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Russian President Vladimir Putin attends a Security Council meeting via videoconference in Moscow, on Sept. 9.Gavriil Grigorov/The Associated Press

After it invaded Ukraine, Russia was hit with waves of sanctions that were supposed to wreck the economy, deprive Moscow of the ability to pay for the war and – some Western leaders hoped – trigger a rebellion within the Kremlin that would see the ouster of President Vladimir Putin.

Today, more than half a year later, Russia is still very much at war, with offensives and counteroffensives raging in southern and eastern Ukraine. Mr. Putin is still the Russian leader, and the economy, while no doubt in recession, does not appear mortally wounded – far from it.

The sanctions are clearly not working as well as expected, which is not to say they have already failed. Over time – perhaps years – they could work their dark magic. The question is whether Europe will be able to muster the wherewithal to keep those sanctions in place as it barrels toward a recession brought on by record-high energy prices and soaring inflation.

A game of chicken is under way between Mr. Putin and European leaders, and it is impossible to know which side will fold first. What is known is that the sanctions have not forced Mr. Putin to sue for early peace.

Let’s start with the gross domestic product forecast. In March and April, various economists predicted the sanctions would knock down Russian GDP by 12 per cent or more. Since then, the numbers have been recast to show a smaller contraction. In July, the International Monetary Fund forecast a 6-per-cent contraction in 2022 rather than the drop of 8.5 per cent it had called for in April.

It expects GDP to decline 3.5 per cent next year – not pleasant for the Russian economy, but hardly an existential threat. Another round of sanctions, if they come, could easily make that figure worse if, for instance, the shortage of chips and semiconductors clobbers the Russian tech sector (Russia’s statistics agency, Rosstat, said GDP in the first half of 2022 fell just 0.4 per cent, but the numbers used to generate that figure were probably manipulated for maximum propaganda value).

Waves of sanctions were supposed to crush the Russian economy, but it is still showing signs of resilience

Working in Russia’s favour, perversely, are the energy markets. The less energy Russia sells to the West, the higher the price goes.

Kremlin-controlled Gazprom, the world’s biggest natural gas exporter, has indefinitely suspended deliveries via the Nord Stream 1 pipeline, Germany’s main source of imported gas, and has said they will not resume as long as the West’s sanctions remain in place. Europe is still getting gas from pipelines that travel through Ukraine and Turkey, but not much. Those deliveries are down about 80 per cent since last year.

The severe shortages have pushed European wholesale natural gas prices up tenfold in a year, and companies across the continent are struggling with cruel energy bills that are forcing some of them to curtail and even stop production. Energy-intensive companies with high-temperature furnaces, such as metal and glass manufacturers, are suffering the most.

Gazprom is flush with cash, even as sales to its core European market vanish. The other day the company announced a record first-half profit of 2.5 trillion rubles (about US$41-billion). Its shares have been rising. Meanwhile, oil is up 27 per cent in a year. While Europe wants to largely halt Russian oil imports by December, Moscow is finding willing buyers in India and thirsty markets in Southeast Asia.

Booming revenues from energy, and declining imports, helped more than triple Russia’s first-half current account surplus over last year, to US$167-billion. The ruble has recovered from its sharp fall half a year ago, and Russia’s banks, which lost fortunes in the first half, say the worst is over for them. VTB Bank, the country’s second-biggest bank, this week said it returned to profitability in July after record losses brought on by the sanctions, which included cutting most Russian banks out of the SWIFT global payments network.

For Russia, the big unknown is how long its recovery can last. It could go into reverse.

Europe finally got the message that allowing Russia to emerge as its dominant fossil-fuel supplier was a fatal mistake, all the more so since Germany was busy shutting down its nuclear power plants and coal plants everywhere were being sent into early retirement to help bring on the net-zero future.

Today, Europe is moving frantically to diversify its supplies. Record amounts of liquefied natural gas (LNG) are being imported, and a fleet of LNG terminals is under construction. Coal burners are firing up again, and Germany plans to keep at least two of its three remaining nuclear plants open beyond their scheduled December unplugging date. The upshot is that Russia could, over the medium-to-long term, lose its most lucrative energy market.

Both sides are gambling that the other will break down first. Moscow obviously hopes that Europe will not be able to endure a winter of crazy-high prices and will move to scrap some of the sanctions. But Europe may decide to intensify the sanctions barrage since the initial campaign failed to knock Russia out of action. Russia’s tentative economic recovery suggests it is in no rush, at least not now, to concede defeat in the sanctions war.

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