How the Russian economy self-immolated in the year since Putin invaded Ukraine

A year after Putin’s invasion of Ukraine, some cynics lament that the unprecedented economic pressure campaign against Russia has not yet ended the Putin regime. What they’re missing is the transformation that has happened right before our eyes: Russia has become an economic afterthought and a deflated world power.

Coupled with Putin’s own misfires, economic pressure has eroded Russia’s economic might as brave Ukrainian fighters, HIMARS, Leopard tanks, and PATRIOT missiles held off Russian troops on the battlefield. This past year, the Russian economic machine has been impaired as our original research compendium shows. Here are Russia’s most notable economic defeats:

Russia’s permanent loss of 1,000+ global multinational businesses coupled with escalating economic sanctions

The 1,000+ global companies who voluntarily chose to exit Russia in an unprecedented, historic mass exodus in the weeks after February 2022, as we’ve faithfully chronicled and updated to this day, have largely held true to their pledges and have either fully divested or are in the process of fully separating from Russia with no plans to return.

These voluntary business exits of companies with in-country revenues equivalent to 35% of Russia’s GDP that employ 12% of the country’s workforce were coupled with the imposition of enduring international government sanctions unparalleled in their scale and scope, including export controls on sensitive technologies, restrictions on Russian elites and asset seizures, financial sanctions, immobilizing Russia’s central bank assets, and removing key Russian banks from SWIFT, with even more sanctions planned.

Plummeting energy revenues thanks to the G7 oil price cap and Putin’s punctured natural gas gambit

The Russian economy has long been dominated by oil and gas, which accounts for over 50% of the government’s revenue, over 50% of export earnings, and nearly 20% of GDP every year.

In the initial months following the invasion, Putin’s energy earnings soared. Now, according to Deutsche Bank economists, Putin has lost $500 million a day of oil and gas export earnings relative to last year’s highs, rapidly spiraling downward.

The precipitous decline was accelerated by Putin’s own missteps. Putin coldly withheld natural gas shipments from Europe–which previously received 86% of Russian gas sales–in the hopes freezing Europeans would get angry and replace their elected leaders. However, a warmer-than-usual winter and increased global LNG supply mean Putin has now permanently forfeited Russia’s relevance as a key supplier to Europe, with reliance on Russian energy down to 7%–and soon to zero. With limited pipeline infrastructure to pivot to Asia, Putin now makes barely 20% of his previous gas earnings.

However, Russia’s energy collapse is also triggered by savvy international diplomacy. The G7 oil price cap has achieved the once unimaginable balance of keeping Russian oil flowing into global markets while simultaneously cutting into Putin’s profits. Russian oil exports have held amazingly consistent at pre-war levels of ~7 million barrels a day, ensuring global oil market stability, but the value of Russian oil exports has gone from $600 million a day down to $200 million a day as the Urals benchmark crashed to ~$45 a barrel, barely above Russia’s breakeven price of ~$42 per barrel.

Even countries on the sidelines of the price cap scheme, such as India and China, ride the coattails of the G7 buyers cartel to secure Russian supply at deep discounts of up to 30%.

Talent and capital flight

Since last February, millions of Russians have fled the country. The initial exodus of some 500,000 skilled workers in March was compounded by the exodus of at least 700,000 Russians, mostly working-age men fleeing the possibility of conscription, after Putin’s September partial mobilization order. Kazakhstan and Georgia alone each registered at least 200,000 newly fleeing Russians desperate not to fight in Ukraine.

Moreover, the fleeing Russians are desperate to stuff their pockets with cash as they escape Putin’s rule. Remittances to neighboring countries have soared more than tenfold and they rapidly attracted ex-Russian businesses. For example, in Uzbekistan, the Tashkent IT Park has seen year-over-year growth of 223% in revenue and 440% growth in total technology exports.

Meanwhile, offshore havens for wealthy Russians such as the UAE are booming, with one estimate claiming 30% of Russia’s high-net-worth individuals have fled.

Russia will only become increasingly irrelevant as supply chains continue to adapt

Russia has historically been a top commodities supplier to the world economy, with a leading market share across the energy, agriculture, and metals complex. Putin is fast making Russia irrelevant to the world economy as it is always much easier for consumers to replace unreliable commodity suppliers than it is for suppliers to find new markets.

Supply chains are already adapting by developing alternative sourcing that is not subject to Putin’s whims. We have shown how in several crucial metals and energy markets, the combined output of new supply developments to be opened in the next two years can fully and permanently replace Russian output within global supply chains.

Even Russia’s remaining trade partners apparently prefer short-term, opportunistic spot-market purchases of Russian commodities to capitalize on depressed prices rather than investing in long-term contracts or developing new Russian supply.

It appears Russia is well on its way toward its long-held worst fear: becoming a weak economic dependent of China–its source of cheap raw materials.

The Russian economy is being propped up by the Kremlin

The Kremlin has had to prop up the economy with escalating measures, and Kremlin control is increasingly creeping into every corner of the economy with less and less space left for private sector innovation.

These measures have proven costly. Government expenditures rose 30% year-over-year. Russia’s 2022 federal budget has a deficit of 2.3%–unexpectedly exceeding all estimates despite initially high energy profits, drawdowns and transfers of 2.4 trillion rubles from Russia’s dwindling sovereign wealth fund in December, and asset fire sales of 55 billion yuan this month.

Even these measures of last resort have been insufficient. Putin has been forced to raid the coffers of Russian companies in what he calls “revenue mobilization” as energy profits decline, extracting a hefty 1.25 trillion ruble windfall tax from Gazprom’s corporate treasury with more raids scheduled–and forcing a massive 3.1 trillion ruble issuance of local debt down the throats of Russian citizens in the autumn.

More can be done

Although 2023 will exacerbate each of these trends and further batter the Russian economy, there is even more that can be done to grease the skids.

A crackdown on sanctions evasion and smugglers, perhaps through secondary sanctions in the case of Turkey and other chronic offenders, will ensure that bad actors do not feed Putin’s war machine.

Sanctions provisions across technology, financial institutions, and commodity exports can be escalated. Pressure on companies remaining in Russia to fully and immediately exit the country must be maintained. Some $300 billion in frozen foreign exchange reserves could be seized and committed to the reconstruction of Ukraine

Tightening these screws will help improve the chances that before this time next year, Russia will realize it does not need Putin, just as the world has already realized it does not need Russia.

Only then will the Russian economy and people stand a chance of returning to prosperity.

Jeffrey Sonnenfeld is the Lester Crown Professor in Management Practice and Senior Associate Dean at Yale School of Management. Steven Tian is the director of research at the Yale Chief Executive Leadership Institute.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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