Why Sanctions on Russia Are Working—and Must Continue
This article was first published by Transitions on September 4, 2025.
The Kremlin’s financial stability—which seemed unshakable in the first two years of the war—is beginning to crack. According to preliminary estimates by the Russian Ministry of Finance, the federal budget deficit for January–July 2025 amounted to approximately 4.879 trillion rubles (2.2% of GDP), while revenues for this period grew insignificantly compared to a significant jump in expenses.
In July, tax revenues from oil fell significantly: the oil production tax brought in 885.2 billion rubles, which is 34% less than a year ago and the lowest since January 2023, which coincides with the introduction of a price cap at the end of 2022.
Another factor that makes the situation more critical is that the consolidated deficit of regional and state funds has risen. According to the Federal Treasury, the consolidated deficit in the first half of the year exceeded 4.95 trillion rubles. This is an additional source of risk for the overall fiscal stability of the Russian Federation. A deficit of this scale means the government is spending far more than it earns, which can lead to borrowing, inflation, or cuts in essential services. It also signals growing pressure on regional budgets and state funds, weakening the country’s overall financial resilience.
Despite all this, Russia continues to bluff, declaring its ability to continue the campaign for as long as necessary, to capture all of Ukraine, and other rhetoric detached from reality. In fact, these statements are purely a negotiating strategy to conceal economic weakness and military incompetence.
Why the Deficit Matters
A deficit of 2.2% of GDP for the first seven months of this year may seem small, but it is actually a serious signal for the economy. Taking into account all potential problems, the Kremlin earlier estimated a much lower deficit for 2025 of 1.7% of GDP, then issuing a more pessimistic forecast in June. Russia’s economy is significantly skewed toward military spending, and even though the military sector is showing growth, the results of military production are rotting on Ukrainian soil somewhere near Bakhmut, while the real non-military economy is no longer providing the necessary revenue to finance the current level of military production and army spending.
Why Secondary US Sanctions Are More Important Than Ever
The United States directly threatened to impose secondary sanctions against buyers of Russian oil ahead of the summit in Alaska in the form of additional tariffs for companies and countries that continue to purchase Russian oil without complying with international restrictions. This would also result in sanctions against intermediaries, insurers, and banks that facilitate trade. Additionally, US officials are considering sanctions against Russian oil companies Rosneft and Lukoil, which account for about 40% and 15% of Russia’s oil production, respectively.
The key effect of such secondary measures is not an immediate cessation of exports, but a significant complication of logistics and financing: insurance companies and banks will refuse to service risky transactions, and buyers will be forced to look for non-Russian suppliers or use risky and more expensive bypass schemes. This already has a direct impact on volumes and revenues, as shown by 2025 data on declining supplies and revenues. Such an approach would fit organically into the strategy of gradual incremental pressure pursued in response to Russian aggression against Ukraine.
The Role of the Price Cap
The Kremlin is confident that it will “survive” the oil price cap, but the reality is different. This mechanism restricts insurers, brokers, tanker owners, and port infrastructure operators from conducting transactions involving Russian oil whose price exceeds the price cap. Its purpose is to act as a regulator to prevent Russian oil suppliers from making high profits, which could ultimately be used to finance the war against Ukraine. Most Western countries—though not yet the United States – have already adopted or announced a reduction in the threshold from $60 to $47.60 per barrel. The cap directly affects revenues from the sale of Urals—primary export-grade crude oil, used as the benchmark for pricing Russian oil exports, especially to Europe and parts of Asia—and related products. This reduces foreign currency revenues to the Russian budget and weakens the ability to replenish the National Wealth Fund, Russia’s fiscal buffer built from oil and gas profits. When prices fall, Moscow is forced to use National Wealth Fund reserves.
Why Control Should Prevail Over Declarations
The essence of the sanctions against Russia lies not in sheer number, but in their implementation. Russia uses a “shadow fleet” of hundreds of tankers with unclear ownership to transport oil from producers subject to sanctions, often without tracking transponders to bypass international safety standards, as well as transferring oil at sea from substandard vessels to “clean” ones in order to conceal the origin of the oil. Complex financial schemes through third parties are also employed to conceal the real sellers of oil. All this is to be able to sell (including trading, transporting, and processing) crude oil at a price higher than the price cap. That is why it is important to combine new measures (lowering the price cap and secondary sanctions) with mechanisms to ensure their implementation—monitoring supplies, sanctions against intermediaries, and working with insurance and shipping registers. Only in this way will sanctions actually reduce the Kremlin’s revenues and not be neutralized by circumvention schemes.
On August 18, Donald Trump met with Volodymyr Zelenskiy and EU leaders, where they agreed upon a possible sequence of talks: first a direct meeting between Zelenskiy and Vladimir Putin, then a trilateral summit with Trump. However, given Kremlin foreign policy aide Yuri Ushakov’s casting doubt on such a meeting both after Trump and Putin’s phone call that evening, and again this week, as well as the scale of Russian propaganda aimed at portraying Zelenskiy as an illegitimate president, the likelihood of such a summit in the near future seems minimal. This creates a unique window of opportunity for the international community to increase economic pressure on Russia and push the Kremlin to make real concessions.
It’s the Economy, Stupid
Instead of arguing about the territories of Ukraine that should be “given up” to “calm Putin down”, the more pressing issue is how to continue the strategy of consistent, incremental economic pressure.
This means strengthening sanctions and monitoring their implementation. Putin will only cease his military and foreign policy pressure when there are real signs of systemic collapse in the Russian economy, and only then will it be possible to talk about a fair end to the war. The National Wealth Fund, whose liquid assets plummeted to $36 billion in June from a prewar peak of $113.5 billion, could run dry by 2026, according to Russian economists cited by The Moscow Times.
Putin has repeatedly demonstrated his willingness to endure economic pressure, but there is a significant difference between being willing to endure hardship and allowing the economy to collapse. The first can be used as political theater to demonstrate resilience; the second risks undermining the very foundations of the regime. Historical precedents, such as the Soviet Union in the late 1980s, show that even closed authoritarian regimes cannot survive powerful economic shocks without causing internal social instability.
In the case of modern Russia, socio-economic stability is one of the pillars on which the regime and Putin’s rating rest. If signs of economic collapse begin to appear, with the risk of sparking social instability, the willingness to endure sanctions will quickly be converted into a willingness to engage in real negotiations, rather than staged performances. On the other hand, if the international community does not continue to intensify pressure on Russia—through military and financial support for Ukraine, as well as through economic sanctions and their enforcement against Russia—Ukraine will risk being forced to agree to “peace at any price.” This will only mean preparation for a new act of aggression against Ukraine or other countries, because this is what happens when the aggressor does not suffer heavy economic and military losses.