Analysis: How to raise the cost of war for Russia

Three and a half years since Russia's full-scale invasion of Ukraine, with a US-led peace process on ice and a stalemate on the battlefield, Kyiv's allies are calling for renewed economic pressure on Moscow. The aim: to raise the cost of war for the Kremlin to a level that forces it to change course.

Eighteen packages of European Union sanctions and dozens more from the United States, United Kingdom and others have weakened Russia's economy – but not its resolve to carry on fighting.

What's needed, then, is not just more but smarter penalties, experts say.

“We just need to be cleverer,” said Timothy Ash, a Russia researcher at the UK-based Chatham House think tank who has advised a number of governments on the impact of sanctions against Moscow.

A massive rise in military spending helped the Russian economy grow more than 4% in 2023 and 2024, but this year the government is expecting just 1% growth. It also sees inflation at 6-7% by the end of the year, and interest rates are at a painful 17% level, aimed at containing price rises.

The Kremlin's hugely important earnings from oil and natural gas are falling and the budget deficit – the gap between government spending and revenue – is widening.

Yet the latest three-year budget plan, submitted to parliament in late September shows that military spending will stay at around four times pre-war levels. And that's thanks largely to Russian taxpayers.

Starting from January, the Kremlin has decided to raise value-added tax (VAT) from 20% to 22%, with the extra revenues “primarily directed” toward defense and security, according to the finance ministry.

Armored vehicles take part in a parade marking the 80th anniversary of the Soviet Union's victory in the Great Patriotic War, or the Eastern Front of World War II, in Moscow on May 9, 2025. Xinhua/Getty Images

Russian President Vladimir Putin has openly acknowledged the economic cost of raising VAT, saying earlier this month that the measure would “be reflected in economic growth” – but he still defended it.

The Kremlin's decision is “consistent with planning for a long conflict and a prolonged regime of constrained private demand,” Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center, told CNN.

In other words, the Russian government has accepted the growing economic pain of the war. But are there potential penalties so damaging that they would sap Russia's resolve to keep fighting?

Stopping the Russian ‘war machine'

The 500% tariff on any country buying Russia's energy exports proposed in the Sanctioning Russia Act – introduced with bipartisan support in the US Congress but not yet brought to a vote – would certainly be one, argues Ash, an associate fellow in Chatham House's Russia and Eurasia program. “That would totally halt Russian exports. It would absolutely definitely crash the Russian economy and stop the Russian war machine,” he told CNN.

But no one, including Putin, who called the idea “impossible to imagine” last week, expects the US to go through with it, because taking Russian oil and natural gas off the market would raise global prices.

Instead, Ash suggests a much lower so-called “secondary” tariff, of 20-30%, which would allow Russian exports to continue flowing to the global market, but with a twist: The revenue generated should be used to fund Ukraine.

A gas station in Moscow, pictured on September 8, 2025. Alexander Nemenov/AFP/Getty Images

Using Russian wealth to fund Ukraine is at the heart of discussions in Europe right now about another economic measure – one that would also send a clear message on Kyiv's longevity in this war.

According to a number of media reports based on an internal European Union document, the EU is considering using Russia's frozen assets in Europe as the basis of a €140 billion ($162 billion) loan to Ukraine. Kyiv would be required to repay the debt only if Russia paid reparations for its war.

The new loan would send “a really strong signal to Russia,” according to Ash, “that Ukraine is well-financed (and) it will be able to buy the weapons to sustain a long war.”

In an opinion piece in the Financial Times backing the plan, German Chancellor Friedrich Merz also wrote that “Moscow will only come to the table to discuss a ceasefire when it realizes Ukraine has greater staying power.”

Another option is to target new measures at the weakest points in Russia's economy, suggests Alexander Kolyandr, a senior fellow with the Democratic Resilience Program at the Center for European Policy Analysis.

His idea centers on Russia's long-standing labor shortages, which have worsened since the war broke out and many working-age men have either been mobilized or fled overseas. Currently, Russian citizens face extra hurdles applying for work visas in some European countries, with the Baltics and Poland effectively banning them.

“Instead of limiting professional immigration from Russia to the West, I think a brain drain should be only encouraged,” said Kolyandr. Doing so would exacerbate Russia's labor crisis, as well as put an upward pressure on wages, complicating its battle against inflation, he noted.

Ukraine has a powerful weapon

As well as taking a new approach to sanctions, enforcing existing sanctions more effectively is essential, experts say.

In a massive missile and drone attack on Ukraine on the night of October 5, Russia, according to Ukraine's President Volodymyr Zelensky, used more than 500 weapons systems containing over 100,000 foreign-made parts – including European ones. That's despite Western sanctions banning the sale of billions of dollars' worth of military and dual-use components to Russia.

“Now, in the fourth year of the full-scale war, it is simply strange to hear anyone claim they don't know how to stop the flow of critical components,” Zelensky said.

Penalties for non-compliance need to be properly enforced, according to Ash. “There's a huge windfall to these individuals, companies and countries helping Russia break sanctions,” he said, “but no penalties… no one goes to jail.”

Residents leave their apartment building damaged by a Russian drone strike in Zaporizhzhia, Ukraine, on October 5, 2025. Stringer/Reuters

But perhaps the most effective penalty on Russia's war economy is in the hands not of Ukraine's allies but Ukraine itself.

In recent months, Kyiv's escalating long-range drone strikes on Russian oil refineries have, according to a recent estimate by Russia's Siala analytics agency, knocked out 38% of Russian oil refining capacity – though Sergey Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center, has said that such estimates do not account for how much was idle before and how much damage has been repaired.

Still, the strikes led to shortages of gasoline in Russia and caused it to export more crude oil, which is generally less profitable than selling refined products.

Ash believes the strikes are a potent weapon against Russia's economy, for two reasons: “You're not only causing domestic disruption to the economy through a shortage of fuel at the pumps, but you're actually capping their export receipts as well.”

This strengthens the argument for supplying more Western long-range weapons to Ukraine and with fewer restrictions on their use, he told CNN.

And, based on Putin's recent reaction, this is something Russia may fear more than any economic sanction.

At a Russian economic forum last Friday, Putin was asked what would happen if the US allowed the delivery of its intermediate range Tomahawk missiles to Ukraine. Perhaps hoping to dissuade the Trump administration, he replied that it would lead to the “destruction of US-Russia relations.”