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The Contemporary Russian Economy

A Comprehensive Analysis

• © 2023
• Marek Dabrowski 0

Bruegel, Brussels, Belgium

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• Provides a comprehensive and wide-ranging overview of the Russian economy in the 2020s
• Studies the Russian economy comparatively with other emerging-market and advanced economies
• Provides a benchmark for students to assess Russia's strengths, weaknesses, and future challenges

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About this book

This textbook offers a wide-ranging, comprehensive analysis of the contemporary Russian economy (as it functions in the early 2020s) concentrated on the economy, economic policy, and economic governance. Chapters cover recent Russian economic history, the economic geography of Russia, natural resources, population, major sectors and industries, living standards and social policy, institutions, governance, economic policy, and Russia's role in the global economy. The book will provide a comparative cross-country context, analysing how the Russian economy and its institutions perform compared to its peers to help students and instructors understand Russia’s strengths, weaknesses, and future challenges. Prepared by a team of leading Russian and international experts on the respective topics, this textbook will be of interest to those studying Russian economics. It will be valuable reading for undergraduate and graduate students of Russian studies, the Russian economy, Russian politics,the economics of transition, the economics of emerging markets, and international relations.

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Russian Economy

• Russian economic policy
• regional development
• social policy
• institutions and governance
• natural resources
• Russian studies
• the economics of transition
• the economics of emerging markets
• contemporary Russian economic history
• economic geography of Russia
• Russia's role in the global economy

Table of contents (19 chapters)

Front matter, natural and human resources, natural resources, geography, and climate.

• Leonid Limonov, Denis Kadochnikov

Human Resources

• Irina Denisova, Marina Kartseva

Historical Roots

Capitalist industrialisation and modernisation: from alexander’s reforms until world war i (the 1860s–1917).

• Carol Scott Leonard

The Soviet Economy (1918–1991)

Institutions and their transformation, constitutional foundations of the post-communist russian economy and the role of the state.

• Christopher A. Hartwell

Business and Investment Climate, Governance System

Marek Dabrowski

Evolution of Ownership Structure and Corporate Governance

• Alexander Radygin, Alexander Abramov

Major Sectors and Regional Diversity

Structural changes in the russian economy since 1992.

• Svetlana Avdasheva

Energy Sector

• Przemyslaw Kowalski

Agriculture

• Eugenia Serova

Regional Diversity

• Leonid Limonov, Olga Rusetskaya, Nikolay Zhunda

Russia in the Global Economy

Russia in world trade.

• Arne Melchior

Foreign Investment

• Kalman Kalotay

Sanctions and Forces Driving to Autarky

• Marek Dabrowski, Svetlana Avdasheva

Editors and Affiliations

About the editor.

Marek Dabrowski  is a Non-Resident Scholar at Bruegel, Brussels, Professor of the Higher School of Economics in Moscow, and Co-founder and Fellow at CASE - Center for Social and Economic Research in Warsaw. He was a co-founder of CASE (1991), former Chairman of its Supervisory Council and President of Management Board (1991-2011), Chairman of the Supervisory Board of CASE Ukraine in Kyiv (1999-2009 and 2013-2015), and Member of the Board of Trustees and Scientific Council of the E.T. Gaidar Institute for Economic Policy in Moscow (1996-2016).

Bibliographic Information

Book Title : The Contemporary Russian Economy

Book Subtitle : A Comprehensive Analysis

Editors : Marek Dabrowski

DOI : https://doi.org/10.1007/978-3-031-17382-0

Publisher : Palgrave Macmillan Cham

eBook Packages : Economics and Finance , Economics and Finance (R0)

Copyright Information : The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023

Softcover ISBN : 978-3-031-17381-3 Published: 02 January 2023

eBook ISBN : 978-3-031-17382-0 Published: 01 January 2023

Edition Number : 1

Number of Pages : XXXVII, 410

Number of Illustrations : 71 b/w illustrations

Topics : International Economics , Economy-wide Country Studies , Economic Growth , Russian, Soviet, and East European History , Political Economy/Economic Systems

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Business Retreats and Sanctions Are Crippling the Russian Economy

118 Pages Posted: 20 Jul 2022 Last revised: 2 Aug 2022

Jeffrey Sonnenfeld

Yale School of Management

Steven Tian

Yale Chief Executive Leadership Institute

Franek Sokolowski

Michal wyrebkowski, mateusz kasprowicz.

