Russia's ongoing economic challenges are unlikely to prompt Moscow to de-escalate in Ukraine in 2024 and 2025, though a decline in its oil revenues could combine with other factors to change its calculations in the long term. In recent weeks, reports have emerged that Russia is experiencing delays in receiving payments for its oil and oil products because banks in numerous countries are concerned about being designated with U.S. secondary sanctions. The caution stemmed from a December 2023 executive order issued by the administration of U.S. President Joe Biden that threatened to impose secondary sanctions on global financial institutions that help Russia circumvent primary sanctions, prompting foreign banks to start asking their clients for additional guarantees that sanctioned persons or entities are not the beneficiaries of a payment. The reports came amid increased Ukrainian strikes on Russian oil refining infrastructure, as well as tightening sanctions on Russia's so-called ''dark fleet'' of non-Western vessels with dubious insurance carrying 60-75% of Russia's oil. As oil and gas exports constituted roughly 20% of Russia's GDP, 40% of its budget and 60% of total exports prior to the 2022 invasion of Ukraine, the developments raise the question of whether economic challenges could constrain Russia's capability and aim to prosecute the war in the short, medium and long term.

• On March 27, Reuters reported that Russian oil firms were facing payment delays of up to several months for crude and fuel as banks in China, Turkey and the United Arab Emirates and other jurisdictions were becoming increasingly wary of U.S. secondary sanctions. On March 19, reports indicated that, as a result of constant pressure from U.S. authorities, major lenders in the United Arab Emirates — such as Dubai's main state-owned bank Emirates NBD — had closed the accounts of sanctioned Russian individuals and entities, including those involved in the oil trade. This came after the United States had recently hit UAE-based entities, such as the Russia-focused oil trader Voliton, with secondary sanctions. 
• In February 2024, reports indicated that the Group of 7 (G-7) was aiming to use sanctions to curb Russia's ability to use its ''dark fleet'' of oil tankers with questionable insurance protection and outside compliance with the G-7's price cap, and that the increased sanctions could eventually pressure Russia's oil exports to the point that they may soon be at risk of curtailment. Sanctions on Russia's ''dark fleet'' are strongly correlated with the vessels ceasing operations; since the U.S. Treasury first started sanctioning individual tankers in October 2023, vessels designated have ceased or significantly slowed their oil shipments, which could force Russia to cut production. 
• On April 2, Ukraine conducted its deepest drone strikes inside Russia yet, hitting the Taneco refinery in Tatarstan, Russia's third-largest. Since then, there have been no reports of successful attacks on Russian refineries. By April 15, Reuters reported that less than 10% of Russia's refining capacity was under repair, down from the peak of around 14% on April 2. The drone hit a unit accounting for half of the plant's refining capacity, which is 6.2% of Russia's total refining capacity, but the strike did not cause significant damage or put the unit out for long. 

Sanctions, along with Russia's economic challenges, will not decisively inhibit Russia's ability to pursue the war through 2025. Sanctions restrict financial transactions with Russian entities, prompting foreign banks to refuse to accept or process payments for Russian counterparties. This affects exports of raw materials — Moscow's primary export and source of budget revenues — as well as imports of consumer goods and advanced technologies to Russia. Sanctions' consequent impact on Russian trade aggravates preexisting problems in Russia's civilian and military economy, including labor shortages, inflation, lack of investment amid high interest rates, slow productivity growth and brain drain — issues that will likely continue to plague the country for the foreseeable future. Additionally, Western financial sanctions, export controls and import bans, along with the oil price cap imposed by the G-7, reduce Russian state revenues and make it more expensive for Moscow to get the financial and material resources it needs to pursue its war in Ukraine. However, these challenges will not meaningfully constrain Russia's ability to maintain the war in 2024 or 2025 because they do not inhibit Russia's access to the goods needed to maintain domestic consumption or sustain its war industries. Russia's deficit can be financed by raising funds domestically via tax hikes (which the Kremlin is already preparing to do) and bonds, or by simply printing money in the form of inflation. This means that after Russia exhausts its sovereign wealth fund (which is currently projected to happen around the end of 2025), Moscow will still be able to continue financing its deficit internally with relatively limited repercussions (with those repercussions being inflation, a reduced ruble exchange rate, and declining living standards). But thanks to its continued exports of oil and other products (like metals and agricultural goods), Russia will have enough foreign currency to keep importing most goods it needs to sustain domestic economic activity, as well as its war in Ukraine. Russia's dwindling sovereign wealth fund thus does not necessarily foretell financial ruin and a cessation of war production for the country. 

