The war in Ukraine and multiple waves of Western sanctions have left Russia’s economy hanging by a thread. But how big a thread?
The West’s response to the war has left Russia’s economy in tatters. Imports to Russia had halved between when the war broke out and last summer, with Russian companies unable to source critical items including semiconductor chips and auto and plane parts. The bulk of government spending has gone toward the war effort, and a lack of key components has left industrial activity in the country at a standstill. Many foreign companies from carmakers to restaurant chains have long since packed up their bags, and Russian average incomes have already fallen to their lowest level in two decades.
To keep the economy propped up, President Vladimir Putin has largely relied on Russia’s biggest historical cash cow: energy. With ample reserves of oil and natural gas—which made up 45% of the country’s federal budget in 2021—Russian energy companies have for years brought in massive profits by selling to their neighbors, mainly in Europe. Even this year after the war broke out, Russian energy companies were still sending large amounts of oil and gas to Europe.
But Russia’s energy dominance has undeniably taken a hit from the war, too. Natural gas exports to Europe have grown more limited than ever, and oil may be the last thing protecting the country’s economy from collapse, at least according to a key White House adviser.
“Oil is the only thing they have left in that economy,” Amos Hochstein, special presidential coordinator for President Biden, told CNBC on Monday. “Putin has destroyed the rest of the economy.”
But even if Putin is counting on oil, it is not a gamble likely to pay out over the long term. Just last week, the IEA, an intergovernmental forum that advises its 31 member countries—largely Western nations—on energy policy, said Russian fossil fuel exports would “never return in any of the scenarios…to the levels seen in 2021.”
So if both Hochstein and the IEA are right, what does that mean for Russia’s economy? Simply put, what will be left?
Russia’s energy power is waning
Putin has spent decades building up Russia’s position as the world’s premier supplier of cheap and abundant energy.
But with the way things are going for Russia’s economy, that reputation could be erased in under a year.
Natural gas flows to Europe—Russia’s biggest historical energy trading partner—have been declining steeply since September, when Russian gas companies halted shipments along the critical Nord Stream pipeline. Russian gas flows to Europe soared after the war began, and Russian revenues from fossil fuel exports doubled during the first few months of the war, but with Nord Stream offline for the foreseeable future, trade volumes are likely to keep shrinking next year.
With natural gas to Europe off the table, Putin may be hoping for oil to take its place, Hochstein says.
“All [Putin]’s got left is the stuff that comes out of the ground. He won’t sell his gas to Europe anymore, so all he has is oil, so that’s what funds this war,” he said.
But even where oil is concerned, the picture looks bleak for Russia. The U.S. has already banned Russian oil, while Europe plans to do so from December. And while other buyers including China and India have stepped up to fill the void, even the renewed interest from Asia has been far from enough to salvage Russia’s economy.
In September, Russian seaborne oil exports fell to just under 3 million barrels a day, according to data from S&P Global, around 300,000 barrels fewer than it shipped out in August, and the lowest level since September 2021, following months of steady declines in oil export volumes.
The decline in interest for Russian fuel may mean that its lofty status in global oil markets “will never return,” as the IEA pointed out last week.
“The rupture has come with a speed that few imagined possible,” the IEA wrote in its annual World Energy Outlook, which lays out multiple future energy scenarios.
The IEA projected annual Russian oil and gas revenues to shrink from $75 billion last year to less than $30 billion by 2030, as European buyers increasingly turn to the U.S., the Middle East, and domestic sources to satisfy their energy needs.
With energy revenues waning, Russia’s economy may not stand a chance. The International Monetary Fund recently predicted the country’s economy would contract 3.4% in 2022.
Putin’s order last month to mobilize 300,000 Russian troops—which was reportedly completed last week—has also sent alarm bells ringing. In the wake of the order, top Russian economist Vladislav Inozemtsev warned it would have “truly catastrophic consequences” for the Russian economy, which he had already warned could potentially “die by winter” because of the war.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.