Date Written: July 19, 2022

As the Russian invasion of Ukraine enters into its fifth month, a common narrative has emerged that the unity of the world in standing up to Russia has somehow devolved into a “war of economic attrition which is taking its toll on the west”, given the supposed “resilience” and even “prosperity” of the Russian economy. This is simply untrue – and a reflection of widely held but factually incorrect misunderstandings over how the Russian economy is actually holding up amidst the exodus of over 1,000 global companies and international sanctions. That these misunderstandings persist is not surprising. Since the invasion, the Kremlin’s economic releases have become increasingly cherry-picked, selectively tossing out unfavorable metrics while releasing only those that are more favorable. These Putin-selected statistics are then carelessly trumpeted across media and used by reams of well-meaning but careless experts in building out forecasts which are excessively, unrealistically favorable to the Kremlin. Our team of experts, using private Russian language and unconventional data sources including high frequency consumer data, cross-channel checks, releases from Russia’s international trade partners, and data mining of complex shipping data, have released one of the first comprehensive economic analyses measuring Russian current economic activity five months into the invasion, and assessing Russia’s economic outlook. From our analysis, it becomes clear: business retreats and sanctions are catastrophically crippling the Russian economy. We tackle a wide range of common misperceptions – and shed light on what is actually going on inside Russia, including: - Russia’s strategic positioning as a commodities exporter has irrevocably deteriorated, as it now deals from a position of weakness with the loss of its erstwhile main markets, and faces steep challenges executing a “pivot to Asia” with non-fungible exports such as piped gas - Despite some lingering leakiness, Russian imports have largely collapsed, and the country faces stark challenges securing crucial inputs, parts, and technology from hesitant trade partners, leading to widespread supply shortages within its domestic economy - Despite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent; the hollowing out of Russia’s domestic innovation and production base has led to soaring prices and consumer angst - As a result of the business retreat, Russia has lost companies representing ~40% of its GDP, reversing nearly all of three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base - Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses, which has already sent his government budget into deficit for the first time in years and drained his foreign reserves even with high energy prices – and Kremlin finances are in much, much more dire straits than conventionally understood - Russian domestic financial markets, as an indicator of both present conditions and future outlook, are the worst performing markets in the entire world this year despite strict capital controls, and have priced in sustained, persistent weakness within the economy with liquidity and credit contracting – in addition to Russia being substantively cut off from international financial markets, limiting its ability to tap into pools of capital needed for the revitalization of its crippled economy Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia, and The Kyiv School of Economics and McFaul-Yermak Working Group have led the way in proposing additional sanctions measures. Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual - the facts are that, by any metric and on any level, the Russian economy is reeling, and now is not the time to step on the brakes. Download the visual slide deck accompanying this research monograph here: https://yale.box.com/s/7f6agg5ezscj234kahx35lil04udqgeo Click here to read a brief summary of our research in Foreign Policy: https://foreignpolicy.com/2022/07/22/russia-economy-sanctions-myths-ruble-business

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Yale School of Management ( email )

493 College St New Haven, CT CT 06520 United States

Steven Tian (Contact Author)

Yale chief executive leadership institute ( email ).

165 Whitney Ave New Haven CT 06511 New Haven, CT 06511 United States

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Four signals regarding Russian economic problems in the “war of attrition”

At first glance, it appears that the Russian economy has largely adapted to the shifts and sanctions that occurred following the full-scale invasion of Ukraine. Despite this, new developments suggest that the state may not be able to maintain this new model in the mid to long term.

A worker on the production line of Vibrotechnik in St. Petersburg. Photo: Shutterstock

The strategy chosen by the Russian Federation against Ukraine appears to be a “war of attrition”. The Russian leadership expects that time will play in its favour and that both the Ukrainian economy and the unity of the international coalition will not stand the test of time. However, one question remains open: is the Russian economy ready for a “long-term” confrontation on its own? Against the background of news about the high revenues of the Russian budget from the export of oil and oil products, as well as the allegedly limited effectiveness of sanctions, one has the impression that the Russian economy is in excellent shape and is successfully avoiding serious problems. The objective situation, however, indicates that “not everything is so clear-cut.”

