Two years after the start of Russia’s full-scale aggression against Ukraine, economists are unanimous in one thing: the Russian economy is not collapsing. Namely, such were the expectations when, after February 24, 2022, the European Union, the United States and other countries imposed unprecedented sanctions against Moscow. Today, a more sober tone dominates the debate: few doubt the sustainability of the Russian economy, but there is disagreement over how solid are the foundations on which the country’s current good performance rests.
Low unemployment, GDP growth, record defense spending
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The International Monetary Fund recently forecast that Russia’s GDP will grow by 2.6% this year, a significant increase from the October forecast. To this is added the growth of over 3 percent in 2023. Meanwhile, oil revenues are also rising again and unemployment is at a historic low.
However, doubts remain. The Kremlin has increased its defense spending dramatically – about 40% of the entire budget in 2024 will go in this direction. Russia has turned into a war economy – and an overheated war economy at that, experts warn. There is a serious labor shortage and persistently high inflation. Sanctions are also taking their toll, and Western leaders continue to look for new ways to reduce Moscow’s economic power.
Three reasons for the sustainability of the Russian economy
There are three main reasons why the Russian economy has managed to survive, says Elina Rybakova of the Peterson Institute for International Economics. First of all, the financial system was well prepared for the wave of banking and financial sanctions, since since the invasion of Crimea in 2014 it has de facto been operating in crisis mode. The second important reason is that Russia was able to make a lot of money from oil and gas exports in 2022 because Western powers were too slow to limit their imports from Moscow, even as prices rose sharply after the invasion. And the third reason – insufficiently effective export controls have not been able to prevent Russia from using third countries through which to import the goods it needs for its military-industrial complex.
Benjamin Hilgenstock of the Kyiv School of Economics points out that while the Russian economy is doing better than expected, the sanctions are still having a serious effect. He gives the example of Russia’s oil and gas export revenues, which decreased in 2023 compared to 2022, and the fact that due to high inflation, the Russian Central Bank had to raise interest rates to 16%.
Russia’s results are largely due to the way Moscow circumvents sanctions. It is remarkable how it has managed to circumvent the ban on imports of Western goods and how it has continued to sell its oil around the world despite a price cap imposed by Western allies in December 2022. For this purpose, the transportation of the raw material was limited if it was sold for more than 60 dollars per barrel. However, for almost a year now, Russia has been able to sell at prices approaching market prices. In this case, of help to Moscow is mostly the so-called a “shadow fleet” that allows it to supply markets such as China, India and Pakistan without regard to the price ceiling. Meanwhile, the US increasingly sanctions individual ships and companies that violate the cap in question. According to the economist Hilgenstock, this is decisive for limiting Russian oil revenues.
As for limiting Russia’s access to Western components through imports through third countries, Hilgenstock says the banks’ role is key here. In December, US President Joe Biden signed an executive order authorizing the imposition of sanctions against foreign banks that enable transactions that finance the Russian military-industrial complex.
The risks to Putin’s war economy
Another key factor in Russia’s economic performance is defense spending, which has tripled since 2021. According to Elina Rybakova of the Peterson Institute, the military economy leads to an increase in GDP because of the high public spending that fuels the production of large quantities of missiles, artillery and drones.
“This accounts for a lot of activity, but in the medium term this is not a productive activity”, explains the expert and adds: “This is not good for the economy – in general, it is wasteful”.
Chris Weafer, an investment consultant who has worked in Russia for more than 25 years, told DV that there will be negative long-term consequences if the additional spending is primarily on consumer goods rather than deeper investment in the country’s industry. “Reserves will be exhausted and when the conflict ends, the economy will be much more damaged. The headaches of what to do from then on will be quite serious,” says the expert.
Weafer adds another important factor – changes in the labor market. Due to the mobilization, but also due to the fact that about 1 million highly qualified personnel have left Russia since 2022, a serious labor shortage is currently felt in a number of fields. There is almost no unemployment, and wages have increased significantly in 2023. “This increase in income is the main driver for the rise in consumer inflation,” Weafer told DV. “The longer they are unable to deal with this, the more expensive and damaging to the economy this workforce reduction problem is going to be.”
The state of the Russian economy is decisive for the fate of Ukraine
And yet: the Russian economy has more than once defied gloomy forecasts. The country’s vast resources are being underestimated in the imposition of sanctions, Weafer says, noting that Russia continues to sell oil and gas and the US continues to buy uranium from Russia. The expert believes that the European Union relies too much on the so-called “political economy”. “They’re going to say that, yes, in 2022 and 2023 the economy didn’t crash, but now it’s going to crash because of military spending. But that’s wishful thinking,” Weafer says.
Elina Rybakova from the “Peterson” Institute, in turn, emphasizes that the state of the Russian economy is decisive for the fate of Ukraine. While sanctions may not be able to stop Russian aggression directly, it is critical that the West continues to limit the Kremlin’s ability to wage war. “With one hand we provide financial support to Ukraine, and with the other – Russia. We still buy energy from them, we do not fully implement the embargo and the restriction of oil prices. We also do not fully implement export controls. And this is a huge problem.” says the expert.
Author: Arthur Sullivan
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2024-02-23 08:40:00
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