• The United States has recently increased efforts to enforce the G-7 oil price cap, which aims to force Russia to sell its oil under the price cap or offer deep discounts to buyers if they circumvent Western services, rather than stop all sales and force Russia to cease production, which would spike global prices. On April 4, U.S. officials met with government officials and business leaders in India, the top buyer of Russian crude behind China, to discuss implementing the price cap. During the meeting, the U.S. officials praised Indian oil refiners, who they said were helping boost the mechanism's effectiveness by complying with U.S. sanctions enacted Feb. 23 on Russia's leading tanker group, Sovcomflot, and associated 14 crude oil tankers.
• Russia's fiscal deficit will likely be smaller in 2024 than last year due to revenue increases from domestic tax hikes and higher global oil prices. Further tax increases or even higher oil prices could also delay the sovereign wealth fund's exhaustion well into 2026 or beyond. Russia's 2023 budget was in deficit of approximately $30 billion, 2% of GDP. Russia used drawdowns from its sovereign wealth fund to cover the deficit. It will withdraw a similar amount in 2024, meaning that as soon as the end of the 2025 budget year, the liquid portion of the fund equivalent to $55.1 billion — mainly composed of Chinese currency — could be exhausted. 
• China has stepped up its efforts to provide Russia with key equipment and technology to pursue the war in Ukraine. While Chinese banks have recently increased compliance with U.S. sanctions, Chinese exports to Russia — which Russia pays for with yuan — are unlikely to decline for an extended period because Russian firms can find workarounds. Moscow and Beijing are also unlikely to allow the sanctions threat to critically undermine key elements of Russia-China trade. According to U.S. officials cited in an April 12 Reuters report, China supplied about 90% of Russia's microelectronics in 2023 (which Russia has used to make missiles, tanks and aircraft) and about 70% of Russia's approximately $900 million in machine tools in the last quarter of 2023. China has also reportedly supplied Russia with finished dual-use equipment — from drone engines to optics — that have significantly strengthened Moscow's battlefield capabilities.

The United States and its Western allies are unlikely to support measures to drastically undermine Russian oil exports for fear of further increasing global energy prices, especially ahead of upcoming elections. A desire to avoid spikes in global oil prices will constrain the West's — and particularly the United States' — appetite to economically inhibit Russia. Russia will likely continue to find ways to sell and receive payment for its oil because the United States is unlikely to more aggressively pursue the G-7 oil price cap for fear of actually triggering wide-scale Russian production cuts, which would surge global oil prices by creating a sudden supply crunch. Indeed, U.S. officials have reassured third countries like India, the top buyer of Russian crude, that it is not asking them to cut Russian oil imports as the goal of sanctions. Given American voters' unique sensitivity to high gas prices, the Biden administration will remain particularly wary of taking any action that could rattle global oil markets ahead of the U.S. election in November, as evidenced by U.S. Vice President Kamala Harris reportedly directly telling Ukrainian President Volodymyr Zelensky not to attack Russian oil refineries during their private meeting at the Munich Security Conference in February. To this same end, the White House is also unlikely to pursue a more rapid sanctioning of Russia's dark fleet tankers in the coming months for fear that overly physically disrupting Russian oil exports would only raise global prices, thus giving Russia more revenue while hurting Biden's reelection chances.

Ukraine, for its part, is also unlikely to significantly escalate its attacks against Russia's oil infrastructure. Ukraine will likely maintain its drone strike campaign against Russian refining infrastructure. However, Kyiv has shown neither the capacity nor intent to sufficiently expand its campaign to include other infrastructure that would sufficiently upset this situation, which could draw condemnation from its allies and exhaust precious resources that Ukraine could instead use to strike Russian forces inside its territory. Ukrainian strikes on Russian oil infrastructure will also be constrained by Russia's ability to respond with escalatory retaliation. If, for example, Kyiv were to begin to target Russia's crude oil export terminals on the Baltic Sea and the Black Sea, most likely following the November U.S. elections, Russia would likely respond with mass attacks similar to the one it conducted on April 11, when it destroyed the largest power-generating plant in Ukraine's Kyiv region and other energy generation and distribution infrastructure across Ukraine. 