The first signal is a stable budget deficit

Despite the uninterrupted flow of oil funds, the Russian government is unable to balance its budget. The reason for this is the unprecedented growth of military expenditures, which have already reached 8.7 per cent of GDP. In other words, the cost of arms exceeds revenue. In addition, it is important for the Kremlin to maintain the impression of stability and life without war inside the country, which also requires investment in social policies, infrastructure projects, etc.

In 2023, the Russian Federation’s budget deficit amounted to 3.24 trillion roubles (37.7 billion US dollars). In 2024, it is expected to be 2.12 trillion roubles (nearly 25 million US dollars). Although it is predicted that the deficit in 2024 should be smaller than in 2023, this phenomenon is largely caused by favourable energy price conditions. If in 2023 the oil and gas sector provided 8.82 trillion roubles for the budget, then in 2024 the finance ministry primarily forecast an expected income of 11.5 trillion roubles (approximately 130 billion US dollars).

It is interesting that in June this year, such optimistic estimates were slightly revised so that oil and gas should bring in about 10.98 trillion roubles to the budget, which will be reflected in an increase in the deficit from the previously planned figure. Therefore, expectations regarding permanently high oil prices are not always reliable. 

The second signal is critical dependence on energy carriers

Revenue for the Russian budget in 2024 is expected to reach the level of 37.18 trillion roubles (434 million US dollars). Nearly one third (29.53 per cent) is revenue from the oil and gas sector alone. The Russian finance ministry squeezes as much as it can out of the income of energy companies with taxes. Despite this, attempts to extract more from the oilmen will simply lead to upheaval. There is already a confrontation between the finance ministry and the heads of various corporations, where some want to take more for the state budget, while others want to keep their own income. Thanks to the political patronage of the Kremlin, the financial bloc of the government is currently winning this competition. The ability of Russian companies to circumvent sanctions and the favourable international environment allow for a stable situation which is acceptable for both the finance ministry and oil producers.

However, the situation in 2025 may change for the worse. The United States plays a key role in ensuring sanctions against the Russian oil complex and wider compliance with these restrictions. Due to the fact that this is an election year, American regulators are not acting as tough as possible so as not to provoke a spike in oil prices for the domestic American market. The fact is that Russian oil is often sold much higher than the price cap and sanctions so far have not restrained the high level of revenue going into the Russian budget. However, 2025 is decisive in view of the fact that the administration of the US president-elect will be in a position to toughen sanctions in relation to Russian oil.

A more active involvement from the US will have several effects that are problematic for Russian exports. Those who are not afraid of American sanctions will have the opportunity to demand a greater discount from the Russians. This means that the income margin will decrease and those who felt free at the time will find themselves relatively restrained. In this way, they will be more careful with Russian oil and this will also be reflected in its price. Thus, even in conditions where China and India will continue to purchase large purchases of Russian oil, a decrease in their real value will finally create problems for the Russian side of the economy. Either the finance ministry will not receive important revenues or the oil producers will have to further limit their profits.

While oil is trading at 75 US dollars per barrel or higher, albeit with problems, the Kremlin will manage to balance the interests of the state budget and oil producers. However, any drop in its price lower than 60 US dollars, and possibly even lower, will finally allow the implementation of the US plan to reduce Russian profits and put the Russian economy in an awkward position. Thus, it appears that 2025 will be the most suitable year for this.

If Kamala Harris wins the presidency, she will be in a better position to act more decisively and drive Russian oil into a corner. Should Donald Trump return to the White House, it is reasonable to expect active support for American oil production, which would increase the supply and push the price down. Both options do not look particularly attractive for the Russian budget and will partially impact long-term war plans. Certainly, it will not be possible to compensate for the potential decrease in the price due to the volume of sales, since the Russian Federation deliberately places itself within the framework of the OPEC+ rules on reducing production. In this scenario, the critical dependence of the Russian budget on the taxation of oil and gas revenues will be able to manifest itself destructively in the next year. A long war would require income diversification, and Russia continues to have problems with that.

The third signal is the reduction of the financial cushion and the absence of sources of external credit

At first glance, the Russian budget deficit does not seem terrible compared to other countries. For example, in France it is at the level of more than five per cent of GDP. Yet Russia does not have guaranteed tools to compensate for a long war. If Ukraine maintains its economy on the basis of lending and aid, the Russians simply do not have such an opportunity. China, the only potential financial partner, not only shows little willingness to open credit lines for Russia in the future, but even now behaves very cautiously in simpler matters of banking interaction, so as not to run into sanctions. The only Russian financial cushion it currently has is its gold and foreign exchange reserves – approximately 300 billion US dollars which are frozen and unlikely to ever be returned.

