Trump administration envoy Steve Witkoff has drafted the outline of a new peace deal between Russia and Ukraine—even as U.S. sanctions on two Russian oil companies went into effect recently. Congress is considering a new package of sanctions that could pass later this year. Ukraine, for its part, is facing a dire budget shortfall for next year. And a growing corruption scandal threatens to engulf the Ukrainian government.
Are U.S. sanctions on Russia working? How severe is Ukraine’s budget shortfall? And is corruption inevitable in Ukraine under conditions of total war?
Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: Are U.S. sanctions on Russian oil companies already showing signs of working?
Adam Tooze: Hitting Rosneft and Lukoil and their associated subsidiaries is a big deal. The Americans hadn’t done anything quite like this before, and certainly [President Donald] Trump hadn’t done anything quite like this before. So it’s a big step. And the real question will be whether or not they really intend to prosecute the secondary sanctions push. So in other words, to hurt the Indians, if the Indians go on consuming this oil. Because the point was to sanction Russia whilst providing the Indians with a benefit. That was part of the American policy to woo India out of its independence, out of its nonalignment toward the Western bloc. And so therefore a deal that hurt the Russians and benefited India was in the logic of American policy.
The Trump administration appears sometimes not to agree with this. We’re going to see in weeks to come how this is played out. What is going on in the background is that both India and China are building payments infrastructure, which means that they have tear-away, throw-away banks, if you like, that will engage in trade with Russia, which, if they were to be sanctioned by the U.S., it wouldn’t do systemic damage to their financial systems where the payments are overwhelmingly organized in non-dollar currencies, so in rupee or MNB. And that will limit the ability of America to actually do serious damage to anyone infringing these sanctions. But this is very much up in the air.
CA: What are the greatest constraints on the Russian economy right now? Are they fiscal constraints, in the sense of oil revenues potentially falling? Or are they demographic, with the cumulative effect of casualties?
AT: What we’ve learned is that the Russian economy has proved remarkably resilient to external sanctioning. In 2023, in the second year of the war, the Russian economy grew by 3.6 percent. In 2024, it grew by 4.1 percent. The question we’re asking really is, is it going to hit the buffers now, finally? Is it going to run up against constraints?
And you could think of a variety of different constraints. Some of them are financial and fiscal. So we were talking about oil revenues. Those are sharply down. Largely driven, I think, by overall price falls. The Russian budget is now set up for oil around $59 a barrel, I think, rather than in the 70s when the war started. That produces a squeeze. If they break out of that envelope, they have to borrow more, there’s the risk of inflation; the Russian Central Bank is a kind of guarantor of a kind of stability, so it has the tendency to raise interest rates. That produces tensions within the Russian economy. There are supply constraints that are driven by the limits on investment that are typical during a war. They invested heavily in new armaments capacity but largely have exploited the full range that they could get out of that. This was largely drones, electronic warfare, ammunition, they’ve kind of reached the limit there.
And then, of course, there’s the question of the labor market. I mean, Russia is a really large country with a really large population. So the mobilization by itself is probably not enough to really squeeze the labor market. But running the economy hot, which is what they’re doing with unemployment at a very low level, produces labor-market strain, gives workers the ability to bargain, people start switching jobs. And there is the brain drain, so they don’t have enough highly trained workers. The armament sector in particular, which employs roughly 3 million people all told, attrited the hard core of skilled workers that had grown up in the Soviet Union quite quickly in the ’90s and the 2000s. So they don’t have the kind of skilled workers that you’d like. Plus, there has been a brain drain out of the Russian economy.
All of this adds up to the fact that growth in the first half of 2025 looks really modest. It looks like about 1 percent. And so I think the most reasonable estimation is to say that, yes, there is very likely to be some slowdown in the Russian economy. But I wouldn’t be counting on any kind of collapse, I wouldn’t be counting on any kinds of crisis. Even before the war, the Russian economy was not exactly a hotbed of innovation and total factor productivity growth. You would expect that to become more and more problematic, especially as the sanctions progressively bite. Don’t underestimate, however, their ability to improvise, which they have demonstrated very, very effectively in the first three years of this war.
CA: Ukraine faces a $61 billion budget shortfall in the next two years; the gap is $18 billion for next year alone. What are the options right now for filling that gap?
AT: Yeah, they are desperately short of money. They need tens of billions of dollars, or euros. The way they do it is that they use their domestic tax flow—it’s a kind of political construct, but it also helps. So they get about 63 billion euros’ worth of domestic taxes. They spend all of that on the war. So that’s about 35 percent of the Ukrainian economy. That’s the way they construct this. They hypothecate the tax flow for the war. Then they rely on gifts of armaments, equipment, and so on to feed the war effort.
And then essentially the entire rest of the Ukrainian public budget, all of the civilian services necessary to maintain Ukrainian public life, are funded externally by borrowing, or domestic borrowing of various types. So the structure is essentially we use all of our tax revenue for the war and everything else we ask our friends to support us with. It’s an artificial construction, but it shows the extent of the dependence here. Literally the entire civil part of the Ukrainian government is relying on that flow.
