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- Two years after the Ukraine war, Russia’s economy still appears resilient.
- While wartime activities supported the economy, Russia also entered the war in an economically sound position.
- Russia still has enough money to sustain the war unless oil revenues are significantly reduced.
During the war, Russia’s economy was growing rapidly.
Although it may sound counterintuitive, it is not uncommon for GDP to grow significantly in times of conflict.
Although the accuracy and completeness of the rosy economic data Russia has released over the past two years is questionable, the Russian government appears poised to continue funding the war into a third year — and the war It costs a lot of money.
“From a purely economic standpoint, Russia has considerable room to continue the war,” said Hassan Malik, global macro strategist and Russia expert at Boston-based investment management firm Loomis Sayles. told Business Insider.
After all, Russia has been exempt from sanctions ever since they were imposed in 2014. illegally annexed Crimea From Ukraine. On top of that, the company is still supported by revenue from oil sales.
Introducing how Russia has managed to keep its economy strong even after two years of war.
Part 1: By starting a war outside your own borders.
One of the key reasons why Russia’s economy remains strong is because of where the war took place.
“The war is being fought primarily on Ukrainian soil, primarily destroying Ukrainian homes, businesses and farms, and has had a relatively limited direct impact on Russian production capacity and households.” Malik said.
Consider the impact of the war on the economies of both Russia and Ukraine.
According to official statistics, Russia’s economy shrank by 1.2% in 2022, the first year of the war. Russia’s GDP is expected to grow by 3.1% in 2023, according to a Reuters survey of analysts. Russia has not yet announced its full-year GDP growth rate for 2023.
In contrast, Ukraine’s GDP plummeted by 29.1% in 2022, and the country’s central bank predicts the country’s growth rate will be 4.9% in 2023. The country does not release official growth rates.
Malik explained that in a scenario where a country does not fight a war on its territory, war can act as a large demand shock, especially for military supplies and human resources. That’s what happened in Russia. The war boosted the economy.
Part 2: By creating demand for wartime goods and services.
Then there is the demand for goods and services to keep the war going.
The Russian military needs physical supplies such as weapons, ammunition and bandages. This demand is particularly boosting the industries that produce these products domestically, as imports into Russia are restricted by sanctions.
The demand for munitions is so high that even bakeries in central Russia have been linked to war aid.
shop — A newly built drone was shown on Russian TV next to freshly baked bread. — It is currently under sanctions from the United States.
Even fighting a war requires manpower.
Even before the war with Ukraine, Russia was facing a demographic crisis due to a declining population and declining birthrate. With the outbreak of war, nearly a million Russians, including men of draft age, fled their homeland, further shrinking the country’s workforce.
Russian President Vladimir Putin’s mobilization for war has created a labor shortage that has persisted since 2022.
Russia faced a shortage of 5 million workers last year, with labor vacancies increasing by nearly 5% year-on-year. In November, Russia recorded a record low unemployment rate of 2.9%.
Labor shortages drive up wages, supporting consumption and economic growth.
Part 3: By making the production of weapons and supplies independent
Russia is a major global economy and will be the world’s 8th largest economy in 2022. One reason for this is its strong position as a producer of commodities such as oil, natural gas, wheat, and metals.
However, unlike many countries, Russia is also self-sufficient in the production of important goods such as: Oil, natural gas and wheat helped it survive years of sanctions.
Referring to an economy based on self-sufficiency and limited foreign trade, Malik said, “There is no doubt that Western sanctions and trade restrictions are having some impact on the Russian economy, but the impact is particularly This is limited by an arbitrary defense industry.”
Malik said that as one of the world’s leading arms exporters, Russia can meet most of its defense needs, even sophisticated weapons.
This comes alongside measures Russia has imposed to boost its economy, including pivoting to alternative export markets such as China and India and parallel imports. new supply chain —The impact of Western sanctions on Russia’s defense industry and wartime economy will be further diminished, he added.
Number 4: By stimulating and stabilizing the economy through subsidies and policies.
Government subsidies, spending and policies also support the Russian economy.
Moscow’s attempts to prop up the wartime economy were so aggressive that subsidies for mortgage discounts created a housing bubble.
The Russian government is rolling out other types of subsidized loans to businesses to further stimulate economic demand.
Russian policymakers also quickly intervened to stabilize markets and the economy after Moscow invaded Ukraine. They shut down the Moscow exchange for several weeks, imposed capital controls and took control of monetary policy, among other measures.
“It happened quite quickly. Many Russian financial instruments got stuck,” Sergei Guliyev, former chief economist at the European Bank for Reconstruction and Development, said in a speech last month.
Part 5: By keeping external debt low and exports strong
Russia entered the war with almost no external debt, and its current account balance is in surplus, due in part to the war’s impact on commodity prices.
“These developments largely compensated for moves in the West, such as freezing central bank reserves,” Malik said.
Russia managed to allocate nearly a third of it. 2024 budget Cut defense spending despite all sanctions.
Malik is not alone in thinking that Russia has room to prolong the war.
Over the past year, experts and several economists, including Russia’s exiled former deputy finance minister, have said that Russia has the money to finance several years of war in Ukraine.
Bloomberg Economics economist Alex Isakov said in a Jan. 17 report that if Russia’s oil export prices fall below $50 per barrel, Russia’s Wealth Fund will remain liquid for another year or two. He said it would be.
The average price of Urals crude oil, Russia’s main crude, was about $63 per barrel in 2023.
Still, Putin is caught in an economic ‘trilemma’
Russia managed to avoid economic disaster after invading Ukraine in 2022 and facing widespread Western sanctions, but not all is well in Putin’s home turf.
Despite the boom, Putin is trying to solve economic problems “Trilemma” A former Russian central bank official recently said:
“His task is threefold: he must finance the ongoing war against Ukraine, maintain the standard of living of his people and protect macroeconomic stability,” Alexandra Prokopenko said in January. I wrote about President Putin in “Foreign Policy.”
“Achieving the first and second goals will require increased spending, which will accelerate inflation and hinder the achievement of the third goal,” he added.
President Putin has already had to personally apologize for the 42% rise in egg prices in Russia in the 12 months to November 2023, according to data from the country’s statistical office. Rostat.
Ultimately, Guriev said, rosy GDP statistics alone are not a good way to measure economic performance during wartime.
“We produce weapons and ammunition and pay for them from the budget, but these weapons and ammunition do not contribute to the quality of life and do not contribute to future economic growth,” Guliyev said. “They will be transported to Ukraine and disposed of there.”
A January report from the Vienna Institute for International Economics said Russia’s contribution from the war has boosted its economy, which risks stagnation or even a “full crisis” once the conflict ends.
“The longer the war lasts, the more dependent the economy will become on military spending,” wrote economists at the Austrian think tank.
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