The liquid part of the so-called National Development Fund may reach critically low levels as early as 2026. The fund has really already helped hold the budget together since the full-scale invasion began, but even it is reaching its limits. At the beginning of 2024 the volume of the development fund amounted to 11.92 trillion roubles (139 billion US dollars). However, its structure consists of both long-term assets (investments in infrastructure, bonds, etc.) and real liquid assets. The latter is the “physical money” that the finance ministry disposes of in order to quickly close gaps in the budget. The estimated value of these liquid assets is five trillion roubles (approximately 56.73 billion US dollars).

It is not difficult to calculate that with a budget deficit at the level of 26 billion dollars in the current year, the fund may lose up to 45 per cent of its liquidity to compensate for the deficit. If we take into account the intentions of the Russian authorities to use the fund also for infrastructure projects and so-called social investments in 2026, its liquidity may consistently move in the direction of zero.

The fourth signal is the absence on the horizon of specific instruments for increasing budget revenues, besides raising taxes

While the fundamentally important oil and gas sector is reaching maximum performance and its further expansion has limited potential, any new increase in the tax burden on oil seems dangerous. The Russian oil sector is already subject to unprecedentedly high requirements for budget deductions from income. Ambitious projects like the “Power of Siberia 2” pipeline remain only on paper and do not promise any additional source of income. The LNG market functions only within existing projects, such as “Yamal LNG”. Other projects like “Arctic LNG 2” are effectively at the stage of “final failure”, which means there are no opportunities to increase revenue due to limited infrastructure.

Discussions about geopolitical transit routes like the Northern Sea Route also, in practice, remain unresolved. Due to a lack of technology, Russia cannot provide itself with high-class vessels that will navigate the route year-round. Thus, the lack of revenue has forced the finance ministry to implement tax reform which is designed to extract more funds from businesses and the population to partially cover the needs of the budget. For example, the increase in income tax from 20 to 25 per cent has the potential to raise an additional 1.6 trillion roubles (approximately 18 billion US dollars) for the budget.

No matter how hard the Russian leadership strives to demonstrate financial stability and distance its own people from the war, the government is already forced to reach into the pockets of its citizens. It is becoming clear that financial cushions and oil revenue do not cover all current needs. If in 2022 Russia was unable to avoid physical mobilization to support the war, then in 2024 it will not be able to avoid economic mobilization to support the budget.

Delayed effect of sanctions

For the sake of objectivity, it is worth noting that the sanctions have not yet had an immediate destructive effect that would drive the Russian leadership into a corner. However, the systematic increase in national defence spending, which in 2024 should be 70 per cent higher than in 2023 and reach almost 11 trillion roubles (128 billion US dollars), as well as efforts to maintain social investments and develop infrastructure projects, are greatly depleting Russian funds and reserves. Already in 2024 the Russian authorities have had to increase the tax pressure on the population and carry out a kind of tax mobilization. This will be only the first stage; the continuation of the war will require new taxes. At this rate, additional increases and the introduction of new taxes are not far off. For example, in the future we may see how for all salaries a general “war tax” could be instituted.

In 2026 the liquid assets of the National Development Fund may drop to 0.5 per cent of GDP, and in some scenarios even lower. The restraining barrier between the war and the wallet of the Russian people is dynamically decreasing, and the supporters of Russian aggression, in the literal sense of the word, will have to pay more for it at their own expense. Simple calculations give reason to believe that in 2024 and 2025, the Russian economy will still be able to maintain the war and military expenditures at a stable level. However, the cumulative effect of the aforementioned four signals calls into question Russia’s ability to wage a long-term war.

If now the effect of sanctions is not as noticeable as Ukraine would like, starting next year, and especially in 2026, the destruction of the Russian economy will intensify. First and foremost, this will happen under the condition of stricter actions by the US after the 2024 elections in the matter of compliance with sanctions, and a drop in the price of Russian oil to 60 dollars per barrel or lower. Such measures have the potential to become the first “black swan” event that, along with other factors, will finally make the price of the war too high for Russia.

