Russia’s wartime economy is thriving. This may seem paradoxical, but headline GDP growth is not uncommon during times of war. While there are issues about the authenticity and completeness of Russia’s bright economic figures presented over the last two years, Moscow seems to be planning to pay for its war for a third year — and wars are costly.
“From an economic perspective alone, Russia has plenty of space to go on with its wars,” Hassan Malik, a global macro strategist at Boston-based investment company Loomis Sayles reported to Business Insider. In any case, Russia has been protecting itself from sanctions since 2014, when it faced a round of economic sanctions for unlawfully taking Crimea from Ukraine. Furthermore, it continues to rely on money from oil sales.
All this sounds mindblowing. And here’s how Russia’s economy has remained healthy despite two years of the war conflict.
1. Waging War Outside Its Borders
According to official data, Russia’s GDP declined by 1.2% in 2022, in the first year of the war. Reuters surveyed analysts, and they anticipate Russia’s GDP to increase by 3.1% in 2023. In contrast, Ukraine’s GDP fell 29.1% in 2022, and the central bank expects the nation to increase 4.9% in 2023. It has not provided any official growth numbers.
The location of the war is a big reason why Russia’s economy is still going strong. “Although the war is happening in Ukraine, it is mostly ruining Ukrainian homes, companies, and farms. As a result, it hasn’t had much of an effect on Russian families or production,” Malik said. He also mentioned that when a war is not conducted on your native territory, it may cause a significant demand shock, especially for war materials and people. This is what occurred in Russia. The conflict improved the economy, and you can closely monitor the situation withing the defense news.
2. Creating a Demand for Wartime Products and Services
Russia’s military needs tangible resources such as guns, ammo, and bandages. The demand stimulates the sectors that create such goods, particularly locally, since imports into Russia are limited due to sanctions. The need for military supplies is so high that even a bakery in central Russia has been enlisted to help in the war effort. The business, which displayed newly made drones alongside freshly baked bread on Russian television, has now been sanctioned by the United States.
Fighting a war also takes personnel. Even before its conflict with Ukraine, Russia was in the midst of a demographic catastrophe, with a dwindling population and fertility rate. With the outbreak of war, approximately 1 million Russians, including draft-age males, have deserted their motherland, significantly reducing the country’s labor pool.
Russian President Vladimir Putin’s mobilization of troops for the conflict resulted in a labor shortage that has lasted since 2022. Russia experienced a 5 million-worker deficit last year, with employment openings increasing by roughly 5% from the previous year. In November, Russia had a record-low jobless rate of 2.9%. Wages have increased due to labor scarcity, which has boosted consumption and economic development.
3. Being Self-Sufficient in the Production of Weapons and Commodity
The strong position of Russia as a producer of commodities such as oil, natural gas, wheat, and metals has helped it become a significant global economy, ranking seventh in 2022. However, unlike many other nations, Russia is self-sufficient in key commodities such as oil, natural gas, and wheat, which has helped it weather years of sanctions.
“While Western sanctions and trade restrictions have probably had some marginal influence on the Russian economy, the impact is notably restricted on a highly independent Russian military sector,” Malik said, alluding to a self-sufficient economy with low external trade.
According to finance specialists, as one of the world’s leading arms exporters, Russia can meet the majority of its military demands, including advanced weaponry. This, along with efforts Russia has taken to strengthen its economy, such as parallel imports, pivoting to other export markets such as China and India, and new supply chains, reduces the effect of Western sanctions on the Russian military sector and wartime economy.
4. Promoting and Stabilizing Its Economy via Subsidies and Policies
Government subsidies, expenditures, and policies are also supporting Russia’s economy. Moscow’s efforts to support its wartime economy have been so robust that subsidies for reduced mortgages have resulted in a property bubble. The Russian government has expanded the sorts of subsidized loans available to firms, hence increasing economic demand.
Russian authorities likewise moved fast to stabilize the market and economy after Moscow invaded Ukraine. They adopted actions like closing the Moscow Exchange for weeks, implementing capital restrictions, and regulating monetary policy.
“That was completed rather promptly. A lot of Russian banking tools were locked up,” said Sergei Guriev, a former head economist at the European Bank for Reconstruction and Development, in a speech last month.
5. Keeping Exports Strong and External Debt Low
Russia entered the war with little external debt and its current account has been in surplus thanks in part to the war’s impact on commodity prices. “Such advances significantly compensated for Western initiatives such as freezing the central bank’s reserves,” Malik said in a statement.
Despite the sanctions, Russia was able to designate roughly one-third of its 2024 budget on military expenditures. Malik isn’t the only one who believes Russia can prolong its conflict. Over the last year, experts including a former Russian deputy finance minister in self-exile and various economists have all said that Russia has enough money to sustain its war in Ukraine for a few years.
According to Alex Isakov, an analyst at Bloomberg Economics, Russia’s state wealth fund’s liquid assets will endure another year or two if oil export prices fall below $50 per barrel. The average price of Russia’s flagship Urals crude oil in 2023 was about $63 per barrel.
Nonetheless, Putin Is Locked in an Economic ‘Trilemma’
While Russia has managed to avert economic disaster after invading Ukraine in 2022 and facing harsh Western sanctions, this does not indicate that everything is OK on Putin’s home turf. According to a former Russian central bank official, Putin is attempting to solve an economic “trilemma” despite the boom. “He has to pay for his ongoing war against Ukraine, keep the living standards of his people high, and keep the economy stable overall,” Alexandra Prokopenko wrote of Putin in Foreign Policy in January.
