Kyiv Holds the Line, and the West's Economic Weapons Start to Bite

For two years the West's economic campaign against Russia looked like a blunt instrument: loud in announcement, modest in effect. Sanctions packages multiplied, a price cap was slapped on Russian crude, more than €200bn of central-bank reserves were frozen — and still the Kremlin's tanks ground forward and its budget stayed afloat on a river of oil money. In the summer of 2026 that picture has begun to change, and the reason lies as much on the battlefield as in any finance ministry.

Russia's much-trailed spring-summer offensive has, so far, gone almost nowhere. According to the Institute for the Study of War, Russian forces seized or infiltrated only about 40 square kilometres of Ukrainian territory between December 2025 and May 2026 — a fraction of the ground they took over the same period a year earlier. Having captured the Donbas stronghold of Pokrovsk, Moscow has been unable to convert it into any deeper breakthrough. Ukrainian drone units, longer-range strikes and the February block on Russian use of Starlink terminals have turned the front into a grinding stalemate that favours the defender.

That stalemate matters far beyond the trenches. As long as Russia appeared to be winning, time seemed to be on Vladimir Putin's side, and Western economic pressure looked like a slow bet that might never pay off. With the front frozen, the calculus flips: the policies the West has spent two years assembling now have time to do real damage to an economy that is itself running out of room.

The reserves are running dry

The numbers coming out of Moscow are no longer those of a confident war economy. The liquid assets of Russia's sovereign wealth fund — the cushion that has absorbed shock after shock since 2022 — have fallen from about 6.5 per cent of GDP at the start of the war to roughly 1.8 per cent by April 2026, according to the Kiel Institute for the World Economy. Oil and gas revenues, the lifeblood of the federal budget, collapsed by 45 per cent year on year in the first quarter; the deficit blew past its full-year target within three months. Labour shortages are at record levels, and the country leans ever harder on a single patron.

“Fiscal reserves have been largely exhausted, growth has come to a standstill, and the country's dependence on China is becoming ever more pronounced,” says Moritz Schularick, president of the Kiel Institute.

China now accounts for about 35 per cent of Russia's foreign trade and for roughly three-quarters of the rise in its imports of the sanctioned components that keep missiles and drones in production. That is resilience of a kind — but it is also dependence, and it means Moscow's war machine increasingly runs on terms set in Beijing rather than in Russia.

The €210bn question

Nowhere is the West's leverage more visible — or more contested — than in the roughly €210bn of Russian state reserves immobilised in Europe. The overwhelming bulk, some €193bn, sits at Euroclear, the Brussels clearing house; a smaller slice is held at Clearstream in Luxembourg. For two years Brussels has used only the windfall profits these assets throw off, channelling billions to Kyiv while leaving the underlying capital untouched.

The bolder idea — a “reparations loan” that would put the frozen capital itself to work for Ukraine — ran aground in December, when Belgian Prime Minister Bart De Wever refused, warning of legal blowback and damage to Euroclear. EU leaders instead agreed a package of roughly €90bn for 2026-27 raised on the markets, with repayment pegged to eventual Russian reparations and the frozen assets held in reserve as a backstop. The windfall itself is thinning: Euroclear booked €1.1bn in interest from the assets in the first quarter, almost a quarter less than a year before, as rates fall. And in January a Moscow court opened hearings on a $235bn counter-suit from Russia's central bank — a reminder that this is a two-way legal war.

Brussels turns the screw

The sanctions machine, meanwhile, keeps grinding finer. At their June summit EU leaders rolled the economic measures over for another year. Successive packages have banned imports of Russian liquefied natural gas, blacklisted hundreds of “shadow fleet” tankers ferrying sanctioned crude, and — for the first time — reached into the crypto platforms used to dodge the rules. A twenty-first package, aimed squarely at Russia's military-industrial suppliers and the ships that sustain its oil trade, is taking shape in the Council.

None of this guarantees an ending. Russia has confounded predictions of collapse before, and a war economy can run on fumes and coercion for a long time. But the logic that sustained Putin's bet — that the West would tire before Russia broke — is wearing thin. For Europe, and for the financial centres such as Luxembourg that hold a piece of the frozen pile, the coming year is less about new weapons than about the nerve to keep the old ones pointed in the same direction.