions directed at a broad range of financial elites, political officials, and members of Putin’s inner circle will include asset freezes and travel bans. The extensive list encompasses, among others, President Vladimir Putin, Foreign Minister Sergei Lavrov, Defence Minister Sergei Shoigu, Head of Russian Security Service Aleksandr Bortnikov, Armed Forces Chief Valery Gerasimov, 351 members of the Russian Duma, Russian security council members, and numerous tycoons.
  • Germany Chancellor Olaf Scholz announced that Germany will shelve final approval of the Nord Stream 2 gas project. The decision means that Russia will need to continue relying on existing pipelines through Ukraine and pay Kyiv transit fees if it wishes to sell its gas to Europe (the EU imports an annual estimated 175-200 billion cubic meters of gas). Germany, which had previously embraced energy connectivity with Russia, has further revealed plans to acceleration construction of two liquefied natural gas (LNG) port terminals, a move that aims to make the country less reliant on supplies from Moscow.
  • BP, the British energy company, has exited its 20% stake in Rosneft, a major Russian oil company, at a $25 billion loss.

The sanctions, all told, threaten to severely hamper economic growth, reduce quality of life, and raise the cost of living in Russia. The financial restrictions will leave Moscow with few options on international markets. Beijing may step in to fill the void but not without exacting a heavy price on a Kremlin that lacks viable alternatives.

Early signs indicate a possible imminent bank run as Russians wait hours in line to withdraw cash and desperately seek out safety in foreign currencies, with the ruble seemingly in freefall and financial institutions sanctioned. As the war takes an increasingly ominous and menacing turn, both Russian losses and sanctions against it will continue to mount. The adverse effects on Russian businesses, elites, and the population more broadly, undoubtedly, will place strenuous political pressure on the Kremlin.