Anton Naichuk is the Director of the Eastern Europe Council based in Warsaw.

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Issue 1/2023: In the throes of crises

The consequences of Russia’s invasion are visible not only in Ukraine. The Kremlin has set off or exploited a series of crises that face most European countries.

Issue 6/2022: Point of no return

New thinking is needed in policies towards Russia, in whatever form it will take after the war.

Issue 5/2022: Loss and division

Ukraine’s suffering goes well beyond the front line.

Issue 4/2022: Values under Siege

With Russia’s invasion of Ukraine we now see our western values under siege, whether we consciously recognise it or not.

Issue 3/2022: The Pain of War

The invasion by Russian forces of Ukraine from the north, south and east – with the initial aim to take the capital Kyiv – has changed our region, and indeed our world, forever.

Issue 1-2/2022: Tug of war?

The situation with Russian threats towards Ukraine once again illustrates the high level of instability in our region.

Issue 6/2021: The Road to Pax Caucasia

Only a year ago we witnessed the second Nagorno-Karabakh war between Armenia and Azerbaijan. It took at least 5,000 lives and significantly shifted the geopolitics in the South Caucuses.

Issue 5/2021: Belarusians. One year in protest

This special issue aims to honour the plight of Belarusians whose democratic choice made in August 2020 was shamelessly snubbed by Alyaksandr Lukashenka.

Issue 4/2021: Ukraine's Unfinished Story

From the social, economic and political points of view, a lot of work still remains for this country. And this is why Ukraine’s story is incomplete.

Issue 3/2021: Tales from the Baltics

30 years after the fall of the Soviet Union

Issue 1-2/2021: Whither Democracy?

And what lies ahead for our region...

Issue 6/2020: Understanding Values in Uncertain Times

Our societies are more polarised than ever before, which makes them more susceptible to disinformation, untruth and conspiracy theories.

Issue 5/2020: Juggling a Pandemic

The COVID-19 pandemic has exposed limitations and weaknesses in nearly all countries around the world.

issue 4/2020: The Kremlin's Hybrid War

The case of Georgia

Issue 3/2020: The War in Donbas

Its costs, challenges and the commitment to peace.

Issue 1-2/2020: Bound to Explode?

Uncertainty, volatility and the relationship between Russia and the West.

Issue 6/2019: New (Old) Faces?

A true makeover or cosmetic change?

Issue 5 2019: The Black Sea region

The Black Sea region is quickly becoming a geopolitical battleground which is gaining the interest of major powers, regional players and smaller countries – and the stakes are only getting higher.

Issue 3-4/2019: Eastern Partnership turns 10

This issue is dedicated to the 10 year anniversary of the European Union’s Eastern Partnership as well as the 30 years since the 1989 revolutions in Central Europe.

Issue 2 2019: Postmodern Geopolitics

The consequences of the emerging multipolar world.

Issue 1 2019: Public intellecturals

This issue takes a special look at the role and responsibility of the public intellectual in Central and Eastern Europe today.

Issue 6/2018: 1918. The year of independence

In the eastern parts of the European continent, 1918 is remembered not only as the end of the First World War, but also saw the emergence of newly-independent states and the rise of geopolitical struggles which are felt until this day.

Issue 5/2018: What's new with Belarus?

It often seems, at least from the outside, that Belarus remains isolated from the West and very static in its transformation. Yet, despite its relative isolation, Belarus is indeed changing.

Issue 3-4/2018: Para-states. Life beyond geopolitics

The Summer 2018 issue of New Eastern Europe tackles the complexity of para-states in the post-Soviet space.

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Local Projections

A central question in applied research is to estimate the effect of an exogenous intervention or shock on an outcome. The intervention can affect the outcome and controls on impact and over time. Moreover, there can be subsequent feedback between outcomes, controls and the intervention. Many of these interactions can be untangled using local projections. This method’s simplicity makes it a convenient and versatile tool in the empiricist’s kit, one that is generalizable to complex settings. This article reviews the state-of-the art for the practitioner, discusses best practices and possible extensions of local projections methods, along with their limitations.