A sharp decline in Russia's oil revenue is probably necessary to deal an economic blow big enough to decisively inhibit Moscow's war efforts in Ukraine, though this scenario is unlikely to manifest in the short-to-medium term. The U.S. Treasury estimates that oil revenues still constitute 30% of the Russian budget, which means that such revenues remain the primary source of volatility and vulnerability for the Russian budget. According to Bloomberg estimates, in March Russia earned $15.69 billion in foreign currency from crude and petroleum product exports alone. In addition to the tax increases on individuals and corporations Moscow is preparing, Russia's non-oil and gas revenues (comprising various taxes and duties, including Russia's VAT) already rose 43% in ruble terms year over year in the first quarter of 2024, and the government can always resort to additional windfall taxes as it did in 2023 to ensure these revenues stay high. Global oil prices also appear likely to remain too high to complicate Russian state finances anytime soon, as there will remain a market for Russia's oil output at or above its OPEC+ production quotas in the coming years — particularly amid prolonged geopolitical premiums driven by Middle East conflict risks. Against this backdrop, global oil prices will likely stay above the $60 price cap, ensuring a steady source of revenue for Moscow. To reduce Russia's access to this revenue, the United States and Europe will continue to prioritize enforcing the G-7 price cap, as inhibiting the mid-term prospects of Russia's energy sector is the most effective way to realize the goal of the West's sanction regime, which is to impose a strategic cost on Russia for its invasion of Ukraine by forcing Moscow to eventually choose between financing the war and other priorities. But the West is very unlikely to lower the cap, and their enforcement measures will not sufficiently reduce Russian revenue and force it to make hard choices until at least the second half of 2025, nor will they prevent Russia from simply changing its budget to prioritize new investments in military production should it deem them necessary. 

• Brent oil is currently trading above $90 per barrel after trading above $80 per barrel for most of the year. Amid these high prices, Russia's oil and gas earnings in the first quarter of 2024 increased by nearly 80% compared with the same period in 2023, injecting 2.9 trillion rubles ($31 billion) into Russia's federal budget, around 2% of GDP. This means that — even in an environment in which the discount for Russia's Urals crude is as high as the U.S. Treasury claims it was in February 2024, at above $15 — Russian oil is still fetching about $75 a barrel at the point it leaves ports in the Baltic Sea and the Black Sea, calling into question attestations of shippers of Russian oil using Western services. Moreover, revenues will exceed expectations because the volume of Russian oil exports is also increasing: Russia's seaborne crude exports reached an 11-month high in the second week of April, with flows from all major ports near peak levels since 2022. The Russian Finance Ministry currently predicts that in 2024, oil and gas revenues will increase 30% year over year in dollar terms and increase again in 2025 amid recovering production. 

While economic challenges are unlikely to prompt Moscow to de-escalate the war in 2024 or 2025, they could constrain Russia from further escalation by harming its ability to purchase and manufacture military equipment. Russia's economic difficulties — including the exhaustion of its sovereign wealth fund and continued budget deficit — are unlikely to force Moscow to scale back its negotiating position with Kyiv and its Western allies by 2025. But they could constrain Moscow from a larger escalation on the battlefield by leaving Russia with fewer resources to invest in expanding and maintaining the military production needed to not only replace losses but arm the even larger amounts of mobilized forces that new large-scale offensives would require. In the likely scenario in which the New START treaty expires in February 2025 without a replacement, Russia would probably maintain sufficient strategic and conventional forces to threaten NATO. However, by 2026, it is possible that Russian authorities may not have the economic or financial ability to control inflation and maintain domestic consumption while simultaneously participating in an arms race with the West and Ukraine, with Russia's sovereign wealth fund exhausted and with high spending having to be financed internally. This could eventually deprive Moscow of its ability to credibly threaten Ukraine and the West with military escalation, one of its key sources of negotiating leverage against them. Russia's dwindling access to dollar revenues may also eventually force Moscow to ration foreign currency for imports and choose between scaling back its war-related imports, or reducing its imports of consumption goods (short term) and investment goods (long term) — with the latter option potentially carrying eventual political repercussions for the Kremlin by decreasing consumption and living standards. 

• According to a February 2024 report by the Royal United Services Institute, Russia's most serious limitation will be ammunition manufacturing, as the country's 122mm and 152mm artillery production will likely stagnate unless Russia builds new factories and invests in raw material extraction, with a lead time of up to five years requiring higher budget expenditures now. Russian overall artillery production will likely largely plateau in 2024 at around 3 million rounds per year of all natures. In 2025, Russia will also have to resort to using increasingly old and poorly maintained tanks and armored vehicles for refurbishment, resulting in vehicles that are even more expensive to refurbish while still being less effective in combat, and by 2026 Russia will have exhausted most stocks and unable to replace vehicles with new production.