And the options really are narrowing, because once upon a time this was a three-way effort. It was the U.S., it was Europe, and it was others, notably Japan. Then there’s the IMF [International Monetary Fund] and the World Bank, which are acting extraordinarily in the middle of this war, despite the fact they have Russian and Chinese shareholders. They are essentially party to the war on Ukraine’s side, even though Ukraine has this long-standing track record of failing in IMF programs. All of that was suspended. And the thing that’s shifted, of course, is the Trump administration has pulled out. So essentially now, the Europeans, because they’re the richest, they’re the largest, and because their interest is so strong, they are carrying the can.
And the issue arises with the force that it does at this current moment because the Europeans haven’t quite figured out how they are going to foot this bill that you’re pointing to. And the embarrassment is, they had a plan. And they developed this plan over the summer, which was basically to use the reserves of the Russian Central Bank that were sanctioned in 2022 that are located in Belgium—this turns out to be important—that were sanctioned and immobilized, they’re going to use those basically as collateral for a large loan for Ukraine to the tune of about 140 billion euros, so that’s $160 billion. So that would cover several years of the necessary margin. And the idea was to use that as the collateral.
And then the Belgians woke up with a panic to the realization that if they gave the green light to this and subsequently there was international litigation and they were found liable for malfeasance for essentially handing over assets that were given to them for safe keeping, the Belgians wanted an indemnity from the rest of the EU if it were found that they needed to pay damages. The Belgians are demanding indemnities from their other European partners for the event in which in a world they are found to be at fault. And that’s collapsed. The Slovakians said no. The Hungarians have never liked this. The Norwegians for a while were saying, “We might use our sovereign wealth fund.” Apparently that idea dissipated.
And so now you’re back to square one. And so then the Europeans have to solve the European fiscal problem, which is a long-standing preoccupation of ours on this show. And that could take the form of individual grants from member states, it could take the form of a joint EU loan, or you might be able to somehow frontload funding that other members of the G-7 had committed to and, like, pay that out quickly. The timing here is significant because you want to get through to 2028, because in 2028 in the already agreed European budget, there’s a hundred billion provided for Ukraine. And so the Europeans are trying to find ways of just doing ’26, ’27, and then once they get to ’28, they’ve already agreed a political frame.
Compared to the relative stability of the Russian war funding, even under this intensive sanctioning, the Ukrainian financing regime just looks incredibly precarious. And they had thought they had resolved that—well, they had under [former U.S. President Joe] Biden. But with the Trump administration in place and the American Congress in the kind of mood it is, really, it’s down to the Europeans. And the Europeans have demonstrated again this year that they simply don’t have the coherence on this issue that they would like. They may get there in the end, apparently Kyiv is sanguine that in the end, they’re too big to fail, the Europeans will pull themselves together. But from the point of view of the Ukrainian political system, this is terrifying stuff
CA: New reporting has shown that corruption is still widespread in the Ukrainian government, potentially including the circles around President [Volodymyr] Zelensky. Is state corruption inevitably a byproduct of fighting an all-out war?
AT: I mean, I think that’s fair. And you could say is corruption an endemic problem of military procurement in general. You know, think about the endless stories of gouging and excess profit taking within the American military industrial complex. The logic here, I think, is it’s much better to think of this not in moralistic terms, but in functional terms, in distributional terms. How is it that the benefits and profits, the surplus value that can be creamed off at different points in production and distribution inside and outside the state, how is it distributed at any given time? Also, you’d be hard-pressed to point to a moment in which the Ukrainian economy has been in a state of normality since the collapse of the Soviet Union, right? And in that, there was always an underlay of oligarchic corruption on a really large scale, truly, truly kleptocratic large scale.
The long-standing allegations of corruption against Ukraine were so comprehensive and essentially slid into the diagnosis of Ukraine as a failed state, which was very widely shared and which fed into then our assumption that it would collapse. And this was an assumption shared by the Americans, by the Russians, by many of the Ukrainians themselves at the beginning of the war, and it has proved to be false. But whatever level of corruption there is in Ukraine, it has not been as corrosive of state capacity as we imagined. That is, I think, the baseline for all discussions of Ukrainian corruption. They are still managing to fight a war we would struggle to fight. We can’t account for the money we’ve given them. They can’t account for it either. The American funding agencies don’t know where their money went, because they didn’t keep track in Ukraine because it’s in a war situation. So it’s tumultuous, it’s hard to track, it’s easy to move money around.
So there’s a long-standing story, there’s a flux of kind of politics around this question in Ukraine. The question is how it’s managed at any given moment. And I think the fact that Zelensky was not able to keep this under wraps and that it’s exploded is a sign of just how much pressure he’s under, both from the front line, from Washington, from this outstanding issue of funding from Europe and from domestic political pressure. I mean, it is politics of near-total war.