We are grateful to Regis Barnichon, Colin Cameron, James Cloyne, Olivier Coibion, Yuriy Gorodnichenko, Amaze Lusompa, Christian Matthes, Valerie Ramey, Sanjay Singh, and Takuya Ura for useful comments and suggestions. Research by many of the authors that we discuss in the article, and others that we unfortunately will have inevitably missed, played an important role in clarifying local projections and advancing them into mainstream empirical research. Steven Durlauf and David Romer helped guide this article to fruition, along with several anonymous referees, and for their help and advice we are very grateful. The views expressed herein do not necessarily represent the views of any of the institutions of the Federal Reserve System. All errors are our own. The online repository of the STATA code that replicates all the examples in the article is available at: https://github.com/ojorda/JEL-Code. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

MARC RIS BibTeΧ

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Analysis: A New Era of Financial Warfare Has Begun

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A New Era of Financial Warfare Has Begun

The west’s latest actions against russia carry risks for the global system and could provoke china..

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Russia’s War in Ukraine

Understanding the conflict two years on.

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Washington and the West have begun a new phase of financial warfare against Russia and China—a powerful but also potentially risky escalation that, if people aren’t careful, could eventually give Moscow and Beijing exactly the outcome they are believed to be looking for.

How so? Because the unprecedented actions taken at the G-7 summit in June to hand over to Ukraine billions of dollars in profits earned on frozen Russian assets—along with new actions taken against Chinese banks—could begin to undermine the legitimacy of the U.S.-dominated international financial system, some experts say. And that could make Russian President Vladimir Putin and especially Chinese President Xi Jinping, who is said to want to create an alternative renminbi-based financial system, very happy in the end.

At a time when many nations are unsure about whether to do business with Russia and are falling into the debt-enforced embrace of China, the G-7 action sends a message: What was once sacrosanct in international finance may be no longer. A number of sovereign wealth funds, central banks, corporations, and private investors—especially from the smaller countries of the global south that are most vulnerable to sanctions—may well want to hedge against full investment in dollar- and euro-based holdings.

“This decision crosses the Rubicon,” said Ryan Martínez Mitchell, a law professor at the Chinese University of Hong Kong, by “weakening the norm of sovereign immunity for foreign central banks.”

“Any shift away from a U.S. dollar-based global financial system is not a near-term prospect, but decisions like these do probably add to the constituency that would welcome that kind of future,” Mitchell said. Others agree. “There were many forces pushing for a search for alternatives to [the U.S.] dollar, and this move will give an additional push to those efforts,” said Harold James, a financial historian at Princeton University. “I believe we are at a tipping point in which two worries coincide: one about the likely fiscal path of the U.S. and an unsustainably large burden; the second about seizure of assets, with secondary sanctions possibly being applied to countries that are in a supply chain with China and then indirectly with Russia.”

The “tipping point,” James warns, could come in the form of many countries, even U.S. allies, beginning to move their assets away from the dollar and euro. According to Raghuram Rajan of the University of Chicago, a former governor of the Reserve Bank of India, nations are disturbed by the idea that Russia’s $300 billion in central bank reserves have been inaccessible for more than two years. “Some central banks have started diversifying reserves a little more as a result, including into gold,” Rajan said.

James added: “One sign that I find very telling is how Central European countries, the Czech Republic and Poland, both of which feel very close to the U.S. and who weren’t interested in gold reserves when they felt secure—indeed, the Czech Republic sold its gold reserves the day they entered NATO in March 1999—are now buying large amounts of gold.”

Putin himself spoke triumphantly of this trend in his notorious interview with renegade U.S. newscaster Tucker Carlson in February. Washington’s decision “to use the dollar as a tool of the foreign-policy struggle is one of the biggest strategic mistakes made by the U.S. political leadership,” Putin said , pointing to America’s fiscal profligacy. “Even the U.S. allies are now downsizing their dollar reserves.” At another point, Putin warned other countries that they “could be next in line for expropriation by the United States and the West.”

Wary of the risks of sending a destabilizing message, the G-7 did stop short of actually seizing the Russian assets at its summit in Italy. Instead, it adopted a complex scheme to transfer so-called windfall profits on earnings from frozen Russian central bank securities—the earnings of some $3 billion to $4 billion a year come from investments by Euroclear, the financial services company in Belgium that holds the Russian assets—to supply finance to Ukraine.

