“Russia is lying about its economic strength: sanctions are working – and we need more”

President Vladimir Putin and his authoritarian regime are peddling the false narrative that the Russian economy is strong, and that its war machine is unharmed by western sanctions. This is a lie that must be rebutted. In fact, there are many signs that the Russian war economy is deteriorating. The sanctions and other measures to weaken the Russian economy are effective, but even more can be done. We must continue to increase pressure on Putin’s regime and support Ukraine.

During the Nato summit in Washington DC, western leaders reaffirmed their commitment to Ukraine’s defence. But Russia’s war against Ukraine is not only being fought by soldiers on the ground. It is also a war of information, on which the Kremlin spends an estimated $1.5bn (£1.2bn) a year, and of economic strength. Putin and his authoritarian regime want us to believe that Russia stands unmoved by sanctions and other efforts made to support Ukraine, freedom and democracy. Thus, it is extremely important that politicians, the media and economic institutions in the west do not take the information coming out of the Kremlin at face value. When taking a closer look at the signals, it becomes clear that everything is not as rosy with the Russian economy as Moscow would have us believe.

While Russian GDP may be growing, the economy is increasingly geared towards the war industry, upheld by large fiscal stimulus. This is not an endless source of growth, nor a sign of a stable economy. The Kremlin’s war factories are already at maximum capacity. Unemployment has fallen to the point that there are reports that Vladimir Putin approved the replacement of imprisonment for forced labour. The tight labour market has put upward pressure on wages, while the weaker ruble increases import prices and is contributing to increasingly high inflation, despite Russian central bank efforts to fight it with high interest rates.

To finance the war, the Russian government has tapped into the liquid assets of Russia’s national wealth fund. Estimates by Bloomberg suggest it has almost halved in size since Russia’s full-scale invasion of Ukraine, as the country sacrifices its future prosperity to wreak havoc abroad. Moscow has also resorted to several extreme interventions to control the Russian economy. Export bans for petrol and sugar have been introduced to secure domestic supply. Strict capital controls have been put in place to prevent the exodus of private funds from the country and keep the ruble from freefalling. Even so, there are still reports of billions of US dollars being transferred out of the country.

For many Russians, the wartime economic policy of the Kremlin must bring about a sense of deja vu. Capital controls, export bans and heavy investments in the war industry are not new policies, but rather a return to the Soviet playbook.

What could be perceived and mistaken as a “boost” to Russian growth is, in fact, the beginning of a re-Sovietisation of the economy.

Many of the hallmarks are there: far-reaching market controls, heavy public spending financed by expropriation of private assets, and a reorientation of the economy towards the war industry, with a total disregard for the social and economic wellbeing of the population. History clearly shows that this is not a successful long-term strategy. The short-term overheating of the economy, fuelled by heavy investments in the war industry and very limited access to technology, will likely hinder productivity gains and result in stagnation of the private sector, even more rampant inflation and increasing pressure on Russian households.

To cover future deficits, Putin will have to use monetary financing, adding more fuel to inflation, and further deplete the Russian cash reserves. If Putin stays on this path, the long-term damage to the Russian economy could be significant and is likely to further erode confidence. However, this also requires patience and resolve from the west. We must maintain and increase pressure, while continuing and strengthening our support to Ukraine. Russian propaganda must not be left unchallenged.

Unlike the story Russia would like to tell, sanctions targeting the Russian war machine are effective and necessary. They have reshaped the geography of Russia’s foreign trade and limited its access to high-priority battlefield items. Between 2022 and 2023, Russian export revenues had decreased by around a third, based on information from the Russian customs service. Further measures are now being taken to up the pressure even more. In June, the EU adopted its 14th sanctions package, including measures targeting liquefied natural gas and Russia’s shadow fleet, which is carrying sanctioned Russian oil around the world.

Meanwhile, at the G7 summit, leaders took further steps to deter China from aiding in the circumvention of sanctions and agreed to put in place a $50bn loan to Ukraine, which will be serviced and repaid by expected future revenues from Russia’s immobilised central bank assets. These are very welcome and important steps.

Further steps are needed, however, to constrain Russia and support Ukraine. The west should ensure a swift and efficient operationalisation of the G7 agreement on providing loans for Ukraine and explore options for more far-reaching solutions, in accordance with international and EU law. Assets should remain frozen and sanctions should remain in place until Russia has paid for the damage it has caused.

Meanwhile, support for Ukraine needs to be maintained and strengthened, and more weapons and ammunition must be supplied. All our nations have contributed significantly to supporting Ukraine, both financially and militarily, and will continue to do so for as long as it takes.

Sanctions must be strengthened – particularly in strategically important sectors like energy, finance and technology; while the enforcement of existing sanctions must be improved.

Both border and source countries should continue working on closing the loopholes that allow delivery of all goods that feed the Russian war machine, directly or indirectly. In particular, the Russian crude oil price cap must be better enforced as we are still seeing trade above the cap at $60 a barrel. It is also essential to implement mirroring sanctions on Belarus and put more pressure on other major enablers of sanction circumvention in east Asia and the Middle East.

The Ukrainians are fighting an existential battle for freedom and democracy against oppression and authoritarianism. Supporting Ukraine and undermining Russia’s capacity to wage war at every turn should be the top priority of every democratic country. By re-Sovietising the Russian economy, Putin has put it on a path towards its own decline. Now it is time for the west to up the pressure even more.

Elisabeth Svantesson, minister for finance, Sweden

Stephanie Lose, minister for economic affairs, Denmark

Mart Võrklaev, minister of finance, Estonia

Riikka Purra, minister of finance, Finland

Arvils Ašeradens, minister of finance, Latvia

Gintarė Skaistė, minister of finance, Lithuania

Eelco Heinen, minister of finance, Netherlands

Andrzej Domański, minister of finance, Poland