Down Angle Symbol A symbol in the form of an angle pointing downwards. Russian President Vladimir Putin (R) clinks glasses with Russian soldiers after awarding them the Gold Star medal on the eve of the “Day of Heroes of the Fatherland” at the Kremlin in Moscow, December 8, 2022. Mikhail Metzel/SPUTNIK/AFP/Getty Images
- Two years after the start of the war in Ukraine, the Russian economy still appears resilient.
- While war activities supported the economy, Russia also went into the war in a healthy economic situation.
- Russia still has enough money to sustain the war unless its oil revenues decline significantly.
Russia's war economy is booming.
This may sound counterintuitive, but GDP growth is not uncommon during times of conflict.
While there are doubts about the accuracy and completeness of the rosy economic data Russia has released over the past two years, Moscow appears poised to continue funding its war for a third year – and wars are expensive.
“From a purely economic perspective, Russia has significant room to continue waging war,” Hassan Malik, a global macro strategist and Russia expert at Boston-based investment management firm Loomis Sayles, told Business Insider.
After all, Russia has been securing sanctions since 2014, when it faced a series of trade restrictions following the illegal annexation of Crimea from Ukraine. Additionally, the company is still supported by revenue from its oil sales.
This is how Russia managed to keep its economy strong even after two years of war.
No. 1: By waging war outside your own borders
A key reason Russia's economy is still doing well is the location of the war.
“The war is largely fought on Ukrainian soil and largely destroys Ukrainian homes, businesses and farms, so the direct impact on Russia’s productive capacities and budgets is comparatively limited,” Malik said.
Consider the impact of the war on the economies of Russia and Ukraine.
In 2022, the first year of the war, Russia's economy shrank by 1.2%, according to official statistics. Analysts polled by Reuters expect Russia's GDP to have increased by 3.1% in 2023. Russia has not yet published its full-year 2023 GDP growth.
In comparison, Ukraine's GDP fell by 29.1% in 2022 and the country's central bank forecast the country's growth of 4.9% in 2023. It has not released any official growth figures.
In a scenario where a war is not fought on home soil, the war can result in a large demand shock, particularly for war supplies and labor, Malik explained. This is what happened in Russia: the war boosted the economy.
#2: By creating demand for war goods and services
Added to this is the demand for goods and services that keep a war going.
The Russian military needs physical supplies – things like weapons, ammunition and bandages. Demand is fueling the industries that produce these goods – particularly domestically, as imports into Russia are restricted due to sanctions.
The demand for military supplies is so great that even a bakery in central Russia has been called in to support the war effort.
The business — which showed off its freshly produced drones next to freshly baked bread on Russian television — is now sanctioned by the USA.
Fighting a war also requires manpower.
Even before the war with Ukraine, Russia was already in a demographic crisis, with a declining population and a falling birth rate. With the start of the war, nearly a million Russians – including men of military age – fled their homeland, further shrinking the country's labor supply.
Russian President Vladimir Putin's mobilization of men for war created a labor shortage that has persisted since 2022.
Last year, Russia experienced a labor shortage of 5 million as the number of job vacancies increased by almost 5% compared to the previous year. In November, Russia recorded a record low unemployment rate of 2.9%.
Due to the labor shortage, wages have increased – which in turn supports consumption and economic growth.
No. 3: Through independence in weapons and raw material production
Russia is a large global economy – the world's eighth largest in 2022 – due in part to its strong position as a producer of raw materials such as oil, natural gas, wheat and metals.
However, unlike many other countries, Russia is also active in the production of critical goods such as: B. self-sufficient Oil, natural gas and wheat, which helped it survive years of sanctions.
“While Western sanctions and trade restrictions have undoubtedly had a marginal impact on the Russian economy, the impact is particularly limited in a largely self-sufficient Russian defense industry,” Malik said, referring to an economy based on self-sufficiency and limited foreign trade.
As one of the world's largest arms exporters, Russia can also meet most of its defense needs itself, even with highly sophisticated weapons, Malik said.
This and the measures imposed by Russia to stimulate its economy – including parallel imports, the shift to alternative export markets such as China and India, and new supply chains – would further mitigate the impact of Western sanctions on Russia's defense industry and war economy, he added.
No. 4: By stimulating and stabilizing the economy through subsidies and measures
Government subsidies, spending and political measures also support the Russian economy.
Moscow's attempt to prop up its economy during the war was so aggressive that subsidies for discounted mortgages created a housing bubble.
The Russian government has introduced other types of subsidized loans for businesses, further stimulating demand in the economy.
Russian politicians also quickly intervened to stabilize the market and economy after Moscow invaded Ukraine. They took measures including closing the Moscow Stock Exchange for weeks, imposing capital controls and controlling monetary policy.
“That happened relatively quickly. Many Russian financial instruments have been shut down,” Sergei Guriev, former chief economist at the European Bank for Reconstruction and Development, said in a conversation last month.
No. 5: By keeping foreign debt low and exports strong
Russia entered the war with little external debt and its current account was in surplus, partly due to the war's impact on commodity prices.
“Such developments significantly offset Western measures such as freezing central bank reserves,” Malik said.
Despite all the sanctions, Russia has managed to allocate almost a third of its 2024 budget to defense spending.
Malik is not the only one who believes Russia has scope for prolonged warfare.
Last year, experts including an exiled former Russian deputy finance minister and several economists said Russia has the money to finance its war in Ukraine for a few years.
Alex Isakov, an economist at Bloomberg Economics, said in a Jan. 17 report that Russian National Fund's liquid assets would last another year or two if the country's oil export prices fall below $50 a barrel.
The average price for Russia's flagship Ural crude was about $63 per barrel in 2023.
Nevertheless, Putin is stuck in an economic “trilemma”
Even though Russia managed to avoid economic catastrophe after invading Ukraine in 2022 and imposing sweeping Western sanctions, that doesn't mean all is well on Putin's home turf.
Despite the boom, Putin is trying to resolve an economic “trilemma,” a former Russian central bank official said recently.
“His challenges are threefold: he must finance his ongoing war against Ukraine, maintain the living standards of his people and ensure macroeconomic stability,” Alexandra Prokopenko wrote of Putin in Foreign Policy in January.
“Achieving the first and second goals will require higher spending, which will fuel inflation and therefore prevent the third goal from being achieved,” she added.
Putin has already had to personally apologize for the price of eggs in Russia, which rose 42% in the 12 months to November 2023, according to data from the Russian statistics agency Rosstat.
Because rosy GDP figures alone are not a good measure of economic performance during the war, said Guriev.
“You produce weapons and ammunition, you pay for them from the budget, but these weapons and ammunition do not contribute to the quality of life, do not contribute to future economic growth,” Guriev said. “They will be shipped to Ukraine, where they will be destroyed.”
According to a January report from the Vienna Institute for International Economic Studies, Russia's war contribution is boosting its economy to such an extent that it risks stagnation – or even an “outright crisis” – once the conflict is over.
“The longer the war lasts, the more dependent the economy becomes on military spending,” write economists at the Austrian think tank.
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