It was unprecedented all the same. As a senior Biden administration official described it: “Never before in history has a multilateral coalition immobilized the sovereign assets of an aggressor country and then found a way to unlock the value of those assets for the benefit of the aggrieved party as it fights for its freedom. That’s what happened at this G-7.”

However it’s done, making money off other nations’ assets—even aggressor nations, such as Russia, in total violation of global norms—is a risky precedent. “Once a new sanction becomes seen as effective, its usage tends to proliferate,” said Jon Bateman, a senior fellow at the Carnegie Endowment for International Peace. “In recent years, creative new uses of export control powers—such as the Entity List and the Foreign Direct Product Rule—have ping-ponged between Chinese and Russian targets, with each country serving as a proving ground for actions later taken against the other.”

Nor did the G-7 leaders stop there. They also indicated that new measures were being considered that might gradually cut Beijing out of the international financial system. While saying in a communiqué that they “recognize the importance of China in global trade” and affirming that they “are not trying to harm China or thwart its economic development,” the leaders obliquely threatened Chinese banks “and other entities in China” with measures to “restrict access to our financial systems.” That could ratchet up the war—and the risks to the system—dramatically.

China has already been quietly insulating itself from financial retaliation over its support of Russia in the past two years, said Hung Tran, a former deputy director at the International Monetary Fund, in a June 21 interview. “The major Chinese banks have been very cautious even in reducing their exposure and dealings with Russia. In place of that, smaller institutions not having any business with any U.S. entity have been set up to handle trade with Russia so that basically Russia-China trade is settled in renminbi and rubles.”

The senior administration official justified the decision to increase pressure on China by saying that “some of China’s actions to support the Russian war machine are now not just threatening Ukraine’s existence but European security and trans-Atlantic security.” The official added that among other “unrivaled policy distortions coming out of China”—meaning its unfair trade practices—Beijing was now openly supplying dual-use components and other economic aid to Russia. “There was unanimous agreement that the Russian military has been sustained by transforming its entire economy into a war machine and because China and other countries have been willing to serve” that effort, the official said.

In a blunt statement during his visit to Beijing in April, Secretary of State Antony Blinken reiterated these accusations, declaring that China was “powering Russia’s brutal war of aggression against Ukraine” as “the top supplier of machine tools, microelectronics, nitrocellulose, which is critical to making munitions and rocket propellants, and other dual-use items that Moscow is using to ramp up its defense industrial base.”

The actions taken at the G-7 summit may well have been necessary. Nearly two and a half years into the war, support for aid from the United States and Europe is flagging, Kyiv’s forces are exhausted, Russia’s economy is still looking fairly robust, and a new anti-Western alignment is hardening between Moscow, Beijing, Tehran, and most recently North Korea. “We are stepping up our collective efforts to disarm and defund Russia’s military industrial complex,” the G-7 leaders said in their communiqué.

This latest approach to squeezing Russia started slowly, even painfully, amid a great deal of tension between the United States and European governments about just how tough to get with Moscow. Immediately following Putin’s invasion of Ukraine in February 2022, none of those governments had a problem imposing the usual economic sanctions—import and export restrictions and the like—and quickly. They took a major step further when they froze Russia’s central bank assets—an unprecedented move against such a large country—in addition to real estate properties, stocks, bonds, and various investments held by Russian oligarchs.

But actually seizing those bank assets was seen as a step too far, especially by the Europeans, who fought off an effort led by the U.S. Congress, and ultimately backed by the Biden administration, to pursue full seizure. That meant tampering with the international financial system itself—the complex postwar network of norms, codes, and laws that has underwritten the greatest surge of prosperity in recorded history and enriched the West. That felt a little too much like playing with elemental fire because it meant threatening the idea of sovereign immunity that is central to the system and because it meant posing increased risks to the holding of dollar- and euro-denominated assets. And having established this precedent, what about China? What effect will the G-7’s warnings have on Xi?

The shot fired in the communiqué could deter Xi from doing even more to isolate China’s ailing economy than he already has—specifically by invading or blockading Taiwan. Or, alternatively, it could mean the beginning of the end of the postwar global economic system if Xi decides to move against Taiwan anyway. Indeed, he could easily gamble that the United States wouldn’t dare do to China what it’s doing to Russia for exactly that reason.

If the United States and West were to respond to an invasion or blockade of Taiwan by freezing and leveraging Chinese assets, the result could be a freeze-up of the whole financial system and a devastating blow to the global economy. In the case of Russia, Washington needed to undergo many months of negotiation with the European Union because the vast majority of Russian assets are held in Europe and there was only about $300 billion or so to freeze. The same is not true of Chinese assets, which are huge and spread all over the world. Under the International Emergency Economic Powers Act, Washington would be able to freeze some $800 billion in Chinese Treasury bill holdings entirely on its own, which is only a portion of some $3 trillion in Chinese-owned sovereign assets overseas. But Beijing could easily retaliate against that nearly $6 trillion in Western investment in China.

As Tran argues, the threat of a kind of financial MAD, or mutual assured destruction, is far too great. In “terms of balance sheet exposures, China has about $3.4 trillion of identifiable international assets at risk of possible sanctions and up to $5.8 trillion of liabilities to, or assets in China of, international investors and companies largely from Western countries. China therefore has plenty of room to take retaliatory actions,” Tran wrote in a 2022 post for the Atlantic Council titled “Wargaming a Western Freeze of China’s Foreign Reserves.”

The deep cross-integration between China and the West is what has led both sides to avoid a complete decoupling of economies, reflecting what former U.S. Treasury Secretary Larry Summers once called a “financial balance of terror.” As a result, “there will be more resistance to imposing the scope of sanctions we have imposed on Russia because Western economies are far more intertwined with China’s than they were with Russia’s,” said William Reinsch, a former U.S. commerce undersecretary now at the Center for Strategic and International Studies.

Reinsch notes there is an important “qualitative difference” as well: “The Russian assets being used are those seized from oligarchs who have supported/enabled Putin. There are some Chinese oligarchs, but their relationship with their own government is much different, as is their role in the economy. If you go beyond oligarchs, you get very quickly to seizing sovereign assets, which I doubt the West would do and for which the consequences would be significant.”

But according to some China experts, the latest moves might only spur Xi to further decouple his economy. The “dimmer” that peaceful reunification with Taiwan seems, “the more incentives Beijing would have to reduce vulnerabilities to sanctions in case of a militarized conflict,” said Zongyuan Zoe Liu, a fellow at the Council on Foreign Relations and columnist for Foreign Policy . “China has been diversifying its foreign exchange reserves since the 2000s. While previously the primary motivation was to search for higher returns and strategic assets, now it is also to reduce vulnerabilities to sanctions.”

And while Xi’s dream of a renminbi-based system still “has a long way to go”—the yuan is a distant fifth in global reserve currency holdings—escalating Western moves “may ultimately weaken international law protections for everyone, not only their intended targets,” Mitchell wrote recently for the Quincy Institute. As a result, “intensified weaponization of Western currencies could indeed boost China’s yuan efforts, and, more significantly, provide a major stimulus to plans for a BRICS basket reserve currency. The move would simultaneously improve Beijing’s reputation as an apparently more responsible actor with respect to foreign assets, while also perversely incentivizing it to further experiment with its own nascent unilateral sanctions regime.”

Russia is much more willing than China to blow up the international system. But that doesn’t mean Xi won’t decide he can afford to see that happen as well. As Tran argues, Beijing has been pursuing a “dual-track” strategy of working within the current Western-led trading system “but also wanting to find alternative ways to do this trade without being exposed to dollar sanctions.” Further sanctions could only push Xi further in the radical direction of trying to set up an alternative renminbi-based financial trading system.

“Both sides are kind of upping their ante,” Tran said.

Michael Hirsh is a columnist for Foreign Policy. He is the author of two books:  Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street  and  At War With Ourselves: Why America Is Squandering Its Chance to Build a Better World . Twitter:  @michaelphirsh

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Most empirical work in economics has considered only a narrow set of measures as meaningful and useful to characterize individual behavior, a restriction justified by the difficulties in collecting a wider set. However, this approach often forces the use of strong assumptions to estimate the parameters that inform individual behavior and identify causal links. In this paper, we argue that a more flexible and broader approach to measurement could be extremely useful and allow the estimation of richer and more realistic models that rest on weaker identifying assumptions. We argue that the design of measurement tools should interact with, and depend on, the models economists use. Measurement is not a substitute for rigorous theory, it is an important complement to it, and should be developed in parallel to it. We illustrate these arguments with a model of parental behavior estimated on pilot data that combines conventional measures with novel ones.

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